Funding social housing through bust, boom and bust

There is a lot of debate about the impact of the shortage of social housing at the moment, so I thought that this UCD Geary Institute for Public Policy working paper on the funding of this sector might be of interest:

https://ideas.repec.org/p/ucd/wpaper/201615.html

In it my colleague Mick Byrne and I argue that the causes of our current difficulties in funding and delivering social housing are older and more complex than is commonly understood.  Rather than policy decisions made during our most recent economic crisis, they are the result of reforms to social housing financing methods initiated during our last major economic crisis in the mid 1980s.

For most of the 20th Century social housing was funded by local government borrowing which were repaid using rents (which reflected the cost of providing housing), rates (local government property taxes) and central government subsidies.  This financing method made social housing delivery affordable for government by spreading out the cost over an extended period and drawing on several sources of funding.  This enabled government to build large numbers of social rented dwellings even during periods when the economy was weak such as the 1950s and to use social house building as a counter cyclical economic intervention.

The replacement of this funding method with central government capital grants as part of Ray MacSharry’s package of budgetary reforms in 1987 changed social housing into a pro cyclical intervention.  From then on central government has paid all the cost of building/buying social housing in an up-front lump sum and to paraphrase another finance minister this meant that ‘when we have it we spend it’ and vice versa.  In relative terms social housing output was well below historic norms in the 1990s; although it rose again during the property boom, the value for money achieved in return for housing investment at this time is open to question and of course output collapsed in tandem with the economic collapse from 2007.  Inadequate social housing output also necessitated increased reliance on rent supplements and other housing allowances for benefit dependent private renting tenants which help to inflate rents and enabled the radical expansion in buy-to-let lending which was a key driver of the house price boom.

Merry Christmas and happy new year everyone.  I hope 2017 will finally see homes provided for those who are without them this Christmas.

6 thoughts on “Funding social housing through bust, boom and bust”

  1. This is a well-presented and very necessary piece of research. Many thanks for the post and link.

    It should have a significant impact on the policy-making process, but I fear it won’t because those who benefit from the current arrangements enjoy overwhelming economic and political power. They will simply ignore or dismiss the case being made here. But the barely disguised abhorrence of market functions and the totally irrelevant references to “neoliberalism” make their dismissal effortless. The state acting on behalf of citizens collectively, whether at the local, regional or national level, can support and ensure the effective functioning of markets. But those who advance the role of the state almost invariably display a visceral opposition to the effective functioning of markets and those who call most loudly for “de-regulation and free markets” seek to distort, rig and subvert these markets, hire armies of advisers, consultants, lawyers, accountants, PR operatives, pliant media hacks and tame academics to facilitate this distortion, rigging and subversion of markets and subborn governing politicians and policy-makers to authorise this distortion, rigging and subversion.

    It is little wonder that these distorted, rigged and subverted markets generate outcomes that cause social and economic damage to large numbers of citizens. But this is not the “neoliberalism” which left-leaning academics and commentators make fools of themselves seeking to define so that they can excoriate it; it is simply the latest mutation of capitalism that has shaken off some of the shackles required to ensure it generates economically and socially beneficial outcomes.

  2. This paper is a useful piece of work and an indictment of decades of housing policy. It typically takes a crisis to get serious attention.
    By 1920 the British local government administration had built about 48,000 rural cottages for non-landowners — 32,000 in 1900-1920 — mainly in Munster and Leinster.

    In the early decades of the State, the Land Commission was used for political patronage and in 2004 Emer Ó Siochrú wrote:

    Rural areas got more than ten times the social housing investment of urban areas. Local authority housing tenants moreover, were given the right to buy their house from the outset – a right only offered to urban flat tenants this year of 2004.

    http://www.feasta.org/documents/landhousing/coritax.html

    To this day fear of a backlash from farmers has prevented sane measures on rezoning. Farmers got 23% of the national road building budget during the boom — about double the typical ratio in the EU. During the bust, farmers who did not have to cede land were paid disturbance money, which was part of a deal to avoid interference.

    The Land Commission was abolished in 1992 but in contrast with Ulster records held in Northern Ireland, access to records from the 19th century for the rest of the island which are held in a building in Portlaoise is only granted if “you…supply individual written permission from descendants of all those involved in the original transactions.”

    http://www.irishtimes.com/culture/heritage/irish-roots-the-land-commission-s-forbidden-fruit-1.1534764

    Eamon Ryan in the Dáil last May highlighted a shortcoming in the parliamentary system when there is key information on a current issue that most of the Oireachtas and media are unaware of, and the Norris/Byrne paper is a very good example.

    the idea of creating parliamentarians who can be specialists in certain areas is an important development. In past debates about the public service, I remember there was always a commentary about the change from public servants being generalists to having specialist skills. While I would nod and agree, there would be a slight background sense in my own mind that it is politicians who are the pure generalists. I believe it would be appropriate for us, in the very complex policy world we live in, to develop those specialist skills, which is what is set out.

