Housing Commission report: delivery, finance & rental policy
The Week in Housing 14/06/24
I finally managed to get through the whole Housing Commission (HC) report, which is no mean feat! In today’s post I present some of my key ‘take aways’. Unsurprisingly, the focus is on my areas of interest, especially rental housing policy, but I do talk about some of the other issues. Although it is long, the whole report is well worth reading. Part of its value is that it synthesizes a lot of the important analyses and arguments that have been put forward over the last years, and sets out a systematic, comprehensive and coherent path forward on that basis. It is also reflective of a wide range of views and a wide variety of forms of expertise (e.g. academic, policy maker and industry). It will be very interesting to see to what extent the report frames policy making over the coming years, for example in the next Programme for Government. Advanced warning: this is a long post!
Housing delivery
Overall, the report argues that housing delivery needs to become more responsive to long term housing need/demand, more proactive, and needs to take greater account of uncertainty relating to future housing need. They highlight the backlog of pent up housing demand (estimated as between 212,500 and 256,000 homes), and the importance of integrating this into planning in relation to future housing provision. It suggests that Government currently systematically underestimates future housing need. They also note that factors such as net immigration and household size can have a very large impact on what level of housing need/demand will materialize in the future, which means there is a lot of uncertainty. The report advocates ‘exceptional and radical measures’, which is quite strong wording.
The HC seem to want there to be something of a reality check when it comes to national policy around housing delivery. There are two main aspects to this. First, they want the type of housing delivered to more closely match the reality of future housing need. In particular, our existing housing stock and new housing supply is skewed towards larger homes, when the fastest growing area of housing need is in smaller homes, specifically one and two-bedroom units. The report argues that one and two-beds should form ‘the bulk of housing delivery’. This flies in the face of a prevailing cultural/political attitude that smaller dwellings are not ‘family homes’, an attitude that impacts on planning permission, local opposition to new developments and so forth.
Second, the report (reading between the lines) suggests that Government need to get real about the Dublin region’s centrality to population and employment growth. Attempts to ensure ‘balanced growth’, i.e. balanced between regions, are more or less pointless because investment, employment, and hence housing demand, will continue to be focused on the Dublin region. The HC are critical of the National Planning Framework, arguing that all it has achieved is constraining housing delivery in Dublin, where it is most needed. The wording on this point is very strong:
“By placing constraints on Dublin’s growth potential, the NPF has driven patterns of development and internal migration that have resulted in urban sprawl, traffic congestion and long commute times for workers. At the same time, there is little evidence to suggest there has been a rebalancing towards regional cities... The policy goal of bringing about more balanced regional development by redistributing economic activity to Ireland’s regional cities at the expense of Dublin requires review”.
The other big take aways in this area is the idea of a coordinating body called the Housing Delivery Oversight Executive and of Strategic Housing Zones. The latter seem to be a version of Strategic Development Zones but with a focus on housing delivery, i.e. they’re about fast track planning. The former is about creating institutional capacity to coordinate different aspects of the housing delivery ecosystem, for examples things like active land management, infrastructure provision etc. The report also advocates a much stronger and better resourced role for Local Authorities.
Politically, a lot of this does not seem particularly palatable and most of these ideas would likely run up against the kind of ‘insider politics’ that housing systems generate. I.e. existing homeowners in Dublin are probably not going to be overly enthusiastic about loads of one and two-bed apartments going up around them, delivered via a fast-track planning process (i.e. with fewer opportunities for objections). People outside of Dublin (really struggling to not use the word culchie here) are also not going to love the idea of growth, employment and housing being concentrated in the Dublin region. This of course does not mean the report’s suggestions are not worth pursuing. On the contrary, in my experience things that existing homeowners (and culchies, sorry!) are likely to oppose are, as a rule, great ideas.
Finance
This one is a bit controversial as the HC argue strongly in favour of international capital in financing housing development. The report argues that domestic finance (i.e. Irish banks) are constrained in terms of the extent to which they can finance development because “there is limited competition following recent exits from the banking system and the system does not have the capacity or risk appetite to finance it in full at present”. Therefore, the main players need to be the state and international capital. Politically speaking, this is a very interesting position because it combines what used to be a very far left position (a very large proportion of housing should be non-market), with what used to be a very neoliberal position (international capital is the way to go). This unusual mix is reflective of what I have argued is the shift towards ‘post-neoliberal housing policy’ in Ireland.
