The Irish Times reported today that the Dept of Local Gov and the Housing Agency are reviewing Part V of the Planning & Development Act. In English, this means that the Social & Affordable housing scheme, which has been part of the law governing planning and development since 2002, is being reviewed. This scheme essentially provided that local authorities could demand that up to 20% of the houses in every residential development had to be handed over at a price equal to the ‘cost to build’ plus a ‘reasonable profit’ (defined at 10-12%). They also had to pay the developer for the land underneath these houses, but only at the ‘existing land use’ value, which in the case of many developments, was close to zero.
The houses would be sold at this reduced value to the local authorities, who would then sell them on (sometimes at a profit) to people who have proved their income is in a certain range etc. The ‘social’ element would be rented in most cases to people on the housing list. The principal behind this was to ensure there was always going to be some housing available for individuals and families whose incomes were below what was needed to buy a house in a given area, to ensure that the social fabric was a bit more even. The principal, in our view, was good. There is nothing wrong with trying to help lower income families live in better neighbourhoods.
There are, however, problems with it.
For one, while it did supply housing at below the market cost to local authorities, it did so at the expense of everyone else. It removed (on average) 20% of the housing stock being created from the market. This constrained supply further which undoubtedly didn’t help the price mania that went on (especially in Dublin where supply was always tight to begin with).
Another issue is that it turned local authorities into developers of sort, putting pricing risk on to them when it was never conceived that they should take such commercial risks. When houses prices fell (in some cases below the cost of building) local authorities were left with commitments to buy housing stock that was worth less than they agreed to pay.
If the aim had always been solely to deliver housing more affordably than the market (which actually does a good job of regulating affordability when it is properly supplied) then the idea of the developer having to sell the house to the local authority who then have to sell it on did nothing but add to the cost of the property to its end user. It would have been much more efficient for the local authorities to administer the process but never actually buy the property, instead having the developer sell it directly to the nominated parties.
There’s no such thing as a free lunch
The Government of the day basically copied the policy from the UK where it was being hailed as a ‘win win’ idea to drive down housing costs. Of course, much in the same way that many people believe that the UK has free healthcare, the reality is different: no matter who is buying, somebody always pays. In London for example, where some councils demand up to 50% of new housing stock is handed over for Social & Affordable use, house prices have risen by 148% since 2000 (that includes the period during the financial crisis!). Stripping out such large proportions of housing stock from the ‘real’ market simply constrains supply and this fuels price growth.
Who gets an affordable house?
In Fingal, when the scheme was in operation, the maximum joint income a couple could have in order to qualify was €57,000. They also had to meet a number of other tests, such as ‘housing need’, and being on a housing waiting list with a local authority. If they did qualify, they are placed on the Affordable list and given an opportunity to purchase whatever properties the Council have at that time. It is subject to choice, so the purchaser is able to pick one area over another. Nothing wrong with any of that. The issue comes later, if the couple want to move house. If they have owned it for less than 10 years, any difference between the price they paid and the price they sell has to be given to the local authority. This is called ‘clawback’. If the couple hold the house for more than 10 years, the clawback is reduced by 10% for every year until it is removed entirely after year 20. This, in the authors view, is the most unfair part of the entire scheme. This serves a disincentive for affordable house purchasers to move house prior to 10 years – when it is precisely during this period that they will likely be trying to start a family and may need a larger house. It completely obliterates any idea of getting a foot on the property ladder, because any equity built up through rising values gets taxed at the rate of 100% and handed back to the local authorities if they choose to move within 10 years.
Helping hand or glorified landlord?
The scheme is therefore both a tax on developers and a tax on the recipients. It takes 20% off builders pre-tax profit, which acts a disincentive towards development. It makes commercial entities out of local authorities, forcing them to take unnecessary risks. The clawback rules act as a tax on hard working, lower income families that the scheme was designed to serve (and if we’re being honest, to pull into the middle class).
Give me solutions!
- Abolish the clawback entirely, but remove principal private residence CGT relief from affordable houses
- Ensure developers sell houses directly to qualifying applicants, with the list being administered by the local authorities
- Reduce the proportion of units in every development to 10% (to encourage development) and remove entirely the ‘social’ housing (instead of social housing, local authorities should help subsidise ownership of property, renting does not encourage long term thinking and does nothing to help pull people out of poverty)
And while we’re at it, why not reform the planning process? It takes up to 1 year for a development to go through planning. This is insane and further reduces the ability of the building industry to react to changes in demand. Two simple things Government could do:
- Reduce the availability of the planning appeals process to residents or businesses within 1 mile of any proposed development
- Increase the fee charged for planning appeals in order to better funds and resource the planning appeals board (An Bord Pleanala) so they can turn around appeals quicker
If we’re going to have an affordable housing scheme, then lets do it right. Lets give lower income families a chance at home ownership. Lets use the tax that we place on developments to genuinely pull hardworking people into the middle class by helping them own a home. Its good for developers and long term it will be very good for the country as a whole.
PS – If anyone is interested to read the report prepared by DKM and Brady Shipman Martin for the department, it is available here.