    Michael Hennigan

  3. With the return to high net immigration and the accelerating collapse in the number unemployed, homelessness has become the latest ’cause du jour’ of the commentariat and the social justice warrior set in Ireland (not suggesting that the author belongs to either of these groups). As past experience shows (e.g. the ludicrously-exaggerated estimates for net emigration bandied about in the past decade), once the commentariat and the social justice warrior set adopt a cause, all regard for statistical accuracy goes out the window. I’ll try to rectify this with a few brief points.

    (1) Despite its recent rise, homelessness in Ireland is on a smaller scale than in most other EU countries – confirmed in a recent EU report:

    https://thewonk.eu/reports/2016-european-housing-exclusion-index__r2083.html

    A recent report stated there were 130k homeless families in the UK ( a rate 2-3 times that of Ireland). I was in New York in November, a city ruled by left-wing Democrats and liberals for years (supported Hillary overwhelmingly in the election) and the number of people sleeping on the streets was enormous. Even the Nordic countries, seen as paradise by Ireland’s commentariat and social justice warriors, publish figures for homelessness rates that are very similar to Ireland.

    (2) Regardless, it is completely unacceptable for anyone to be unwillingly homeless. The primary cause of the increase in homelessness in Ireland in recent years is the failure (since circa 2009/10) to build houses at the same rate as the population has been increasing. In the decade between 2006 and 2016, during which the perception generated by the media has been of a population in free fall through mass emigration, the reality has been that Ireland’s population grew by over 12 per cent compared with 3 per cent in the EU as a whole. Indeed, Ireland’s population has been growing at 4-5 times the EU rate since the late 1980s. There needs to be acceptance on the part of economists, demographers and policy-makers that this is likely to continue and indeed accelerate. There is a continual tendency among forecasters to underestimate population growth in Ireland (largely because they think Ireland is such a vile country no one would want to live in it) and to invoke spectres of future population collapse that are eagerly gobbled up by the loony-liberal media and commentariat. Hence emigration is always over-estimated and immigration is always under-estimated in forecasts for future population growth. Based on current trends, It looks as though population growth could hit 60k in the year to April 2017, a rate of increase that was completely unpredicted even a year ago.

    High population growth is in itself not a problem. When Bertie Ahern was in power and the Galway tent was up and running, there was no problem building enough houses despite astronomical growth in population (140k in the year to April 2008 alone). Since then we have had the demonisation of the construction industry and absurd exaggeration of the surplus of ’empty’ houses. We need to get back to the very high level of housebuilding that was the norm when Bertie was Taoiseach and for which he was condemned by the same people who are now moaning about the low level of housebuilding. There are signs that this is happening, but far too slowly (given the rapid acceleration in population growth). It looks as though the number of new house completions in Ireland in 2016 will be 15k-16k (v 8k in 2013). But, it needs to be brought up to 35k-40k as quickly as possible. Past experience shows that the construction industry in Ireland has no capacity problem in raising house-building to very high levels (a complete contrast with the UK), but it needs to be given accurate projections of future population growth by the country’s economists and demographers. They have failed completely to do this in recent years. I could name two in particular who are most guilty (neither post on this site), but its Christmas and I am still feeling the effect of the sermon at a packed Omagh Cathedral on Christmas day, in which the congregation was exhorted to be charitable to all people no matter what they had done. I may return to this point at a later date, when the effect of the sermon has worn off.

    (3) As stated in (2), the primary cause of the increase in homelessness in recent years has been the low level of house-building compared with population growth. But, there are other social factors at play as well. Among them, drug addiction and the collapse in the traditional family. We should be charitable to those who screw up their lives through bad choices and lack of moral guidance in their formative years. But, the reality is that in some of the most-publicised cases of homeless people dying on the streets, it turned out that they had turned down offers of accommodation and were on the streets through choice. It is also a fact that the collapse in the traditional family is resulting in an increase in the number of ‘loners’ who have no contact with family members who would help them out. If I had taken to drugs and lost my home in my youth, or become unemployment or bankrupt in later years, my parents would have taken me in. And, if not them, my brother or sister, or my uncles/aunts or cousins or whatever. I would never have ended up sleeping on the street no matter what had happened or what I had done. Unfortunately, in Ireland, as elsewhere, the move to extreme social liberalism has brought about an increase in the number who have no family or extended family who could help them out.