The HC estimates that an annual output of 56,000 homes requires between €16 billion and €20 billion per annum of capital for development finance. They suggest that there will be about €5 billion in capital funding from the state in 2024, and that while this can be expanded there are limits given our housing spend is already very high and the wider fiscal picture. On this basis they argue that:
“While increased domestic public and private resources can be used, the Commission believes that the scale of financing required to achieve Ireland’s housing requirements over the medium term necessitates a substantial proportion from international capital”.
Recommendation #18 of the report is:
“Ensure that diverse sources of finance, including stable public financing and a predominant international element, are available to increase housing output in the medium term” (my emphasis).
The reasoning here is sound and it is very hard to disagree with. There are two objections that could be raised. First, while the HC is right to note that the domestic banking sector is currently constrained, it is also possible to argue that domestic finance needs to play a much greater role in housing finance, on the basis that no country can allow its housing system to become so dependent on private equity firms, hedge funds, REITs, and pension/insurance funds. The HC do, in fairness, address this (although not in these terms), when they recommend that the State ‘identify measures that could be taken to increase the scale of financing from the domestic banking system’, as well as in Recommendation #20:
“The State should explore the option of setting up a specific private savings fund that can be used to assist in the funding of housing”.
This second, and related, objection is that the report does not discuss any of the potential drawbacks involved in reliance on international capital. These include introducing new forms of systemic risk into the housing/financial system, a topic around which admittedly there is currently virtually no literature or evidence (a notable exception is this excellent report). What we do know, however, is that institutional investment is very concentrated in high-end, small apartments in a select few locations in Dublin, something which the HC note in the later section on the PRS. This raises the question of how a housing system which is so dependent on international capital can deliver the variety of housing typologies required.
Moreover, the HC perspective seems to be advocating for a housing system which is entirely dependent on international capital and public spending on social/cost rental. The latter is precarious because of the fiscal cycle, and the latter is precarious because it is driven by factors completely beyond the control of the Irish Government (such as international interest rates, exchange rates, global capital markets etc.). If the fiscal situation where to deteriorate quickly and at the same something changed in the international economy to reverse the popularity of BTR as an asset class, we could find ourselves with a catastrophic decline in supply. Unfortunately, I can’t say I have a better idea though.
Private Rental Sector
As readers will know, one of my main areas of interest is the PRS, so unsurprisingly there is a lot to say about this. But to keep things short and readable, I’ll just pull out some of the bits that are really valuable, and one or two points that I feel are problematic. I might return to this section of the Report in conjunction with an analysis of the Department of Housing’s review of the PRS, which is supposed to be published over the summer.
First, the good stuff:
· The report’s overall view (reading between the lines somewhat) is that due to demographic trends (inward migration in particular), the PRS, due to its flexible nature and low barriers to entry, needs to be an important part of our housing system. However, the report also seems to suggest that the main way to address affordability in rental housing is to expand cost rental and social housing, and that rent subsidies should be a short term measure that is not viewed as a form of long term social housing. This is, in my view, a very balanced position which can provide a sound framework for policy making in relation to rental housing.
· A lot of emphasis is placed on enforcement. I wrote a report for Threshold four years ago that argued that our current enforcement regime is overly reliant on tenants advocating for themselves, and is ineffective at deterring non-compliance. It is great to see the HCs very frank recognition of the scale of the compliance problem and a clear statement that effective enforcement is needed or no other aspect of PRS policy will function. This represents a departure from the tendency to sweep mass non-compliance in the PRS under the carpet.
· The report argues that the regulatory framework needs to be simplified and easier to engage with for both landlords and tenants, and is critical of the piecemeal nature of reform over the last 6 years or so.
· Overall, I view the report’s position on the PRS as compatible with the proposals I recently set out in my #SimonTalks Webinar, and wrote about here, in that it implies a tenancy regime which is simple, stable, balances security and investment, and pushes us towards a more tenure neutral housing system in which renting privately is a viable option.
· The report argues for a move from the current RPZ system, which is effectively a flat rate cap, to a reference rent system. The details are not spelled out but it appears to be suggesting something a long the lines of the German ‘mirror rent’ model. This is probably a good idea but unfortunately no rationale is really provided for this (to be clear, the report explains the problems with the RPZs, but doesn’t go into detail on the rationale for the model proposed).
And now to the less good stuff:
· There is nothing concrete on security of tenure. Thus the report doesn’t go beyond the Strategy for the Rental Sector, Rebuilding Ireland and Housing for All, all of which state that the PRS should be a secure, long-term tenure of choice but do not tell us how to make it secure or explicitly point out that it is currently chronically insecure as a direct consequence of policy. The report does however note that for PRS housing to be secure, it needs to be affordable, which is very welcome.
