The prediction by the State’s largest home builder that a 4.5 per cent cut in the VAT rate charged on new apartments could unlock most of the schemes that have planning permission but are stalled is both welcome and somewhat concerning.
Michael Stanley, the chief executive of Cairn Homes, did not put a figure on the number of apartments that might now be built, but various sources estimate around 50,000 of them could now come on stream.
More building would be good news. But what it says about the economics of apartment building and implicit government subsidies need to be looked at.
The median price – meaning the middle of the range rather than the average price – of a new apartment in Dublin is estimated to be €355,000. The VAT saving on such an apartment as a result of the budget measures will be a significant benefit to the developer.
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According to Stanley, the VAT reduction, along with other budget measures and new guidelines on apartment design announced during the summer, will be worth around €70,000 to €80,000 per apartment to the developer. It is worth noting here that the new regulations are subject to a judicial review.
The other way of looking at this is that the State is effectively subsiding each apartment by a similar amount, both directly and indirectly.
The need for Government intervention on such a scale is indicative of a number of things.
The first is that the ceiling in terms of affordability has been reached. People’s ability to borrow is curtailed by their income and the lending limits placed on banks. Developers cannot put up prices any further.
It also implies that the cost of construction – mostly materials and labour – has increased significantly, rendering projects unviable at the prices that people can afford to pay. Construction inflation has eased recently, but prices are still elevated.
The third is that – in hindsight admittedly – the cost of the land was, in many cases, too high. The laws of economics suggest it should fall, but we know from the wider housing market that normal rules often don’t seem to apply in the Irish housing market.
The Government is backed into a corner where it is endlessly tinkering around the edges of a dysfunctional industry. The measures announced on budget day are just the latest in a series, including €5.3 billion in funding for social and affordable housing with mixed results at best. A revised housing strategy is due to be published shortly but unless the Government can move the fundamental levers dictating supply, it risks being as aspirational as its predecessors.
