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Housing

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.

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Housing supply and demand

There is quite a bit of momentum currently – and thankfully, given the severity of the housing crisis – in the whole area of housing, rising prices and rents, and the lack of supply in Ireland’s urban centres. I had thought pretty much everyone involved was agreed that a lack of supply was indeed the root cause of rapidly rising rents and prices.

Hence my despair at reading this article in today’s Irish independent: Easy mortgages for first-time buyers are on the way. Shifting out demand to encourage supply seems to me to be like adding fuel to the fire in the hope that the fire brigade are more likely to turn up. The losers will be the very people the policy aims to help, first-time buyers who will be given more credit to bid against each other.

What is particularly disheartening is that it comes so soon after Ireland tried this before and it went so spectacularly wrong – while house price growth from 1995-2001 was driven by a combination of factors (including incomes growing faster than supply), house price growth 2001-2007 was driven almost exclusively by easy credit and that was where the damage was done.

As per last night’s Prime Time, if you want housing to be affordable, increase supply – it’s no more complicated than that. If supply is not forthcoming, we need to understand why, rather than push the price of housing further up. My suspicion is the current lack of supply is down to a complicated and overly prescriptive system of planning and building controls, coupled with an array of developer contributions and levies which shift the burden from existing to new residents. This could be replaced with a unified land use policy and a simple land value tax.

As for policy in relation to loan-to-value, pick a number (like 80%) as the maximum loan-to-value for anyone and stick with it. That way at least, policy won’t be responsible for turning a house price upswing into another bubble.