A few points. You rightly identify three aspects of cost rental in tension with each other. I’d suggest there are also some wider systemic features at play too.
We can see from Project Tosaigh that cost rental is being implemented in a policy context of extensive and deepening reliance on the private sector for delivery of social housing, and the apparently permanent reliance of the private development sector on huge levels state support to be viable. This has been fairly well critiqued in social housing (e.g., Lorcan Sirr’s criticism of reliance on turnkeys) but it is increasingly a feature of “affordable housing” too. Project Tosaigh and the issues you’ve raised about developer costs come from the same impulse to embed state support in the development industry. At the moment I think we can only expect this to deepen further – just look at the Secure Tenancy Affordable Rental investment scheme announced last year, which is explicitly about getting private investors to build cost rental. I’ve no idea yet how popular this will be, but a quick google search reveals an extraordinary number of blogs about it from investment brokers and corporate law firms, so I think there must be a lot of interest in it.
Secondly, political viability of high rents is an issue – but this points to another important context of Irish cost rental. This new tenure is explicitly called “affordable housing” – that’s even the name of the underlying legislation. Cost rents will be high thanks to high costs, and a big challenge will be for cost rental to be politically viable as “affordable housing” in this context. This seems particularly a problem in Dublin City at the moment, and will be an issue whenever St Michael’s in Inchicore ever gets built. Incidentally, I think this maybe goes against your previous piece in defence of cost rents – why would we expect anyone not to question high rents when literally everything about cost rental is under the slogan “affordable housing”?
Ultimately, we do need to recognise the unique and unusual character of Irish cost rental. The most important difference between this new Irish tenure and its apparent counterparts in Austria or Denmark is one that ours is *explicitly not social housing*. While it may be superficially similar, ours plays a very different social and political role in the housing system, and I don’t think is really comparable. The bar on HAP recipients taking up tenancies is unusual and a reflection of this, but this is only part of how cost rental has been set up to be separate to traditional social housing. There’s obviously complex political reasons behind this – but if we recognise this we can see that the policy is not being implemented with the same goals as social housing here or elsewhere.
To make two small points. One – yes, having units pre-sold eliminates a lot of risk which should reduce the gap between a contractor’s margin and a developer’s. I assume when you said ‘there is no justification for a profit margin’ you meant a developer’s margin. Contractors are entitled to a margin, too. But there are more risks involved in construction than exit risk. Is the builder giving a 100% fixed price? Are their financing costs variable? Is the build technically complex? Is there a long lead time before building commencement - ask builders who entered binding contracts with AHBs which took forever to close, for example. And in the current market, elimination of exit risk is less important since there is little problem selling. The opportunity cost for builders of entering binding, fixed-price contracts is much higher in the current market than previously. State agencies can thus set a limit to margins but in times like the present they will come under pressure. If Eoin O’Broin or anyone else thinks that the LDA or the councils themselves doing the building will ensure that Cost Rental costs will then be under control, then it’s difficult to know what to say except maybe start reading the papers more often. More state involvement in construction is fine and badly-needed but the evidence for reducing costs is scant so far as I can see – mostly explained by subsidised or free land transfer, soft loans, levies foregone etc – O’Cualann, for example. John Moran made a heartfelt plea some years ago for a detailed comparison of construction costs for specific units here as against those in European countries – I’m not aware that he ever got a reply.
Secondly, I’m a reasonably diligent reader of your work and grateful for it but I do not have a strong sense that you much engage with builders or developers i.e. the people who furnish the supply we all crave. The industry managed to supply almost 90k units in 2006 and such engagement (assuming I’m right!) might help explain why we’re now struggling to reach even 35k with a significantly larger population. The CIF or IIP can probably supply some names who would help, for example, re your Project Tosaigh queries or a more long-term connection. Could I also suggest looking at the HBFI financing, too as we are continuing to subsidise demand through buyers’ schemes, AHB soft financing etc but if the HBFI is there to finance construction why are many builders/developers paying 10-16% for loans with very onerous covenants?
