Distinct whiff of Celtic Tiger from shared equity scheme
The proposal will not increase supply where it is needed — but instead ensure prices will rise, writes Eoin O’Malley
ANOTHER address to the nation, another extension to restrictions, and another victim.
The expected opening up of building sites has been suspended until at least April. When we emerge from the Covid air raid shelter, Ireland will still have a housing shortage. While some building sites are deemed essential, in the last year we will have reduced building by at least a third of what it could have been.
That means we will have built many fewer homes than we otherwise would. Last year, about 20,000 homes were built, not far off what was built the year before, but much lower than the 50,000 or so housing units built each year during the Celtic Tiger, and just a third of the 60,000 or so homes we need to add annually if we are to bring down the price of housing in Ireland.
The decision isn’t likely to be a popular one. A recent poll shows 43pc of people want constructions sites opened immediately, the same rate as for those who want schools reopened immediately. The Government is frequently accused of being in thrall to big business, and there are few bigger than construction. But the Government is not giving in to the property sector on this. Which is why its determination to introduce a shared equity scheme as part of its Affordable Housing Bill is surprising. The accusation from the Opposition is that this scheme has come straight from developers’ lobbying.
There are two ways to address housing affordability — supply and demand. Supply-side measures try to encourage building with instruments such as increasing the supply of appropriately zoned land in the right areas, ensuring the availability of finance for developers — either private or public — or reducing the costs of building, perhaps through tax reductions or increased competition.
These supply-side measures are generally more effective at making housing more affordable. But they are also harder to do.
A symposium on housing last week found that EU procurement rules cause councils and other public bodies a significant delay in starting building on the lands they already own.
The Affordable Housing Bill that the Fianna Fáil Housing Minister Darragh O’Brien brought forward introduces three schemes aimed at making housing more affordable for people.
One scheme is brand new, to have a cost rental sector. We still don’t know exactly how it will work, as only the broad outline of the bill has been published, but it will start with 400 homes to be built by housing bodies that will have rents set at 25pc below the market rate.
The bill also plans to allow the provision of affordable housing by building on public land. But the most controversial part of the bill is the shared equity scheme.
Shared equity schemes allow for people to buy homes that they would not normally be able to acquire a mortgage for. The owner owns all of the home, but the State will provide 30pc of the purchase price of the home — which will have to be paid back, but not initially, and then with reduced interest rates.
The two aims of the policy are to help middle-income people who are renting to get out of the rent trap, whereby they cannot save for a deposit and buy a home that might see their monthly housing costs actually go down. The second aim is to increase housing supply, because this scheme is aimed only at newbuild houses.
It works by reducing the need for a full deposit — in the UK, a deposit of 5pc was enough where normally it was 10pc — and so removes this constraint on potential buyers. By moving people out of the private rental market, the pressure on rents should ease as well.
Rents remain the real problem in Dublin. Average rents in Dublin are close to €1,800, almost twice the rate outside the greater Dublin area. If the scheme eased these by increasing the supply of homes, it would be welcome.
Mr O’Brien is at pains to point out that the National Audit Office (NAO) in the UK found that a similar scheme there represented good value for money, and saw a 14.5pc increase in supply.
There are problems, however.
The UK introduced the scheme in 2013, when the UK house-building programme was still constrained by ready access to finance. Banks were unable to lend, because they were still recovering from the financial crash and the housing market was still stagnant. The NAO is now concerned that the market needs to be weaned off the scheme. Ireland is in a different place to the UK in 2013. The housing market here is buoyant and the banks have ready availability of finance.
A second problem relates to where the homes were built. In the UK, the NAO found that the scheme worked least where need was greatest. It did not provide more housing in London. So while this scheme will increase supply in areas outside Dublin, it is unlikely to increase supply where there is greatest demand.
A third problem is that demand-side solutions are likely to just drive up prices. The ESRI has said it. The Department of Public Expenditure and Reform has said it. And economists say it. If you put more money into the system to help people to buy, that extra money is still chasing the same number of homes, pushing prices up.
The Government’s official think tank, NESC, made both these points last year; that such schemes “are likely to reinforce upward pressure on prices and act as an incentive for housing development to take place away from major urban centres”. The Central Bank may also have something to say about this. It introduced rules on borrowing designed to stop loose lending pushing prices up as happened before the financial crash. This looks like a way to get around those rules.
The Housing Minister will point out that this scheme takes place with increased supply built in, through the Land Development Agency — but Fianna Fáil pushing this through against opposition from all sides looks very Celtic Tiger. And remember how that ended.
‘If you give people money to buy, that extra money is still chasing the same homes — and is still pushing prices up’