With house prices on the rise in Dublin and some other parts of the country, the focus has shifted to why this is happening. Across the board, from estate agents to chartered surveyors to politicians and even some charities, the same reason keeps being stated – we’re not building enough housing in growth areas to meet the demand.
However, what hasn’t been examined is why there are not more houses being built? The construction sector wants to work and house builders want to build. There is no shortage of construction personnel available to work on these projects. So what’s the problem?
While there has been a small increase in new house building in areas which are experiencing price rises, this will not be anywhere near enough to supply the needs of the market. If enough houses are going to be built to meet the demand that exists, then a number of barriers to house building must be addressed.
The main problem still is the cost of building. Despite rising prices, there is still a disconnect between how much it costs to build a house and the market value of new homes. Either house prices must rise further to make these developments profitable, or else measures must be introduced to reduce the cost of building them.
Extra burden
There are several simple steps the Government could take to tackle this problem. Take the Part V social and affordable housing obligations. Under this law house builders must set aside up to 20 per cent of the development land of a housing project for social and affordable housing or else make a payment of the equivalent value to the local authority.
There was merit to this initiative in the days of the Celtic Tiger, but in these more austere times, it is not realistic. Part V must be abolished or suspended. It is an extra burden on house builders which is not affordable when they are already struggling to recover the full cost in any new building they undertake.
Another step that should be taken is a re-evaluation of the excessive prescriptive densities in terms of units sought by planning authorities in many metropolitan areas. New housing units built under these requirements are not marketable in the current climate. People nowadays want homes with their own private door and which includes a small private area such as a rear garden. They don’t want apartments outside of central urban areas.
Planners should look to secure the maximum achievable footfall in many areas so as to fully utilise public infrastructure. This could be done by encouraging house builders to produce the required densities using a “bed spaces” approach rather than the current “units” approach.
The issue of Vat should also be looked at. Vat on a new house valued at €250,000 is about €30,000. A temporary reduction in Vat levels would reduce production costs and incentivise recommencement of new house construction.
The level of development charges also needs to be examined. Development levies are still extremely high and are discouraging house building in some areas.
There are also a couple of steps the Government should encourage the banks to take. Firstly, mortgage approvals for new houses should have a 12-month lifetime. It takes up to a year to build a new house, so mortgage approval which lasts for only six months is of little value to a person purchasing a new home off plans.
Banks should also be asked to make development finance available to house builders on reasonable terms. If we want to see more building, then finance will be necessary. Very few construction companies have the cash reserves to undertake projects on their own.
It is estimated that more than 20,000 housing units should be built every year. This year less than 8,000 will be completed. About 60 per cent of that total are one-off units. There are few, if any, new housing schemes being built. Taking those numbers into account it is no surprise that demand is outstripping supply and prices in metropolitan areas are rising rapidly.
The lag time between a housing project being conceived and finished is on average 18 months. If action isn’t taken soon to address the difficulties highlighted above, the supply problem will get worse in the short term and that will have a major impact on housing prices in Dublin and other urban areas.
The construction industry does not want to see further spikes in house prices. We need an environment which ensures that the appropriate level of house building can take place in the appropriate areas. Regrettably, the current environment does not support that objective.
Hubert Fitzpatrick is director of housing with the Construction Industry Federation
