Deflating housing bubble must bring realistic prices
Politicians need to be honest over remedies for the dysfunctional property market, writes Colm McCarthy
FRIDAY’S report from Daft.ie, urging changes in the regulation of the housing market to counter the latest jump in prices, should have come as no surprise at RTE’s sprawling Donnybrook campus in leafy Dublin 4. The State broadcaster has just concluded a deal to sell an 8.6-acre portion of the site, which is 6km from the city centre, for the astonishing figure of €108m, without planning permission.
The developers hope to build 500 residential units, almost all of which will be apartments. The price works out at €12.5m per acre and equates to €216,000 site cost per unit before a planning adviser has been engaged, much less a sod turned. It will be many years before the first home is occupied and hard to see how the cheapest will sell for under half a million.
RTE’s Donnybrook site is one of many examples of profligate and wasteful landuse policies in the Dublin area, where the few available sites are again commanding bubble valuations. The immediate area includes UCD’s huge Belfield campus, an 18hole golf course and an ugly sprawling bus garage. Every site that changes hands mobilises local residents, assured of generous exposure on RTE, to oppose the granting of planning permission, even in areas that enjoy residential zoning and are well-served by public transport.
The problem of housing affordability in Ireland is not truly national. In the Dublin region, and in a few smaller provincial markets, house prices and rents have moved beyond the budgets of those on average incomes. In the capital, young people can no longer aspire to homeownership and rental costs are already exorbitant. But in most parts of the country, starter homes can still be purchased within the Central Bank mortgage guidelines by people on moderate incomes. Rents are also affordable but in the Dublin region this has once again ceased to be the case.
The Daft.ie report shows national average asking prices at around €240,000. But starter homes are available in most counties for €150,000 or even less, while little is on offer in most parts of Dublin much under €350,000. Rents of €2,000 per month and upwards are now being sought for modest apartments in Dublin’s inner suburbs, while considerably larger units are available in most provincial areas for less than half this figure. National averages have no meaning in these circumstances and should be avoided in the discussion of policy.
The dysfunction in the housing market clearly visible in 2006 and 2007 as the bubble burst has begun to reemerge, this time without the benefit of runaway mortgage finance. The source remains the failure, in a small number of areas but particularly in and around Dublin, to ensure the availability of adequate sites for the construction of affordable housing to meet demand. The result is an illusion of increased housing-related wealth for those who own residential property and intergenerational inequity in access for the younger generation. The increased ‘wealth’ is an illusion precisely because the increase in price is an artefact, the result of policy failure and not any enhancement in the practical utility of the housing stock. Your house does not grow extra rooms when the price goes up.
Housing Minister Eoghan Murphy is reappraising the Government’s housing strategy. First to go should be the first-time buyers’ grant, which stimulates demand and adds impetus to the renewed price bubble already in evidence. Prices in the outer Dublin suburbs are already double the pure construction cost and more. The ultimate source of this unsustainable state of affairs is the system of landuse regulation, which zones too little land for housing, sees too little zoned land serviced by local authorities and denies planning permission even to land already zoned and serviced. If politicians sincerely believe in more affordable housing, this implies an early end to rising prices and a long-term plan to get prices back in closer relationship to construction costs in the rolling prairies of derelict land that surround the city.
One short-term obstacle to more realistic values in Dublin is the exposure of the Irish banking system to residential mortgage lending. The three main domestic banks, AIB, Bank of Ireland and permanent tsb, have large mortgage books collateralised against high valuations and continue to lend 80pc and even 90pc of price into the inflating market. Should valuations trend downwards, these loans become riskier. There is evidence from the United States that default rates on mortgage loans tend to be higher the greater the portion of the valuation accounted for by land value as distinct from the construction cost component. Since Dublin valuations are so much higher than those for comparable properties elsewhere, it follows that Dublin loans are collateralised to a greater extent by volatile land valuations. These loans are particularly vulnerable should politicians actually deliver on their declared intention to make housing affordable through serious changes in land-use regulation.
In New Zealand, when faced by a price bubble in Auckland, the largest city, the financial authorities decided temporarily to impose more restrictive loan-to-value ratios on mortgage lending in that city. The Irish Central Bank will be undertaking its annual review of the mortgage lending rules over the next few months and will no doubt need to consider whether recent trends in Dublin prices are beginning to create prudential risks for the lending banks.
It is not the task of the Central Bank to target any particular level of house prices, that is the Government’s job, but the Central Bank should get concerned about lending risk for banks unless it believes that the Government is not serious in dealing with the affordability issue.
Mr Murphy should target a standstill on Dublin area land prices and a gentle annual reduction over the medium term, slowly enough to avoid negative equity for borrowers or higher default rates for lenders. In the private mar- ket, this will require extra zoning, accelerated servicing by local authorities of land that is already zoned and the ready availability of planning permission.
It has taken several decades to create the current artificial shortage of building land in the Dublin area and it would be risky to unravel it too quickly.
The minister should also be considering the possibilities for reducing add-ons to construction costs arising from local authority development levies and over-elaborate design requirements for apartments. The capital gains tax exemption for private dwellings has also passed its sell-by date.
The local authority housing stock has been depleted through sales to tenants at heavy discounts. The scheme, suspended some years back, is being reintroduced and both Fine Gael and Fianna Fail have expressed support. This looks like a mistake in current circumstances and Sinn Fein has expressed reservations. There is not much point seeking to expand the availability of social housing through costly new construction while reopening a large hole in the bucket through an overgenerous tenant-purchase scheme.
The principal challenge remains the unwillingness of politicians to state clearly that the objective of policy, affordable housing, must translate ultimately into lower Dublin prices, and lower rents.
‘Houses do not grow extra rooms when prices go up’