The government cannot be blamed for the housing crisis, as it has been in the making for the past few decades.
Its response, however, has been slow and incoherent. The standoff between Michael Noonan and Alan Kelly has to be resolved soon and a comprehensive action plan needs to be put in place.
Mr Kelly wants rent controls as part of the government’s policy mix; Mr Noonan is implacably opposed to such a move. On balance, Mr Noonan is correct.
There are a number of factors contributing to the housing crisis, although the lack of supply is by far the most serious.
In 2006, Ireland was building just over 90,000 housing units. Last year, less than 9,000 units were completed, which is well below the 25,000 units required.
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There are a number of pressure points in the system.
There is a direct link between escalating rental costs and the homelessness crisis. Also, there are about 100,000 mortgages in arrears and the number of repossessions is growing.
There are several factors complicating a solution to the crisis.
The current scale of construction activity is constrained. The planning process is unwieldy and expensive. It takes up to 18 months to get through red tape. Development levies and a 13.5 per cent VAT rate on new builds make Ireland a more expensive country to build new homes in than others.
There is also a shortage of developers with the financial ammunition to take on the type of large scale projects needed to meet underlying demand.
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Banks are lending, but on the basis of strict criteria such as the number of pre-sold houses in a development. New Central Bank rules on mortgage lending have dampened demand, particularly in Dublin, where the shortage is most acute. The majority of mortgage applicants now need a 20 per cent deposit and the value of the loan is capped at three and a half times’ salary.
The Labour party is in favour of rent controls to protect the most vulnerable people from the threat posed by unscrupulous landlords.
Mr Noonan has called on the Central Bank to review its lending rules and developers have asked the institution to ease its new mortgage caps. The most effective policy response, however, is also the most politically toxic, and that is tax relief and other incentives for developers.
Rent controls at this stage would act as a disincentive at a time when supply is at unsustainably low levels. The Central Bank is an independent institution and should not cave in to political pressure. There are legitimate concerns about the timing of the introduction of these rules, but they are needed to prevent another repeat of uncontrollable house price inflation in the future.
Tax incentives for developers were one of the main causes of the housing bust in 2008, but there are crucial differences between then and now. In the Noughties there was a lack of intelligent planning; developers were getting incentives to build in areas where there was no demand, including on flood plains. Also, because there were no macroprudential rules, there was no reasonable limit on how much mortgage applicants could borrow, which increased the pressure on house prices.
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The public profile of many developers elicits a less-than-favourable reaction from the public. Take Bernard McNamara. Tenants in Mr McNamara’s Longboat Quay development in Dublin face paying thousands in fees for remedial work or eviction because of fire and safety issues. Having availed of British bankruptcy laws, Mr McNamara is back in business in this country. If he were to receive tax incentives, then the fallout would be hugely problematic.
This is a difficult and testing issue for the government, but the reality is that the coalition needs measures to stoke the supply of new housing, even if they are unpopular. In the longer term, the new lending rules will limit the overall access to mortgages and many people will have to rely on the rental market.
There is the risk that if the rental market remains unchecked it will attract more investors, which could lead to another bout of very damaging house price inflation. If the rental market is to become a viable alternative to buying, then renters need access to long-term contracts similar to the model used in mainland Europe.