Despite widespread agreement that Ireland is suffering from a severe housing shortage, residential development remains largely dormant. Last year just 12,541 dwellings were built across the country - about half the estimated requirement.
The problem is even more acute in Dublin where the population is rising by 32,000 persons per year yet fewer than 2,900 residential units were built.
Growth in construction employment has outstripped that in every other sector over the last 18 months. But the industry is less than half the size it was, and only one third of builders are currently engaged in housing projects.
Recent figures show that housing starts edged up by just 5 per cent last year and only 8,000 commencement notices were served.
While the problem is easily identified, putting one’s finger on the causes is more difficult. Nonetheless, from my dealings with agents and developers, the three most common complaints I hear are:
1. Availability of Land
There is a scarcity of residential development land for sale with planning permission in place. By way of illustration, Savills is currently marketing €300 million of land assets, but only 5 per cent of this comes with planning consent. This is not unusual.
Under normal conditions vendors often prefer to sell land without planning permission. This is because it widens the pool of potential buyers in a context where developers can have differing views on the optimum scheme for any site.
The problem at present, however, is that the banks will not lend on development land purchases unless planning permission is already in place. Consequently, some vendors are now seeking to secure planning permission themselves prior to sale. But delays in the planning system mean that this is a lengthy 12-18 month process.
In the interim, a possible work-around might be for developers to borrow the money from non-banking sources. But most of these lenders will want to fund an entire project - not just the land acquisition phase - and the interest rates charged would torpedo the viability of housing schemes in many locations.
2. Density Requirements
Urban planning authorities generally favour higher density apartment development, particularly in locations that are well served with public transport amenities. While these objectives are in place for good reasons - to encourage sustainable development and prevent urban sprawl - they create a practical obstacle to development.
On one hand, apartments are more expensive to build than traditional houses. This reflects the costs of providing basement car parking and the higher financing costs associated with having to finish-out entire blocks before selling units and paying-down debt.
On the other hand, apartments generally sell for less than houses of the equivalent size and specification. This combination of lower selling prices and higher build costs means that apartment development is still not profitable in many locations - even within Dublin.
3. Taxes and Levies
In deciding whether or not to pursue projects, developers start with the price that they expect to sell their housing units for. From this they deduct a range of expected costs including labour, materials, professional fees, site acquisition, finance costs and levies.
At present many schemes are not viable because the residual remaining after these expenses - the developers’ profit - would not justify the risks involved. Recognising this, steps have been taken to reduce Government charges - for example the Part V social housing requirements have been reformed and a rebate scheme has been introduced in respect of levies paid to local authorities in Dublin and Cork on foot of affordable housing development.
Nonetheless developers argue that further cuts in levies and reduced VAT on new home sales would bring schemes that are currently marginal into viability.
Given what has gone before, the public is entitled to regard the development industry with suspicion. Nonetheless I believe that these claims are genuine and that prices will have to go up, or costs will have to come down, before we see the resumption of large scale housing development.
Dr John McCartney is Director of Research at Savills
