Ireland’s housing crisis

Posted on August 25, 2016 · Posted in Accounting & Business

Ireland is in the midst of a housing crisis that is getting worse.  With the Government about to publish its new housing strategy, those in the sector are urging it to make an effective intervention.

 

One indicator of the scale of the challenge is the rise in housing costs.  In the year ending April, average property prices rose by 7.1%, in a period when inflation was broadly flat.   Dublin prices rose by 5% in the year – and 1.9% in a single month.  While those statistics reflect a problem of affordability, they still represent a significant fall in average prices from the pre-crash peak – Dublin house prices remain 33.1% below their pre-crisis peak, while Dublin apartments are 41.5% below their peak.

 

House prices are likely to continue to increase.  SCSI – the Society of Chartered Surveyors Ireland – reports that average prices for a three bedroom home in Dublin are actually below the real cost of a new build.  While the average price for a three bed home is €285,000, a new build in Greater Dublin typically costs €330,000.  Of this, construction costs come to €150,000, with land costs, VAT and professional services making up the rest.  SCSI wants government to either abolish or cut the current 13.5% VAT rate on new homes.  Housing is exempt from VAT in Northern Ireland and the rest of the UK.

 

Micheal Mahon of the SCSI says: “The country is experiencing a chronic housing shortage which is contributing significantly to the current homelessness crisis. The findings of this report highlight a number of pressing issues, particularly on the soft cost side. We need to kick-start housing supply as soon as possible and to accelerate from the current output of 12,000 units per annum to the 25,000 units which is required.”

 

That under-supply is evident in both the homes for sale and for rent.  In the year ending March, average rental costs in Ireland rose by 9.3%, according to analysis conducted by Ronan Lyons, a Trinity College Dublin economist, for the Daft.ie website.

 

“This represents a remarkably persistent rate of rental inflation,” says Lyons.  He warns “there is the danger that this very high rate of inflation becomes something of a new normal”.  But, he adds: “There is nothing normal – or indeed sustainable – about inflation in rents of 10%.”  The clear indication, says Lyons, is that housing costs will absorb an ever increasing proportion of income for households that are renting.

 

The same is true for those who are buying, with many finding mortgage costs crippling.  For many, problems will intensify as and when interest costs return to normal.  While there are some signs that the number of borrowers in mortgage arrears is falling, the problem persists for both borrowers and lenders.  AIB reported – in its results for Q1 2016 – that mortgage arrears had declined by 4% in the period.  Since the end of 2014, the number of its mortgage accounts in arrears had fallen by 29% for owner occupiers and by 27% for buy-to-let borrowers.

 

However, Ulster Bank – which is under continuing pressure from its owners RBS and the UK government to clean-up its balance sheet – is in the processing of disposing of 900 non-performing mortgages, with a face value of around €875m.  PwC is reportedly handling the sale of the portfolio, which has been called Project Oyster.  An Ulster Bank spokesman said: “The loans involved do not belong to typical customers, they are all in Ulster Bank’s problem debt management unit and in arrears or under specialist management for a significant period of time.”

 

Lenders are conflicted: while they want to tackle the level of mortgage arrears, they are under political pressure not to evict.  Social justice campaigner Peter McVerry of the Peter McVerry Trust argues that the vast majority of people who are homeless are simply unable to afford any available accommodation.  At present, there are around 6,000 people in Ireland who are homeless, a third of whom are children.

 

McVerry told the Oireachtas committee on housing and homelessness: “I would like to see legislation preventing anybody – local authorities or banks – from evicting people into homelessness. It should be illegal until alternative accommodation is available.”

 

A report, Promoting protection of the right to housing – Homelessness prevention in the context of evictions, from NUI Galway echoed the call for stronger legal protection from home evictions, in the case of both tenants and borrowers in arrears.  It recommended that courts should be obliged to involve social support agencies in repossession cases.  A major cause of evictions, concluded the report, was the result of rising rents. 

 

Research leader Dr Padraic Kenna said: “The findings of this research show the need to integrate accepted eviction-related housing rights standards into national and EU legal and policy norms. Creating a legal obligation on courts and other agencies, involved in possession proceedings, to promptly engage with housing and social support agencies would be a valuable first step in preventing homelessness.”

