Only a ‘whole of Government’ approach can manage housing
New schemes to bring vacant homes into use could be part of a carrot and stick approach, writes Conor Skehan
INTERNATIONAL and historical evidence point to the mistake of using housing supply alone to deal with the aftermath of a housing crash. Conventional economics predict that high demand increases costs. Increasing supply initially satisfies demand and later oversupply causes prices to drop.
Housing, however, is different. It does not obey the rules of conventional economics — mainly because of investors.
Increases in housing prices, to buy or rent, makes it an attractive investment — which means that sales and prices increase to meet this need, rather than the need for affordable accommodation.
In these circumstances, more and more housing is built — yet prices continue to rise. This happens because, as prices increase, so too does investment and expectations of profits. This causes further increases in both supply and demand. At some point the prices begin to reflect the hopes of investors, rather than what can be afforded by home owners — and a housing bubble begins. This happens rapidly and is often ignored or defended by the property sector, which gains from increased activity.
A consistent feature of every housing crisis, everywhere and at every time, is the excessive emphasis on supply — and insufficient emphasis on affordability and the control of the use of housing as an investment.
Countries like Canada and Australia attempt to deter speculative investment in housing by imposing high taxes on some types of investors. This seems to slow, but not halt this problem.
These problems are avoided in mature economies which deal with this problem by recognising that housing management is the key — not housing supply.
Managing housing means recognising that solutions lie with financial ministries — as well as housing ministries.
It means managing the demand for housing by reducing the causes of homelessness — such as arrears and unsuitable accommodation.
It means dealing with affordability, lending ratios and borrowing — and it means dealing with the utilisation of existing stock.
Managing housing means dealing with vacancies and obsolescence. The Housing Agency has advised that Ireland needs about 25,000 homes each year to add to our existing stock of two million homes — but this does not mean that we need to build 25,000 new houses every year.
We can easily reach much of this target by better management of our existing stock. Housing management has three main aims.
The first is to get maximum use out of existing stock; the second is to keep people in their existing homes; the third is to keep housing affordable.
Here’s what our existing homes can deliver — in little time at little cost. The UK has 200,000 vacant homes; we in Ireland have 198,000. Clearly, we have an unmanaged problem. If we can incentivise the reuse of just 5pc of them every year, then we’d have nearly 10,000 extra homes from existing stock. Every year.
About 8,000 houses become obsolete every year. But we could keep these in use with better management.
Around 200,000 homes in Ireland have difficulties with their mortgages. Every 5pc of this group who lose their homes adds another 10,000 homes to the demand for social housing.
When people live in a home that’s much too big for their needs it is called “under-utilisation”. It most commonly occurs when children have grown up and left one or two aging adults in a home with more rooms than people.
This quick sketch points to the capacity to avoid up to 28,000 homes needed each year and to provide an additional 10,000 — all without building one single new house. Finally, the cost of buying or renting property must be affordable. Housing costs occur as a result of a complex mixture of the costs of land, finance, materials, labour and regulatory compliance. This complexity needs to be managed so that specific targets of affordability are met.
Meeting targets for housing costs are much more important than meeting targets for numbers of houses.
Housing costs (the affordability) is the ultimate cause of homelessness — not supply. It doesn’t matter how many homes we have if we can’t afford them. None of this can happen without vigorous ongoing management under strong political leadership to set priorities and resist noisy special pleading. It needs adequate resources — mostly of skill and application. But it is not expensive.
Every Local Authority should have a Housing Vacancy Officer — their job being to find vacant homes, their owners and the reasons for vacancies. This needs a system to support and to incentivise the re-use of these houses.
We also need to give priority to raising awareness of, and incentivising housing maintenance as a critical supply issue. We need to get our planning system to use zoning to actively accommodate infill of new compact housing in existing residential areas — so that people can age in the same neighbourhood, while making their home available for larger families.
Many of these solutions lie with the Minister of Finance — not the Minister for Housing. The construction industry has learned that the best way to advance their prospects is to lobby the powerful Department of Finance. This needs to be counter-balanced by demanding that the same Department takes a longer and wider view of housing.
The construction sector is an important economic actor throughout the EU — but unmanaged it has the potential to de-stabilise an economy if it assumes too much importance or influence. It is currently forecast to reach 10pc of GNP by 2020 (the EU norm), so we know that we are already reaching saturation.
Short-term gains of taxation from construction and property need to be set against long-term issues, such as loss of national competitiveness due to high housing costs, as well as the indirect and incurred costs of new housing provision that requires additional infrastructure. It is critical that the Department of Finance becomes actively involved in bringing this wider and longer perspective to bear on housing. Housing costs are the single biggest driver of cost of living increases.
Housing costs, in turn, are a very significant factor in establishing and maintaining Ireland’s international competitiveness — which directly and indirectly is the source of most of our taxation. Finance needs to drastically alter its perspective on housing in three important ways.
First, it needs to be aware that the laws of supply and demand do not apply to housing (as discussed above). Property investment behaviour needs to be actively managed to avoid pro-cyclical tendencies — such as the much criticised help-to-buy scheme.
Second, Finance needs to develop a better yardstick for Avoided Capital Costs (that is the economic advantage that accrues nationally when we re-use existing homes).
It is often overlooked that development levies usually recover money spent by the local authority — but not that spent by the State on schools, transportation, energy, health and security. Third, Merrion Street needs to appreciate that property and infrastructure investments by the State have such long depreciation periods that the re-use of areas with existing schools, clinics, transportation and power systems represents a very significant saving over the cost of servicing greenfield developments. Housing supply and homelessness continue to absorb headlines and political attention. Meanwhile, real opportunities that would provide real solutions quickly and effectively are receiving less attention.
Housing supply has an important role to play — however its actual role is completely overlooked in the frenzy to restart the traditional building industry. The new housing, that we urgently need are not traditional semi-detached three bedroomed homes.
We need new types of homes — not just new houses — for our new demographics and our new needs.
We need built-to-let apartments; we need lasttime buyer homes for aging baby boomers; we need more high-quality small units for people living alone and we need large city-centre apartments for families.
The Taoiseach has asked for a review of Re-building Ireland (last year’s action plan for housing and homelessness). The next version should devote as much space to housing management as to new building. It should devote as much space to the types of homes as it does to the number of houses. It should identify the roles of other departments to chart a path towards a well-managed housing sector. Managed housing will solve homelessness, supply, affordability and suitability. Management must be the main priority of Government — not supply.
‘We now need new types of homes — for our new demographics’