Budget 2023: 'steady as she goes' or coming storm?

The Week in Housing 30/09/22

As Lorcan Sirr put it in his article in the Irish Daily Mail, as far as housing goes the budget was something of a damp squib. There were no major surprises, and to be honest, there were no major policy changes of any sort. There were a few minor things, such as the tax credit for renters and the new tax on vacant properties, but neither would be expected to have a significant impact.

The lack of housing news on budget day no doubt reflects the fact that Housing for All is a multi-annual programme and funding has in a sense been pre-allocated. There have been some minor increases in the amount of funding available for various schemes, including affordable purchase and cost rental, but it is more or less along the lines already envisioned in Housing for All.

According to the Dept. of Housing’s budget day press release, exchequer funding of €4bn is being made available for housing delivery. Of this, €2.6bn is Government capital funding, while the remainder is made of loans provided (primarily to AHBs) by the Housing Finance Agency, as well as Land Development Agency investment. Seemingly, within this overall figure, about €1.3bn will go on the affordable purchase and cost rental schemes.

No doubt opposition politicians will dispute some of these figures, and it always takes a while to parse the budget day announcements. But probably the more significant thing is that the funding associated with Housing for All has not been dramatically changed. On the one hand, it could be argued that this is welcome. Many involved in housing have long argued for multi-annual budgets as this allows a degree of medium term stability which really supports housing provision.

On the other hand, there are a number of major new challenges on the scene since Housing for All was launched. As the Minister for Finance kept pointing out on Budget day, no one knows what the future holds; but these challenges have the potential to create some very troubled waters for our housing system over the coming years. If this turns out to be the case, Budget 2023 may look like a captain opting for a ‘steady as she goes’ approach while the ship drifts inexorably into a storm.

There are two particularly notable challenges. The first is the well known issue of construction cost inflation (which incidentally the new levy on concrete risks adding to). The second is rising interest rates.

I don’t know if I am missing something, but I find it hard to understand why there is not more discussion, and indeed concern, about the impact of rising interest rates on housing. On a recent episode of the Macro Trading Floor podcast, the hosts argued that the most recent statement by the Chairman of the Federal Reserve in the US amounted to a ‘Draghi’ moment. This refers to Draghi’s famous comment back in 2013 that the ECB would do ‘whatever it takes’ to support the Euro. The Fed Chairman, however, was talking about doing what ever it takes to bring inflation under control, i.e. they are willing to continue pushing interest rates aggressively upward for the foreseeable.

Christine Lagarde, President of the ECB, has being saying similar things about eurozone interest rates, and highlighting that price stability is their first concern. The issue, especially in Europe, is that a lot of the inflationary dynamic stems from the energy crisis and the war in Ukraine. This means increasing interest rates might be something of a blunt policy tool and it may take quite some time for them to bring inflation back to acceptable levels.

What all this means for housing is that borrowing costs for housing providers will increase significantly. In particular, that means the cost of development finance, already a challenge for domestic developers, will increase, as will the cost of HFA funding for the AHB sector. This, combined with construction cost increases, can create real challenges in terms of viability. Moreover, it will impact households and especially house prices. If increased interest rates drive the purchasing power of FTBs down significantly, it will create a further set of issues for our housing system.

The final element of this interest rate challenge relates to the BTR and institutional landlord sector. This is something I have written about in this Newsletter a few weeks ago. I pointed out the current vulnerabilities in this area are quite different from those associated with the last financial crisis:

“[T]he current housing cycle has not been driven by cheap credit coming from the mainstream banking system… The fact that the current housing market, in Ireland at least, is not inflated by abundant mortgage credit or high risk developer finance could lull is into a false sense of security. But there is a danger of becoming generals fighting the last war here….The current financialized real estate cycle is not a domestic bank credit bonanza. Instead, it primarily takes the form of international institutions investing in institutional PRS/BTR.”

I went on to argue that this means our current system is exposed to international interest rate shocks, such as the one we are currently experiencing.

Interestingly, on Saturday 17th September, David McWilliams wrote an article in the Irish Times which very much echoes these concerns, entitled ‘Don’t examine market through lens of the last cycle’:

“This time, the retail banks are not involved as much as private sector money. This is largely made up of leveraged funds that operate like bond market investors, borrowing at low interest rates from investment banks, wealthy individuals, private equity and other investment funds to buy blocks of flats. The last decade of almost zero interest rates has facilitated this trade”.