 

David Silke, director of research and corporate affairs at the Housing Agency, says there are “multiple reasons” for the current housing crisis.  “Lack of supply of accommodation is clearly the main reason,” he says.  “We also need to ensure supply is affordable.  One of the lessons of the past is that people took out mortgages that they could not afford, so there are 60,000 households in mortgage arrears of over 90 days, which is a huge number of people to have suffering problems with their mortgages, and there are 25,000 households living in buy-to-let properties that are in mortgage arrears of over 90 days.”

 

Changing demographics is another factor.  There has been substantial population growth in Ireland, which has risen by 30% in the last 20 years.  The population is predicted to continue growing, reaching 5.2 million by 2031 from the current 4.6 million, with the number of older people doubling by then from current levels.

 

“The population is both increasing and the households are reducing in size,” explains Silke.  “So about three quarters of the housing requirement will be for homes of three or fewer people.  That has implications for the type of accommodation we are building.  We need houses and apartments that are smaller.”

 

There are other steps we should be taking, argues the Housing Agency.  Silke explains: “We should prioritise keeping people in their homes.  There are a growing number of people in emergency homeless accommodation.  That is very unsatisfactory.  We want to avoid more people being in that situation.  The second thing is utilizing empty homes.”  There are almost a quarter of a million empty homes across Ireland – more than enough to house those who are homeless.  The Agency also wants greater support provided to the private rented sector, with a vast number of people in Dublin, in particular, living in private rented accommodation.

 

Newly appointed housing minister Simon Coveney says that significant reforms to housing policy will be included the government’s new housing strategy to be published during July.  One option being considered is the introduction of new taxes on empty homes, as is the case in several jurisdictions around the world.  In England, for example, many local authorities impose a 50% council tax surcharge on homes that have been empty for more than two years.  Former Mayor of London, Boris Johnson wanted to go further by imposing penalty taxes on those who bought properties for investment purposes and then left them empty.

 

Speaking to the Dail’s Housing and Homelessness Committee, Coveney said the government would consider cutting the VAT rate on new homes to 9% to assist with affordability.  The government will also address the issue of rental affordability, including through interventions to achieve discounts on market rents in the private sector.  A programme of new social homes is likely to be initiated, with the focus on mixed developments – to prevent the creation of new ‘ghettos’ of social housing-only estates.  Some of the new provision will be through public-private partnerships, Coveney explained.

 

In an address to Cork city and county councils, Coveney said that housing policy will evolve as part of the development of a new national spatial strategy that will decide “where people will live and how people will live in 10 and 20 years time”.  He explained: “If we had done that successfully 20 years ago, the extra million people living in Ireland now wouldn’t all be living in the Dublin area. We may have had a much more balanced geographical spread.”

 

Ministers believe the over-heated housing market in Dublin is a symptom of a broader issue of too much of Ireland’s economy being based on the capital.  We can expect policies to make housing more available and more affordable will go significantly beyond the consideration of housing – and look at greater economic decentralisation across the country.

 

Northern Ireland

 

Paddy Gray is emeritus professor of housing at Ulster University and was a speaker at the Housing Agency’s recent conference on affordability.  Northern Ireland has its own serious housing difficulties, but they are different from the south, he says.

 

“We don’t have the same major problems as with Dublin and Galway with very high rents and very high housing prices,” explains Gray.  “Our housing prices are one of the cheapest in the UK.  An average price in the North West is £90,000.  People laughed when I mentioned that at the conference.  There is a growing private rental sector on both sides of the border.  In Dublin, rents might be €1,500 a month for a poor quality city centre apartment.  They are not as unaffordable in the north and rents have not gone up as much.”

 

One of the north’s problems is the surplus of demand over supply for social housing – nearly 40,000 households are on the waiting list.  A growing anxiety is over the future of the Housing Executive, a government body and the main provider of social housing.  At present it charges rents that are substantially below market levels.  But the Fresh Start political agreement promises to reform the Housing Executive and to reduce the public subsidy, implying higher rents.  At present rent levels, Gray points out, the Housing Executive does not generate enough revenues to reinvest.

 

As well as the shortage of investment in social housing, another factor in Northern Ireland limiting supply is the lack of available development land.  In Belfast, where demand is highest, most potential development land is brownfield and requires costly remediation.

As development prices crashed in the financial crisis, the suspicion is that many landowners do not want to sell until prices recover.  “People are holding onto land and land banking, hoping that prices will rise,” says Gray.

 

While the crisis in the south is in part about the number of vacant properties, the corollary in the north is the withholding of development land that could be used for housebuilding. Gray says while part of the political conversation in the south is about levying a tax on empty homes, in the north people are starting to discuss a tax on unused development land.