March 17, 2016
With a few simple steps, State could provide social houses for €800 a yearPosted in Irish Independent · 107 comments ·
Years ago, I had the wonderful opportunity to work for Jack Welch of General Electric fame at close quarters.
It is the sort of invaluable experience that is hard to replicate, even if, at times, his pace of work was shocking for someone 30-odd years his junior.
During the period, we had time to chat about all sorts of things.
At one stage, we were talking about crises or challenges, not just in business but in life in general and he sat me down, almost pointing his finger at me, and stated that there are three things to do in a crisis, or when faced with a challenge.
First, define your reality, not as you would like it to be but as it is.
Second, do something about it.
Third, face into the challenge and it won’t be as traumatic as you first feared once you have defined your reality.
Our new government has to define its reality and that reality is that Ireland has a housing crisis.
This column documented, well before it was fashionable, how we catapulted from building an abundance of housing units in the wrong places, to building none at all. But there are solutions.
The key thing to appreciate is that the market acting alone can’t provide decent housing at decent prices for our country.
It was the free market, not the State, that built ghost estates.
It was private banks, not State banks, that blew their balance sheets and ransomed the national finances with the explicit “bail us out or we will take the economy down” threat.
Rightly or wrongly, fixing the housing problem will take massive government intervention.
It will be done via government borrowing and that government borrowing has to be ringfenced explicitly to build houses.
These are not social houses; they are houses. Let’s drop the social bit.
Before I explain how it will work, let me tell you about the true cost of houses.
If you want to write about building houses, who do you talk to? A builder, of course – these are the lads on the site.
An old mate is a builder in Dublin. He is a small builder, nothing too fancy.
He reckons it costs €110 a square foot to build an extension on your house. To build a whole house, that figure could come down a bit, and to build lots of houses, that figure comes down a lot.
He suggests that if you are building hundreds of houses, the cost could come down 30pc because of volume.
This implies that a new build house on an estate should be costing about €70-€75 a square foot.
Like most Dubliners, I was brought up in a three-bed semi, which would have been about 1,400 square feet.
This means that these houses should be costing €107,800 to build.
Now let’s say the new government were to build 50,000 such houses in Dublin over the next two years. This would meet demand and still have some change to go around.
It would also cause the price of all houses to fall, as such a supply shock often does.
So, how much would that cost?
It would cost €5.3bn.
Our new government can borrow for 30 years today at 0.7pc per annum.
This implies that a ringfenced special purpose borrowing vehicle for Irish State housing would have to pay around €38m per year.
Now we are talking. This is a tiny figure.
How much annual rent would you have to charge on these State houses to cover this interest rate cost?
The actual figure would be €760 per house per year. Not per month, per year. This would be affordable housing, wouldn’t it?
And what would happen to the lion’s share of the €5.3bn that the State borrowed to cover the cost of the houses?
When you think about it, most builders will tell you that 70pc of the cost of building is wages, so there would be a net injection of €3.7bn into the economy in terms of wages.
This has a multiplier effect on spending and taxes, which all leads to a boost in demand.
Obviously, there are other costs and charges you could add to these base figures but this gives you a sense of how the creative use of State borrowing at very low interest rates can get us out of this hole at almost zero cost.
If you wanted the State to pay back more, you could increase the rent paid on these houses.
Now, obviously, the other big cost is land. It is land prices, not building costs, that are sky-rocketing.
In this case, you simply rezone agricultural land and pull the carpet from under those who are hoarding land.
A more sensitive way might be a “use it or lose it” scheme, where the land owner has to start building within one year or the site reverts to agricultural use and the State can enforce a compulsory purchase order.
The State would simply be the buyer, as all these houses would be built by private building companies.
To those developers who are suggesting, rightly, that super-levies are increasing the frontloaded costs of building, the State could help them out.
For example, in Cherrywood/Kilternan/Glenamuck, which is a massive site in south Dublin, the levies on units are huge.
Levies are to pay for roads, drainage and special services such as the Luas.
Standard levies are €9,000 per unit, the Luas levy is €6,000 per house but a local surveyor told me that the super-levies in Kilternan/Glenamuck are as high at €40,000 per unit.
This is crazy and, as these levies are frontloaded, the levies are preventing developers from building, which may explain why so many sites are vacant.
The State could again smooth the payment of these levies over years by again deploying the 30 years’ grace the bond market gives any sovereign government.
The levies will be paid, but not all at once and not all at the beginning.
It is time for the new government to take Jack Welch’s advice regarding the crisis.
Define reality, do something about it and once you are prepared to face it by taking action, the crisis doesn’t appear so bad at all.