McWilliams points out that: ‘[t]his time round, cracks will appear first in these private funds which, when squeezed by rising interest rates, will be forced by margin calls to come up with cash for financial backers, forcing property to be sold to raise cash, causing prices to fall’.

Getting back to budgetary matters, it is quite concerning, given the above challenges, that Budget 2023 does not appear to have taken into account the changing environment as far as housing provision goes, which is a real concern considering how badly we need to reach, and remain at, adequate levels of supply.

The other thing of note on Budget day was the absence of any real tax reductions for landlords, other than an increase in pre-letting expenses. Landlord organisations have been lobbying hard for a reduction of taxation on non-professional landlords to 25%. The idea of a ‘landlord exodus’ has really taken off over the last couple of months, and I think it is fair to say that landlord organisations have been very successful in framing the debate in these terms. Indeed, Darragh O’Brien had been raising this issue at most of the events he spoke out over the last few months, such as the launch of the Threshold Tenant Sentiment Survey back in the summer.

As I have argued before, the data on all of this is quite patchy. Just before budget data, we did get some new data from DNG real estate suggesting that ‘almost 30% of all houses currently advertised for sale throughout our nationwide network are former buy to let properties, whilst in Dublin the figure is 23%’. The related press release goes on to argue that landlords are being driven out primarily due to taxation and that this is something that Budget 2023 needs to address.

It's anyone’s guess why the Government didn’t move on this issue. I heard Paschal Donohoe on Drivetime argue that if they reduced taxation on landlords, this would lead to calls from farmers, small-business people and others for the same favourable tax treatment. I think it is more likely that the Government (a) didn’t buy the argument that reduced taxation would have a tangible impact on supply of PRS properties; and (b) were not keen on giving out goodies to non-professional landlords given that would-be first-time-buyers and tenants are struggling so much.

Ultimately, I think it is the right call. However, many had hoped that there might be some kind of favourable tax treatment for landlords who entered into long-term leases, thus helping to address the issue of evictions and residential instability, and it is indeed concerning that nothing has been done about this issue.

Events

On the 13th of October Threshold are organising an event entitled ‘Renting and risk’. I will include more details as soon as they become available. On October 6th this seminar will look at women and the right to housing. And finally, the Talking Towns seminar series will host this event as part of its Autumn series, looking at vacancy and Irish towns.

What I’m reading

Michelle Norris and Julie Lawson have a new article on one of the biggest issues in housing today: how to tame the financialization of housing? On the subject of financialization, some interesting research from the Ditch.ie here on some of the less well known, and frankly very concerning, forms of PRS investment taking place somewhat under the radar. The Dublin Inquirer had a good piece on the length of time people are staying in emergency accommodation published on Wednesday. Finally, some readers might find useful this list of Budget 2023 housing measures, from the Dept. of Housing’s press release (pinch of salt required, as always!):

• €1.3bn investment will support an overall package of measures to deliver more affordable housing including 5,550 households supported to buy or rent at an affordable price

• Continued delivery of Cost Rental Homes with 1,850 to be delivered next year via Cost Rental Equity Loan (CREL) facility and Affordable Housing Fund (AHF).

• €90 million under the AHF to also support the delivery of 1,200 affordable purchase homes.

• €50m for First Home Scheme delivering approx. 2,000 homes next year

• 11,830 new social homes to be delivered, including 9,100 new builds.

• 9,600 new households to be supported under HAP and RAS

• €215m, a 10% increase on 2022, to ensure local authorities and our NGO partners can provide homeless prevention services, emergency accommodation and other services and funding to help us achieve our target of creating 1,300 new Housing First tenancies.

• €136m to support the advancement of 132 Urban Regeneration and Development Fund (URDF) supported projects already approved and for the targeted expansion of the programme to accelerate new supply and tackle vacancy in towns as part of the Town Centres First approach.

• €219 million to fund programmes and supports for disabled people, older people and Travellers.

• €65 million is being provided to remediate homes affected by defects including Pyrite and Defective Concrete Blocks