Housing Crisis | Supply, Demand and Cost

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30 July 2015

The following articles from this week give a snapshot of the current housing crisis and explore factors that are impeding residential supply at the moment: a Government unprepared for recovery with a Local Authority infrastructure deficit, the effect of building standards on the viability of residential projects, and the Government focus on supports to developers for speculative housing supply.

“THE HEAD OF Dublin City Council’s Economic Development Committee has raised concerns that “a serious lack of investment” in the capital’s infrastructure has left the city “completely unprepared for the upturn…Fianna Fáil councillor Paul McAuliffe said a lack of investment in housing, transport infrastructure and public services has led to “unsustainably high rents, heavy traffic congestion, pressure on public transport services and a lack of available office space in the desired locations”.

McAuliffe said Dublin City Council’s latest economic monitor shows the city “simply doesn’t have the infrastructure and services to cater for the economic recovery”.

“The report shows that the lack of available housing in the city has driven rent prices to their highest level in six years and twice as high as the rest of the country. Office rents have surged by 25% in just a year…“The capital is creaking at the first signs of growth.”

A spokesperson for the Department of the Environment said McAuliffe’s criticism is unfair, noting the government has committed to spending billions in areas such as housing…Meanwhile, a spokesperson for the Department of Transport said the level of funding available for investment in transport was “dramatically reduced following our economic collapse which was due, in large part, to severe mismanagement of the economy…”

  • €500m home-building finance joint venture with leading global investment firm announced”  Irish Building Magazine.ie, 28 July 2015. In this article current policy by Government to support developers and speculative housing is highlighted. A new joint-venture funding body has been created to lend up to €500m to developers. The residential mix and extent of luxury homes is not made explicit, and figures quoted by Government appear to be optimistic. Current development costs are €250k for a typical average apartment excluding developer’s profit of €37k per unit and the site cost (see previous post here). The new €500m funding body, supplying 90% of the development cost, will finance just 2,000 homes (or max 4,000 at 50% funding level). With a lead-in period for most mid-large scale residential projects of 18-24 months, a housing list of 90,000+ and only 1,200 social and affordable units delivered by NAMA in the past 4 years, the current housing crisis looks likely to continue for some time. Extract:

“The Ireland Strategic Investment Fund (ISIF), managed by the National Treasury Management Agency (NTMA), together with KKR Credit, have today announced the launch of a new €500 million joint venture,…The lending platform will facilitate home-builders in engaging on medium/large scale housing schemes, delivering a material increase in housing supply. Activate Capital will lend on a commercial basis to projects, providing home-building companies with cost effective loans for up to 90 per cent of the total financing requirement…

Minister Michael Noonan said: “…The announcement is a win-win for the State from all perspectives: economically, we are increasing activity in the housing sector, which is vital for our economic competitiveness and long term growth prospects; financially, we are generating a commercial financial return for the Ireland Strategic Investment Fund, which can be continually recycled into new and additional projects; and socially, we are supporting employment in a sector that was worst hit during the crash and it is noteworthy that employment in the sector will be at all levels from early school leavers through to third level graduates.”

Minister Alan Kelly said: “…Many builders and developers are reporting difficulties accessing finance for building projects so this investment is hugely significant.”

ISIF Head of Private Equity Fergal McAleavey said: “…Our joint venture will help to address this by providing funding on a commercial basis to development projects that are capable of delivering over 11,000 new homes. This will meet the ISIF’s ‘double bottom line’ criteria of achieving commercial returns while delivering a significant economic impact – in this case by providing crucial infrastructure that Ireland needs urgently.”

  • Loosening building standards for apartments won’t solve housing problem” Irish Times 28 July 2015. The issue of building standards and their effect on residential supply is explored in this article by John McCartney director of research at Savills. Rather than reducing planning standards, the author suggests a more careful study of existing housing stock, demographics and demand is required. His analysis suggests solutions such as a targeted increase of family homes along with cost reductions. Extract:

“An increasingly common argument is that minimum building standards are contributing to Ireland’s housing problems. The logic is that burdensome regulation is choking development activity and driving up property prices.

…the requirement to build bigger, more accessible, more energy-efficient apartments significantly adds to construction costs. This is problematic because, in an economy where mortgage lending is tight and earnings are just beginning to recover, attainable sales prices often don’t justify the extra spending. As a result, developers are finding it hard to build profitably in many locations. Improved standards are therefore among the factors impeding residential construction…

…Between 1994 and 2007 a stock of more than 160,000 apartments was built. As these predate the Department of the Environment’s design standards for new apartments, most were small units, built to basic specifications…Viewed in this context it is hard to argue that we have a shortage of small, basic apartments…The real problem is that our large stock of small, basic apartments is not being fluidly traded because the occupants of these properties don’t have anywhere to trade up to…

We urgently need more family housing and, given current density requirements, large good quality apartments are a sustainable way of meeting this need. But the cost of building these units is prohibitive at current prices. As such the cost base needs to be reduced…if we want families to view apartment living as a viable, long-term option, we should not focus our policy efforts on scaling back the size and quality of apartment dwellings.

Instead we should look for cost-savings elsewhere. Given the limited range of options, a good starting point would be to reconsider local authority development levies and VAT on new homes. As it stands these are pitched at a level that serves nobody.”

For more information on Active Capital see link here.

Other posts of interest:

Developer -Led sales price for a typical apartment

Housing Crisis | NAMA funds €1.5m ‘trophy homes’?

Minister Kelly, “Stroke Politics” and Social Housing | Irish Examiner

Further questions over Newbridge fire-trap houses that have ‘no resale value’

Realistically, the industry will probably manage to build a total of 9,000 houses a year | CIF

Getting Our Housing in Order | Vivian Cummins

House completions continue to stall | Department of the Environment

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