Mind the gap. Hardly a day passes without another “solution” being offered to the housing crisis, but none of them will add up to much unless one fundamental issue is sorted out: who is going to provide the funding for the tens of thousands of new homes we need to build in the coming years? There are a lot of other issues in housing too – but if the money isn’t there, you don’t get past first base.
Why is this financial gap opening up? The end of the era of super-low interest rates is the fundamental reason. For years, house building and the wider construction sector was funded almost exclusively by the Irish banking sector, via loans to builders and developers and also mortgage borrowers. Irish banks were in on both sides of an over-inflating market. Then, after the crash, Irish banks stepped out in terms of lending to developers and international funds stepped in.
But now, as interest rates rise, the game has changed for these investors. When you can get a safe return of 3.5 per cent for putting your cash into US government bonds, the profit needed to justify investment in Irish property goes up. Meanwhile the cost of building has shot upwards. The economics of building apartments – already challenging – is now undermined and even house building becomes more financially difficult. So the international investors are stepping out. And with domestic builders also hit by higher costs and the Irish banks still loath to extend their lending to the property sector, there is a funding gap.
There are signs that the penny is dropping about this in Government, due to the sharp fall in housing starts now being seen and signals from the industry that the stretched economics of building apartments is now broken. Taoiseach Leo Varadkar hinted this week that the Government would do more to underwrite the development of new homes, effectively giving a Government guarantee to buy some or all of certain projects when completed. In turn, this would help builders and developers to get finance from banks or investors to get schemes under way and finish them.
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This, combined with direct State spending on development via local authorities, approved housing bodies and the Land Development Agency, will see more Government money being used in various ways to try to plug the financial gap.
Market incentives are not now leading to the required results. Many smaller builders find it much easier to make a living doing home improvements where the risks are lower and the profit margins better
Offering upfront guarantees on a scale more generous and widescale than via existing schemes offers one big political advantage: it might get a quick result. The Government is eyeing up 70,000 planning permissions already granted and hoping that if a significant portion of these could be got moving, it would make a difference to the figures. More State-funded building projects will be planned too, but many of these will still have to go through planning. And the Coalition will realise that if building starts are not ramped up in the months ahead, then delivery will fall off before the next general election.
Developments already under way should keep commencements around current levels for much of this year, but beyond that there is a big danger of a fall-off. And there is a real crisis threatening in apartment building – vital for the Government’s plans for denser city-centre living as a key part of its climate strategy and to meet demand from smaller households of one and two people, now increasingly common.
Market incentives are not now leading to the required results. Many smaller builders find it much easier to make a living doing home improvements where the risks are lower and the profit margins better. The older, property-owning class are getting their homes dickied up with Covid savings, while prospective younger buyers lose out.
Painfully slow
Development efforts by local authorities and State agencies seem painfully slow and there is often little sense that everyone is pulling in the one direction. Local politicians try to secure their positions by objecting to many projects. Whoever is in government will face the same problem of “getting things done” when faced with a dysfunctional system, and a Nimby culture.
Against this background, the challenge now for the Government is to ensure that the bucks being thrown into housing – probably €5 billion or more this year when the cost of tax incentives is added to direct spending – generate the required bang.
It is very hard to get the required impact from a tax break and very easy to give a tax shelter to well-off people
There are a few lessons from Ireland’s property history. The first is to ensure that if the State is spending cash, it gets the kind of houses it wants, where it wants them. This may be easier to achieve via direct State spending via local authorities and other bodies than by tax incentives, which last time left us with a lot of building where it wasn’t needed. But incentivising private development in some way will have a role – and it is here that the hard work comes in getting the kinds of development needed and not wasting State cash on projects which would have happened anyway.
Another lesson from history is the power of tax, both good and bad. Tax changes will almost certainly feature – for example in relation to VAT on new development. But experience shows that actual tax breaks – write-offs for certain types of projects – need to be approached with extreme care. It is very hard to get the required impact from a tax break and very easy to give a tax shelter to well-off people. During the Celtic Tiger years, tax breaks had a key role in distorting the market. Tying incentives tightly to national and local development plans would be vital.
Ireland is not short of savings – the issue is how to direct them into the right kind of investment. We will see all kinds of wheezes floated in the weeks ahead, from everyone from desperate Government TDs to the property sector itself. We can’t revert to the old playbook of a load of generous and unfocused tax breaks. The Government needs to use its balance sheet and its market power wisely.