Aftershocks from the crash
THE dramatic housing bubble and crash that took place between 1995 and 2012 has left its footprint on Irish policymaking. One of the obvious signs of this is the Central Bank’s macroprudential rules about how much households can borrow. In part, this is just formalising the systems the Irish building societies had in place for over a century. The building societies, however, wanted to be more like banks and got their way in the late 1980s.
As the old saying goes, though, “Be careful what you wish for”. And less than a generation later, they are all gone. Most were gobbled up by the banks in the 1990s but the few that weren’t, converted to become banks before disappearing when the bubble burst.
The banks that took over the mortgage market had very little experience in sustainable mortgage lending. Thus, the Central Bank took the step of putting in place rules to make them act like the building societies of old.
This was how the system responded to the problems with credit supply that emerged in the bubble. A different problem emerged with housing supply. Whereas there is general agreement that the problem with credit was loose lending, there is less consensus on what happened to construction.
To some, the principal problem in housing supply was a simple lack of regulation — allowing developers build whatever they wanted wherever they wanted. If this is your preferred diagnosis, then the solution is to regulate more strictly what is built and where.
A closer examination, however, reveals that much of the problem of excess was not to do with allowing the free market to build what it wanted. Rather, it was skewing the tax system, through, for example, Section 23, to get the market to build what would never have been built otherwise.
Under Section 23, developers could build homes in designated areas and write off the costs against their tax bill. It was a one-way bet: either the homes rented out, in which case they got income, or they didn’t, in which case, they paid less tax on the rest of their earnings
How else, for example, can you explain the fact that more homes were built in Connacht and Ulster in the years 2000 to 2008 than in Dublin — despite Connacht and Ulster having half the population of Dublin?
It is inconceivable that the parts of the country currently blighted with unfinished developments would be so badly affected if Section 23 had not been extended from its origins in urban renewal to a ‘one for every constituency’ bonanza.
If you subscribe more to this diagnosis than the first, then the problem was Government interference skewing the market rather than a lack of Government interference and leaving the market to its own devices. This choice matters because it affects housing supply today.
The Irish housing policy system has mostly bought in to the former story. It believes that the State was not involved enough in the housing system in the 2000s and therefore needs to become more involved in what gets built and where.
In fact, and of central importance today, the same problem and diagnosis extends to Dublin and the cities too. If you look at the poor quality of apartments built in the late 1990s and early 2000s, it is easy to sit back and think: “This is what happens when developers are allowed to build unfettered by planners and the State.”
This is a complete misdiagnosis of the problem, however. The only reason construction took place, for example, along Dublin’s quays, was the presence of tax reliefs. If you give people tax breaks to ‘rack ’em and stack ’em’, that is what they’ll do. If you want them to stop doing this, stop giving them the tax breaks.
Why does this matter? What harm can a few extra regulations do? The Irish housing market, where sale and rental prices have risen by up to 75pc in the last six years, is living proof of the potential consequences.
Clearly, the fact that rents and prices have risen is first and foremost about demand. Between income growth, employment growth and population growth, the country needs more homes. But unless you want to stop people from having families or hiring workers, the focus has to be not on why there is so much demand but where there isn’t enough supply.
Dublin alone has a shortfall of at least 125,000 apartments and in about the next five years it will have closer to 150,000 apartments. This is astounding, when you think that the city has only roughly half a million households.
But to build an apartment today means complying with the specs. Regulations cover everything from ceiling heights, window orientations, balcony depths, basement car parking, lifts per floor and overall height of the building.
All these specifications bring benefits but also costs. The cheapest a basement car parking space can be built is roughly €30,000. For context, a city centre apartment would have a site cost of between €50,000 and €100,000. One regulation alone adds an extra 50pc to site costs.
Every extra €1,000 in costs adds €50 to the break-even monthly rent. So a basement car parking space adds €150 to the monthly rent. Not a problem if you can afford an extra €150 a month and need the space. But many households cannot afford such a luxury. And many more don’t need it when we are moving past the age of car ownership, in particular for urban dwellers.