Budget 2015, due to be announced on October 14th, has the potential to support a more sustainable property market by ensuring that the barriers to construction can be overcome to improve the availability of supply.
There is a serious shortage of supply of residential property in Dublin and urban areas at present which is leading to house price inflation at unsustainable levels. According to the latest Central Statistics Office Residential Property Price Index, property prices in Dublin increased by 22 per cent year-on-year, and that does not include cash sales which make up approximately 50 per cent of all sales transactions.
The shortage of supply is primarily due to a lack of construction of new homes in recent years against a backdrop of increased demand over the past 18 months. Approximately 89,000 units were built at the peak in 2006 and 8,301 were built in 2013, representing a decline of around 90 per cent. Furthermore, many of the houses built in recent years were one-off homes and while some new developments have restarted in recent times, these are unlikely to meet the projected demand in the short-term.
The ESRI suggests that in the coming years, increases in population and changes in Ireland’s demographics will result in the formation of at least 20,000 new households per year, each requiring a separate dwelling. The results suggest an ongoing need for approximately 25,000 dwellings a year over the coming fifteen years.
The Housing Agency, which recently published its report ‘Housing Supply Requirements in Urban Settlements 2014-2018’ has estimated that there will be a total requirement for 80,000 units across 272 urban settlements nationally, an average of 15,932 units per annum over the five years (ranging from 9,526 in 2014 to 20,853 in 2020). It estimates that 47 per cent of total supply over this period will be required across the Dublin region.
The Society of Chartered Surveyors Ireland (SCSI), the professional body for the property and construction sector, has endorsed the 75 measures contained in Government’s Construction 2020 strategy and has identified some potential solutions to improve supply in a targeted and measured way.
The availability of finance is a key element in any normally functioning property market. Mortgage availability levels have improved but are still below sustainable levels. The value of the mortgage market in 2013 was approximately €2bn. Industry reports suggest that it should be closer to €8-€10bn.
Greater availability of construction finance is also required, in a controlled manner, to support the funding of new developments. It is imperative that the type of lending which occurred in the past is not allowed to re-occur, but there are small builders with good track records who would be in a position to start building if they could access adequate development finance.
In the UK, the Department for Communities and Local Government and the Homes and Communities Agency have launched a £525 million Builders Finance Fund to help restart and speed up housing developments between 15 and 250 units that have slowed down or stalled. Its main objective is to address difficulties in accessing development finance faced by some house builders, particularly smaller developers, and to help bring forward stalled but viable sites. The SCSI believes that a similar ‘Builders Finance Fund’ could be established in Ireland to provide liquidity for builders seeking to access development finance. Earlier this year, Government introduced a €500m Strategic Banking Corporation fund for SME’s supported by the European Investment Bank (EIB) and it is reasonable to suggest that a similar fund could be set up to support SME builders secure finance for the construction of new homes.
Another option would be for landowners such as NAMA to licence builders to build on viable sites. According to the latest NAMA’s Annual Report approximately 11% of its portfolio is made up of land and 23% of development property. NAMA could potentially issue licences to developers to build on viable sites in strategic locations in the NAMA portfolio in Ireland. As the small developer/builder would not have to pay for the site upfront, it could devote its capital to the construction cost. When the completed houses are sold, NAMA would then receive payment. This model worked very successfully in Dublin during the 1970’s and 1980’s.
The financial viability of the construction of new developments is a key challenge. For example, the input costs required to build new homes including land, labour, development levies, materials, Part V/social housing contributions and the requirement to fund infrastructure in advance of the development being completed, are significant barriers to making it viable to build houses at required rates of return. The SCSI has recommended that some of these construction costs could be temporarily reduced to stimulate construction. For example, the VAT rate on new homes, currently set at 13.5%, could be reduced to 5% for a period of 2 years. In the Tourism sector, the reduction of VAT to 9% is estimated to have created 15,000 jobs since it was introduced in July 2011 and has been very successful. A similar initiative in the construction sector would improve the viability of building new homes and stimulate development.
Another significant barrier to unlocking the supply of residential homes is the requirement to fund local infrastructure in advance of the development being completed. In the current environment, there are fiscal constraints on developers in financing infrastructure upfront and this leads to delays in the completion of developments. There are also situations whereby funding for the delivery of a piece of local infrastructure (i.e. a traffic calming measures or roundabouts) is required from a number of landowners/developers but the developers may be at different stages of development or even insolvent. This means that the piece of local infrastructure cannot be financed by all parties and thus some of the developments which may ready for construction, cannot be completed.
In the UK, Revolving Infrastructure Funds (RIFs) are being introduced as a funding mechanism for infrastructure prior to developments being completed. The fund enables the delivery of infrastructure required to unlock or serve developments that will bring about economic and/or housing growth. By providing this key infrastructure upfront, the planning risk is reduced, as are up-front planning obligation costs, enabling developments to come forward quicker than they would ordinarily. The new developments will also have a reduced impact on existing communities, as new infrastructure required to serve them will be in place prior to the completion of large-scale development.
The lack of mobility in the second hand home market is also having a significant impact on the supply of residential properties coming to the market. This lack of mobility has been caused by negative equity and also an unwillingness of homeowners to lose valuable tracker mortgages by moving, which is understandable. Some financial institutions have introduced products to support this, but the level of uptake remains to be seen. Due to the lack of suitable alternatives, older people are also staying in large houses that are no longer suitable for their needs. The SCSI recommends that an incentive is introduced to facilitate older people to ‘trade-down’ their properties to smaller units, if they wish. This incentive could be in the form of a reduction or waiver on the Local Property Tax for several years and help increase the supply of family-type homes in established areas.
It is clear that there is no single panacea for increasing supply in the Irish housing market, particularly in the context of the peak to trough experience of recent years. There is, however, a need for both short-term targeted solutions and a longer term strategy, to ensure that a more sustainable property sector is developed.
The Government’s Construction 2020 – A Renewed Strategy for the Construction sector is a positive step in this regard and Budget 2015 has the potential to build on successful measures introduced by Government in previous Budgets, to ensure an adequate supply of homes and greater stability in terms of house prices for the benefit of citizens, the exchequer and our international competitiveness.