Home-builders and Building Contractors need support

Home-builders and Building Contractors need support

Tom Parlon, Director-General, Construction Industry Federation

I’ll start by disagreeing with the topic of this discussion. We don’t need a housing strategy and it’s too late for a vision for house-building in Ireland. I’m being purposely provocative for the following reasons:

We already have many housing strategies from many agencies and Departments. Construction 2020, the Social Housing Strategy 2020, the Committee on Homelessness and Housing Report. These strategies set big targets for house-building but no focus on industry’s capacity to deliver. Since the recession, the construction industry has been essentially excluded from the policy formulation process.

So we have had strategies that don’t address the fact that many house-builders haven’t found it viable to build houses and the state has stopped building homes.

My second point is: that it’s now too late to have a vision for housebuilding in time to solve the current housing crisis. We might have one in place for the next housing crisis whenever that may be. There’s an old saying: the best time to grow a tree is twenty years ago.

The next best time, was yesterday. Unfortunately, houses are similar to trees. When you need them it’s at least 5 years too late to start growing them. So, we do, of course, need a vision for housing for the next 20 years to cope with Ireland’s changing economic, social and demographic changes.

Let’s have a look at what the lack of strategy and vision has result in:
• 90,000 on the social housing list
• Rents are at celtic tiger rates with 15 consecutive quarters of rent rises, with average rents in south County Dublin being €1600
• Average mortgage deposit in Dublin of €51,000 meaning a FTB couple putting away €400 a month would have to save for 10 years
• We spend €46m on hotel accommodation for homeless people (about 150 new homes)
• 1000 families and 2000 children sleeping in hotels every night

All this in the country with the fastest growing economy in the EU

To give you a sense of the challenge we face:
In 2006, we completed 90,000 homes. Last year, we completed 12,300 homes. This is the same level we produced in 1974 with a population of 3 million – nearly 50% less than today’s. But many of these were houses mothballed in the recession and were only completed last year. The figure that you need to watch is our commencement levels.

Last year, we only began building 8,000 houses this year. We’re behind even that level at the moment for 2016.

So when you hear targets set, you should compare them to our commencement levels.
• The ESRI believes we require 25,000 houses a year to meet our population’s growth.
• 30,000 according to Minister Coveney to meet pent up demand by 2020.

Think about that – the construction industry now needs to reach a level of output that is nearly quadruple our level of commencements in just 4 years.

The biggest development that will come online quickest could be Glenamuck with 3,000 houses. We need 10 Glenamucks in one year to hit the 30,000 figure that the Minister has mentioned.

On social housing, to give you a sense of the challenge:

Just today, we heard that we need to complete 45,000 social houses in the next 5 years. Last year, there were only 75 new social housing units built by local authorities. 476 were built by voluntary housing agencies. In 1975, local authorities built 8,800 social housing units. So, this is what we’ve achieved with no vision and a series of strategies that set big targets without asking industry if they can deliver.

Having been a politician, and more recently representing the construction industry, I believe the engagement between those who can deliver housing – the industry, and those who plan for Ireland’s housing needs – the Government, is broken in three harmful ways:
1. The Government depends on housing to deliver on its social needs and for a significant chunk of its income through the tax take – 36% of the cost of each unit built. When house-building activity increases, the Government binges. Then comes the hangover and the Government stops engaging.

2. There is no line Department for the construction industry. All food companies are covered by Agriculture, all banks are covered by Finance etc. However, in construction the only thing approaching a line department, Environment, has a role which is to monitor the industry, not help develop it.

3. And … there is little or no coordination between the myriad Government agencies involved in the industry – 15 state agencies and departments.

As an ex-politician, I can understand how this disconnect can happen. TDs/civil servants cannot be seen as supporting house-builders. Media have been vigilant in ensuring no politician can promote a policy that might be seen to support the construction industry.

There are 34,000 businesses involved in construction and construction related industries. Over 99% are SMEs. Very few are developers. The home-builder and local contractor run small businesses in every community in Ireland. The small house builder is the equivalent of the small farmer in local communities – provide jobs, spending their income in the local area and tending to the housing stock and built environment across the community.

The Need for a Long-Term Vision
Currently, the construction industry is growing strongly at nearly 7% of GNP (before our recent massive GDP increase!). The OECD and others believe that construction accounting for 12% of GNP is a sustainable level for a modern economy. The Irish Times Cranewatch counts 45 cranes on the Dublin skyline indicating increased activity. But construction companies are building offices and infrastructure, not houses. Minister Coveney’s strategy must support home-builders by ensuring they have access to finance. So far, Ministers Coveney and English have adopted a pragmatic approach to increase supply.

They are moving quickly to speed up delays in planning issues, such as part 8, for larger developments to address housing shortage straight away.

They have taken the innovative step of establishing a €200million fund to build infrastructure for land zoned residential that can support large developments. Hopefully, the measures announced today will address the housing supply issue in the medium term. But to break the cycle of volatility in housing, then the government does need a long-term vision.

This vision needs to be cognisant of trends such as urbanisation, the ageing population, climate change and demographics and the industry’s capacity to deliver. This will also help home-builders plan, secure finance and adopt new business and production models to meet Ireland’s changing needs.