Very interesting as ever!
A few points. You rightly identify three aspects of cost rental in tension with each other. I’d suggest there are also some wider systemic features at play too.
We can see from Project Tosaigh that cost rental is being implemented in a policy context of extensive and deepening reliance on the private sector for delivery of social housing, and the apparently permanent reliance of the private development sector on huge levels state support to be viable. This has been fairly well critiqued in social housing (e.g., Lorcan Sirr’s criticism of reliance on turnkeys) but it is increasingly a feature of “affordable housing” too. Project Tosaigh and the issues you’ve raised about developer costs come from the same impulse to embed state support in the development industry. At the moment I think we can only expect this to deepen further – just look at the Secure Tenancy Affordable Rental investment scheme announced last year, which is explicitly about getting private investors to build cost rental. I’ve no idea yet how popular this will be, but a quick google search reveals an extraordinary number of blogs about it from investment brokers and corporate law firms, so I think there must be a lot of interest in it.
Secondly, political viability of high rents is an issue – but this points to another important context of Irish cost rental. This new tenure is explicitly called “affordable housing” – that’s even the name of the underlying legislation. Cost rents will be high thanks to high costs, and a big challenge will be for cost rental to be politically viable as “affordable housing” in this context. This seems particularly a problem in Dublin City at the moment, and will be an issue whenever St Michael’s in Inchicore ever gets built. Incidentally, I think this maybe goes against your previous piece in defence of cost rents – why would we expect anyone not to question high rents when literally everything about cost rental is under the slogan “affordable housing”?
Ultimately, we do need to recognise the unique and unusual character of Irish cost rental. The most important difference between this new Irish tenure and its apparent counterparts in Austria or Denmark is one that ours is *explicitly not social housing*. While it may be superficially similar, ours plays a very different social and political role in the housing system, and I don’t think is really comparable. The bar on HAP recipients taking up tenancies is unusual and a reflection of this, but this is only part of how cost rental has been set up to be separate to traditional social housing. There’s obviously complex political reasons behind this – but if we recognise this we can see that the policy is not being implemented with the same goals as social housing here or elsewhere.
To make two small points. One – yes, having units pre-sold eliminates a lot of risk which should reduce the gap between a contractor’s margin and a developer’s. I assume when you said ‘there is no justification for a profit margin’ you meant a developer’s margin. Contractors are entitled to a margin, too. But there are more risks involved in construction than exit risk. Is the builder giving a 100% fixed price? Are their financing costs variable? Is the build technically complex? Is there a long lead time before building commencement - ask builders who entered binding contracts with AHBs which took forever to close, for example. And in the current market, elimination of exit risk is less important since there is little problem selling. The opportunity cost for builders of entering binding, fixed-price contracts is much higher in the current market than previously. State agencies can thus set a limit to margins but in times like the present they will come under pressure. If Eoin O’Broin or anyone else thinks that the LDA or the councils themselves doing the building will ensure that Cost Rental costs will then be under control, then it’s difficult to know what to say except maybe start reading the papers more often. More state involvement in construction is fine and badly-needed but the evidence for reducing costs is scant so far as I can see – mostly explained by subsidised or free land transfer, soft loans, levies foregone etc – O’Cualann, for example. John Moran made a heartfelt plea some years ago for a detailed comparison of construction costs for specific units here as against those in European countries – I’m not aware that he ever got a reply.
Secondly, I’m a reasonably diligent reader of your work and grateful for it but I do not have a strong sense that you much engage with builders or developers i.e. the people who furnish the supply we all crave. The industry managed to supply almost 90k units in 2006 and such engagement (assuming I’m right!) might help explain why we’re now struggling to reach even 35k with a significantly larger population. The CIF or IIP can probably supply some names who would help, for example, re your Project Tosaigh queries or a more long-term connection. Could I also suggest looking at the HBFI financing, too as we are continuing to subsidise demand through buyers’ schemes, AHB soft financing etc but if the HBFI is there to finance construction why are many builders/developers paying 10-16% for loans with very onerous covenants?