    (4) As for social housing, the government should have no part in the building of houses. All governments waste money and houses of similar quality and size can be built by the private sector at less cost. If the government wishes to purchase some of these houses on behalf of less fortunate people who can’t afford them, so be it. I have no problem with that. Some people need wheelchairs, but the government doesn’t go into the business of manufacturing wheelchairs. It simply purchases them on behalf of those who need them. It should be the same with houses. But, even this should be a last resort and people should be encouraged, via the tax system and other incentives, to purchase their own houses.

  4. As one reads this paper and in particular looking at Figure 1 (private and public housing construction 1923-2014, I am left with a feeling of admiration for the founders of the state, who managed to build more desperately needed public housing in the hungry 30s, the war-torn 40s, the emigration blighted 50s, and indeed the recovering 60s, than our modern mohair-suited administrators managed in the last eight years. It was clearly a question of political and societal priority. Those founders of the state could have chosen to ‘residualise’ the homeless, and leave them as Trevalyn had done ‘to the operation of natural causes’. That they didn’t is to their eternal credit.
    Of course the ‘residualisation’ of social housing is ideological, both economically ideological and socially ideological. Perhaps modern ‘policy makers’ in addition to having a blind adherence to market ideology, are attempting to distance themselves from having to acknowledge the fact that, if their grandparents or in some cases parents had not benefitted from public housing provision, they would be in a far different place today. Eaten bread is soon forgotten.
    The counter cyclical nature of public housing, in distant decades, is well made. Equally the benefit of income related rents is acknowledged. The fact that income related rents may have helped in creating a more stable society in hard times may need some exploration.
    Figure 2 is more ominous in that its shows renting from private landlords now back approaching 1940 levels. This was the era of Frank McCourt’s ‘laners’ and the preponderance of tenement dwellings throughout the cities.
    It should now be acknowledged that the private sector, which is capable of building tax-incentivised and brown-bag-incentivised houses by the tens of thousands in places, to steal a bird from Patrick Kavanagh, that a snipe would consider unsuitable for building a nest, should have no role in the provision of public housing; except to build under contract price on land designated and already purchased by the state.
    The ‘residualisation’ issue really bother me, as for many years in the 1990s, I signed bank and building society mortgage income verification statements that failed that to secure even a small mortgage; often from the most reliable and best of people working on low incomes, but who would I believe have managed to pay back those mortgages. They certainly would not have dumped billions of construction-loan debt on the state, that many more buccaneering types did. Such working people were ‘residualised’, but often their incomes were above the threshold for public housing, even if that was available.
    Now it seems an entire young urban population is being residualised, even as houses are being financialised.
    One technical point regarding the report.
    What is the % of households renting (from all sources) in Ireland, for both urban Ireland, rural Ireland, and in total.
    The reason I ask is that I have heard many commentators use a figure of ~20%. However, the CSO ‘The roof over our heads’ Report based on Census 2011, put the figure for all urban areas at 38.4%
    Profile 4 – The Roof over our Heads – Entire Document (PDF 5,703KB)

    [Page 13 ‘Home ownership rate in urban areas 61.6%]

    Well done on the paper.

  5. This is an outstanding paper by any measure. It spells out, with supporting data, a series of developments over the decades which will seem oddly familiar. The core analysis would seem to me to be in the following extract.

    Page 16

    “During the second half of the 20th century, social housing financing came under growing strain which resulted in a slow process of centralisation and also nationalisation of funding for this service as central government took over from local
    government as the primary borrower of finance for social housing development in the late 1950s and central government subsidies towards the repayment of these loans until they covered all the interest costs by the 1960s (Daly, 1997). These arrangements proved increasingly difficult to sustain as the tenants rents, which originally reflected
    the cost of housing provision, were linked to incomes in all local authorities from the late 1960s and consequently were often insufficient to service debt. In addition sales of social housing to tenants at significantly below market value often yielded revenue which was insufficient to cover the loan taken out to build the dwellings.”

    Oddly enough, however, there is no discussion in the paper of why the need for social housing arises in the first place i.e. the fact that some persons – indeed, a considerable number – in a “highly competitive social market economy” (Article 3.3. Treaty on European Union) will NEVER be able to raise, and service, the capital necessary to actually own the roof over their heads, a concept which has been willfully confused, both by politicians and electorate, with the right of all citizens to have one.

    The economic consequences of ignoring this rather obvious fact are now forcing both to address the question. The most obvious response is to aim to separate out the the essential elements (i) capacity to raise the necessary capital (ii) capacity of tenants to service the required levels of rent to service it (iii) various – clearly identifiable – social supports to make up the economic gap for those unable to do so. Government funding is not necessarily the only answer. Housing associations, tenant groupings, even – perish the thought – private sector developers, can be part of the answer.

    The desire of everyone to “own their own home”, and the willingness of Irish politicians to pander to it by getting “first-time buyers” on to “the first step on the housing ladder”, must be one of the strongest, and most distorting forces, in Irish economic development, a fact well brought out in this paper..

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