Currently, SME homebuilders pay over the odds interest on bank loans when they can get them. The reality is that if the SME regional homebuilder does not build in Tullamore or Athlone or Castlebar or indeed Glenties, then how will those towns regenerate, attract FDI and generate jobs across the region. Currently, it’s ECB policy to decouple member state banks from their respective property sectors. Domestic banks have been strongly encouraged to only provide finance to property companies on a 60/40 debt/equity ratio. This costly type of finance is beyond the reach of many would-be housebuilders.

Essentially, the view of the Central Bank is ‘small companies will have to consolidate or go out of business.’

The Mortgage Crisis and Development Levies
Just in case you think this is a regional issue, the country managers of Intel, PayPal and Apple have recently lamented the lack of housing for their employees. The IDA is now deeply concerned that the lack of housing supply is beginning to impact on FDI investment decisions in the near future. The other area where we feel the central bank can affect supply is on mortgages. They are currently placing home-ownership beyond the majority of first-time buyers. Our analysis shows that first-time buyer couples – teacher/guard or two civil servants with 5 years’ experience – fall well below the combined salary required to secure a mortgage for the average starter home.

Since their introduction mortgage approvals have declined, average deposits have gone up, as have house prices, as have rents in the city to celtic tiger levels.

Interestingly, these rules were brought in at a time when house price inflation was very high in Dublin city. Sherry Fitz have reported that at the time house prices were rising rapidly in 2013, there were only 300 properties for sale in the Dublin area.

Let me just explain the impact of this lack of mortgage approvals. When a homebuilder applies for finance, a domestic bank will in addition to looking for a 10-15% profit margin, look for a stream of mortgage approved buyers. That stream is currently dry because of the central bank’s stringent mortgage rules. Tweaking the deposit requirement and loan to income requirements subject to credit history and ability to repay could result in a small but significant reductions that could increase mortgage approvals to sustainable levels without unhealthy credit levels.

The CIF will outline a number of initiatives in its budget submission that taken together should stimulate sustainable supply.

One of the measures, we believe will help first time buyers is the introduction of a Help to Buy Scheme. This system has had some success in the UK where the government takes a stake in the homes of first time buyers – essentially reducing the mortgage and deposit levels that first time buyers have to meet for an average home. This could also be supplemented by a SSIA type saving scheme for first time buyers.

One other area the Government must address is development levies. These levies are upfront costs per unit and act as a barrier to the home-builder securing finance. Property tax should replace the current development levy contributions for residential development and this would improve affordability.

Finally, the vexed question of a VAT reduction. Minister Noonan recently asked if industry would support measures to ensure any reduction in VAT from 13.5% to 9% were passed on to the consumers. Of course, it would. This measure will increase affordability, bringing more ‘customers’ into the market – generating the steady stream of mortgage approved buyers that banks insist on before providing finance to house-builders.

A Strategy and Vision
With the anticipated increase in supply required, the CIF has pro-actively sought to ensure standards in housebuilding. Along with the Department, we have established a standards body: CIRI Construction Industry Register Ireland and over 850 members have signed up at this time. This, we hope, will be put on a statutory footing in the near future and this will have a profound effect on standards and confidence in the sector.

A strategy and vision will also help ensure we have sufficient skills for the industry to deliver for Ireland. The commercial and industrial construction sectors are already reporting skills shortages as they try to build the offices and specialist building that facilitate Irish FDI.

We’re back to when is it best to plant trees. Apprentices take 4 years to grow. If we ramp up output of house to 30,000 and continue strong growth in other sectors of construction – where are all the skilled employees going to come from?

Any vision for house-building must also focus on national infrastructure. If we create a national housing strategy that does not, then we will have a new phenomenon of ghost communities, not ghost estates: unconnected clumps of housing in areas disconnected to urban growth centres.

A significant increase in the public capital programme from 2% – lowest in EU, to the more sustainable and long-term average of 5% in the next decade is required.

Currently, Ireland’s ambition is being limited by the EU’s fiscal constraints. Surely, a small growing country, coming out of recession with an infrastructure deficit that paid of 43% of the EU’s banking crisis debt, should be given some lead when it comes to capital expenditure for major transformative projects. The case should be clearly made at EU level – the housing crisis and infrastructure gap are force majeure and Ireland’s should be allowed more space to sustain and spread our economic recovery.

It’s our belief that an independent commission is required to prioritise limited infrastructure spending. This model has worked very successfully in the UK where they have established such a commission to insulate prioritisation of projects from the political process. Most interestingly, the commission has been tasked with identifying 40 towns that must double in size and make a compelling and sustainable case to do so to secure infrastructure investment. Could a similar approach be utilised in Ireland in developing clusters driving economic growth through collaboration rather than unnecessary competition and duplication?

The Construction Industry will play a role in shaping Ireland’s future for good or ill as we underpin the competitiveness of every other sector including FDI. However, without proper engagement between government and industry we are likely to be back here in 20 years talking about another housing boom or bust.

History shows us that industry, communities, local councils and national government all need to work together effectively to create homes people want to live in and towns that can become economically independent, are well connected to the regional economy, and generate local jobs. The construction industry is Ireland’s greatest economic and social tool – let’s pick it up again and forge a new future for Ireland.

Book Now