· The report calls for a ‘balance’ between landlords and tenants. This is politically expedient but in my view we need to get away from the ‘balance’ word. Housing provision is first and foremost about the rights and needs of residents, and these should be the clear priority. That doesn’t mean that we ignore the needs of investors. Nobody ever talks about balancing the needs of Local Authorities and social housing tenants, or balancing the needs of banks/developers and the needs of homeowners.
· The discussion of the current issues around availability does not deal with the evidence adequately in this writer’s opinion. The report doesn’t really highlight the fact that the PRS has grown between census 2016 and the most recent census. Instead, it focuses more on the RTB registration figures. These figures show a decline since 2016, but as is well known they are not a helpful measure of what’s going on because the old tenancy registration system was very flawed and because a new system of annual registrations was recently put in place, and this change explains most of the decline in registered tenancies. Thus the RTB data doesn’t tell us a whole lot. To be clear, I think the report’s views on these issues are basically correct, but the data is presented in a way which is not entirely accurate and contributes to some of the existing confusion on these issues in the public debate. This stands out because most, if not all, other sections of the report are extremely rigorous and careful in terms of how they present data and evidence.
A couple of other quick things. The report argues for reform of tax treatment of landlords (I’m not opposed to this but the report doesn’t really say why or what form this should take) and it also advocates for facilitating sales of PRS property with tenant in situ (but again not much analysis on this point). Overall I think the section on the PRS provides a very good framework for approaching the policy challenges in the PRS, but it is not as coherent or well grounded in evidence as some other sections.
Cost/social rental
This is already a very long post so I‘ll keep this short and focus on two of the big issues that stood out to me. First, the report advocates very strongly for cost rental housing. As has been covered in the media, it argues that cost/social rental should make up 20% of housing, which is quite ambitious given where we are. The report is very clear on what the advantages of cost rental are:
“Cost-rental allows housing development loans to be paid off over the long term. This can enable rents to fall over the long term and rental income from older dwellings to cross-subsidise new housing development. If cost rental housing is delivered at scale, this enables providers to build more homes, further dampening rental inflation across the rental sector.”
It also outlines the benefits of CR from the point of view of housing providers:
“Providing cost-rental housing has substantial organisational and financial benefits for social housing providers. It increases their non state revenue and may contribute to the recategorisation of their activities as outside the government balance sheet over the long term. It also enables them to provide accommodation to households with a wider variety of incomes, which enables development at scale within the sector while still having regard to the need to provide sustainable communities.”
Based on this the report takes the view that Government needs to be much more ambitious:
“Cost-rental housing needs to be provided at scale to have real impact – to have a material effect on housing supply and assist in moderating private sector rents through increased competition. The development of a viable and sustainable cost-rental housing sector is critical to assist in addressing the affordability challenges among many private renting tenants and to increase the supply of rented housing in the context of undersupply in the market. This will require a much more ambitious programme if systemic change and a stable rental market are to be achieved.”
All of this is very positive at a point in which the cost rental sector is just being established. Hopefully the report’s extremely helpful and lucid account of the rationale and potential of cost rental can help inform and underpin a consensus among political parties and policy makers.
The report also makes some very sensible recommendations for the nascent sector:
1. Rents should be solely linked to cost of provision and have no relationship with market rents
2. Cost rental should only be provided by local authorities, AHBs, the LDA and other non-profit actors
3. The eligibility criteria should be reviewed and simplified
The final point I’ll make is that the report suggest that ‘consideration should be given’ to moving social housing provision to a cost rental model. The idea here is that rents in social housing would be cost rents, in order to provide a sustainable form of revenue for housing providers that support borrowing from a wider range of sources, maybe getting off balance sheet at some point, and most importantly being able to adequately resource tenancy management and maintenance. To make this affordable to social housing tenants, a rent subsidy should be used (this is how the system works in Denmark/Austria). This would recommend a highly radical reform of the housing system, and it will be interesting to see if it gets any traction.
News & events
I would really recommend this podcast with Dan O’Brien interviewing Michelle Norris (who was a member of the HC) - some really detailed analysis here, much of it related to the recent Housing Commission report. On June 18th the Housing Agency will hold the first of their summer research seminar series looking at sustainable and affordable housing. Threshold will launch their annual Tenant Sentiment Survey on June 26th.
What I’m reading
A new report from the ESRI on credit and the housing market. Two new articles on tenant activism. The first is an Irish one by Tommy Gavin and Cian O’Callaghan looking at CATU (one of the first publications looking at CATU as far as I understand). And another new article looking at the impact of Spain’s Tenants Unions on policy.