Tackling the housing crisis - public auctioning of development rights on rezoned land would increase Exchequer revenues, argues Jerome Casey
Economic commentators such as the OECD and ESRI take a fairly relaxed view of Irish house prices. High house prices reflect a current excess of housing demand over housing supply: with demand slowing and supply improving into the medium-term, house price rises will be reined in.
Yet for this to occur, housing costs must be flexible. And while labour and materials will adjust reasonably quickly to lower levels of housing demand, the same is unlikely to occur to land costs in housing.
Prior to the boom, site costs in Irish housing represented 10 - 15 per cent of house prices - in line with EU site costs, although somewhat below those in the US. Today, Irish urban site costs are 50 per cent of the house price, with rural sites costing somewhat less.
The cost of land as a proportion of housing costs is currently running 30 percentage points higher than its long-term average and this excess margin accrues mainly to land developers, particularly those operating close to the five cities. In 2002, on the 32,000 new private, urban houses built, it amounted to €1.9 billion.
Obviously, high site prices reflect strong current demand allied to site under-supply, whether real or contrived. To look at this in more detail, site supply and ownership were examined in Fingal - the area of north Co Dublin where most of the capital's new housing will be built in coming years.
Fingal County Council currently has zoned sufficient land for approximately 50,000 houses in the period to 2008. At last year's rate of house completions, this would be sufficient land for almost 12 years. It seems that the council has zoned more than enough land to make a major contribution to Dublin's medium-term housing needs. But when Building Industry Bulletin looked at ownership records in the Land Registry and the Companies Office, it found that 25 individuals/ companies owned over half the land for housing development in Fingal. And while there is no evidence of a price cartel between Fingal developers, a quasi-gentleman's club exists, which outsiders have difficulty in penetrating.
The capability of Fingal developers is considerable. Most seem to have come from a western construction or farming background, which gave them sufficient initial product knowledge to deal with actors at both ends of the value chain. To this they have added an ability to understand and sometimes anticipate the planning needs of the local authority. And most are now extremely wealthy, removing normal market pressures to sell land into a falling market. Their capability makes it very difficult for a new entrant to best an incumbent developer.
Fingal developers also prefer co-operation to outright competition with other developers. There is nothing illegal in construction contractors or developers forming consortia with their peers in order to scale up for a major project. But relationships between Fingal developers appear to be particularly chummy.
Benign neglect by legislators has left developers' margins unaffected. No legislation has been introduced to allow planning authorities to retain for themselves most of the "betterment" benefit accruing to agricultural land that is zoned for development.
"Betterment" occurs when a planning authority rezones agricultural land for development, raising the value of such land up to tenfold. Uniquely in Europe, all of this betterment goes to the Irish landowner. Following Bacon II, CGT (Capital Gains Tax) on undeveloped, zoned land was raised to 60 per cent, only to be rolled back to 20 per cent within a short period: this actively rewarded the hoarding of development land. And, compared to an auction system of development benefits, current proposals for penal taxation on development land sold above a capped price, will again increase land hoarding.
If the experience of Fingal is not untypical of development patterns in other cities and towns, then development land for housing in Ireland is extremely expensive, in part because the land is now owned by a small number of wealthy investors who are relatively immune to a levelling-off in housing demand. To remedy this market failure and restore affordability to urban site costs for housing, legislative action is required by Government - not just a levelling-up of the playing field, but a complete change in rules.
The first change needed is a constitutional amendment to replace the present two unclear articles in the Constitution with a single article as suggested by the Whitaker Review Group in 1996. This would clearly set out the rights to private property and the limited circumstances under which these rights might be set aside, in the interests of the common good.
It is a little unnerving to hear assertions by experienced members of the Oireachtas of all political persuasions that such an amendment may not be necessary. But, to attempt to change our system of land development by depending on existing case law and the 1937 Constitution would be like entering the OK Corral unarmed. Protected by such a constitutional amendment, betterment legislation should be introduced. Ten years after the 1963 Planning Act was passed, disquiet over betterment resulted in the Kenny Report. Judge Kenny suggested the purchase of zoned land by local councils at agricultural value plus 25 per cent and subsequent sale of this land to builders as required.
At that time the Department of Local Government opposed the proposals as unconstitutional and neither implemented Kenny, nor put another betterment solution in place, a policy failure which directly contributed to both the corruption in the planning system during the 1980s and early 1990s and to the current monopoly profits of developers.
The vast bulk of these profits arise at the first stage of development when agricultural land is rezoned for development. At present, planning authorities transfer a publicly-created absolute right to a superior class of real property to a developer in the hope that this will result in the orderly rollout of the new homes, factories, and offices that society needs. A modern betterment system would auction these development rights to the highest bidder.
Although the value of these development rights could be estimated at €1.9 billion in 2002, in their first year of auction by the public authorities the yield would be considerably less. But it would be sufficiently large to enable the Exchequer to increase its affordable housing programme and to restart stalled projects in the National Development Plan.
Jerome Casey is publisher of Building Industry Bulletin.