Very good post, thanks as ever. I think we really need more critical interrogation of cost rental policy as it's actually being implemented here, and how it sits in wider policy - so great to read your reflections!
The point on private finance is very astute. The Secure Tenancy Affordable Rental scheme has so far avoided any scrutiny but it appears aimed at exactly the involvement of private financial interests that you warn about - indeed, if you read the small print, it even allows for investors to make a "reasonable profit" from cost rental. This is of a piece with housing policy's wider direction towards hugely subsidising the private development industry and addressing its "viability challenges" (which incidentally helps explain the high cost rents in Citywest!). Ires Reit are reportedly interested in the scheme, so just imagine that kind of actor putting pressure on the sector!
Your point on the commercialisation and loss of social vision of the sector is important - but again I think a crucial factor here is the radical novelty of Irish cost rental, that it is not social housing. After all, to what extent can we really expect a social purpose in the long when the state has deliberately defined it in law as not being social housing? In England, one of the factors in the hollowing out of social purpose that you mention was the creation of a vague range of "affordable" tenures that simply acted to water down or replace real social housing. Luckily we don't seem to be doing that here - but it does show how that the danger of commercialisation is much greater when you have an isolated "affordable housing" tenure with no relationship to social housing.
Sorry for the late reply Killian. Some great points there and thanks for the IRES link, I hadn't seen that. Your point about the implications of cost rental not being social housing are interesting and it is something I havent gotten my head around yet. As you know the Housing Commission recommended merging the cost rental and social housing sector into one sector with cost rents applied throughout. Perhaps not likely to happen but would change the role of CR if it did
A few comments on financial sustainability. I'll break it down into (i) the sustainability of schemes once launched and (ii) the sustainability of the flow of new schemes.
Sustainability of schemes once launched
I don't see this as a significant risk because:
Cost rents are unlikely to fall below market rents. Even during the GFC rents were only more than 25% below peak (Apr 08) for three months (Nov 2010 - Jan 2011). This makes a high level of empty apartments unlikely. Existing tenants who are unable to pay rents can qualify for HAP
Cost inflation on maintenance, repairs etc is unlikely to undermine the finance model as only 30-40% goes to cover these costs. The balance covers the repayment of loans which are fixed in nominal terms.
Finally the models have built in buffers - they assume 5-7% vacancy (cf with Iris REIT who regularly report vacancy of circa 1%) and must include a 5-10% buffer for loan repayments
Sustainability of new schemes
This is where the real risk lies. The most significant risk is the high level of subsidy required . Budget 2025 allocated €300m for 1,000 AHB delivered units. In the event of a budget crunch its easy to see how this level of subsidy could evaporate.
The role of Private Finance
Its worth elaborating on the nature of private finance used in cost rental in other European countries. Private finance can come from either households or capital markets. In my opinion the models in France and Austria which provide low cost finance from households, channelled through tax efficient deposits accounts with local banks are the ones to copy. Livret A accounts in France allow literally millions of private households to invest up to 20k and to earn tax free interest. This funding is stable and low cost. It also fosters political support for the sector. The challenge with capital market finance (as opposed to equity investment - more on this below) is its high cost (relative to State funding) and volatility,.
The role of private ownership in Cost Rental
There is an appetite in official circles to involve private investors in Cost Rental provision in order to scale up more quickly. There are at least two huge issues with such involvement. The first is that the homes would after 40 or 50 years fall out of cost rental controls and become part of the PRS. The second is that the private owners would adopt a profit maximising approach, raise rents by the maximum allowed and skimp on maintenance. So far this hasn't happened as even with STAR the economics are not sufficiently attractive. In fact STAR itself may have been designed solely for the LDA. One important protection in the Cost Rental legislation is that providers can only make 'limited equity returns.; This mirrors the 'limited profit' provision in the Austrian scheme.
Thanks Colm for those detailed points. I didnt know that 5-7% vacancy rate was built in to the calculations, that's very interesting to read. Also I really like the points about household savings based finance models. These would also tie into the wider need to have more domestic based sources of finance given the pillar banks are not providing a whole lot of development finance.
Very good post, thanks as ever. I think we really need more critical interrogation of cost rental policy as it's actually being implemented here, and how it sits in wider policy - so great to read your reflections!
The point on private finance is very astute. The Secure Tenancy Affordable Rental scheme has so far avoided any scrutiny but it appears aimed at exactly the involvement of private financial interests that you warn about - indeed, if you read the small print, it even allows for investors to make a "reasonable profit" from cost rental. This is of a piece with housing policy's wider direction towards hugely subsidising the private development industry and addressing its "viability challenges" (which incidentally helps explain the high cost rents in Citywest!). Ires Reit are reportedly interested in the scheme, so just imagine that kind of actor putting pressure on the sector!
https://www.independent.ie/business/irish/ires-reit-eyes-government-partnerships-amid-dearth-of-private-investment/a1504934266.html
Your point on the commercialisation and loss of social vision of the sector is important - but again I think a crucial factor here is the radical novelty of Irish cost rental, that it is not social housing. After all, to what extent can we really expect a social purpose in the long when the state has deliberately defined it in law as not being social housing? In England, one of the factors in the hollowing out of social purpose that you mention was the creation of a vague range of "affordable" tenures that simply acted to water down or replace real social housing. Luckily we don't seem to be doing that here - but it does show how that the danger of commercialisation is much greater when you have an isolated "affordable housing" tenure with no relationship to social housing.
Sorry for the late reply Killian. Some great points there and thanks for the IRES link, I hadn't seen that. Your point about the implications of cost rental not being social housing are interesting and it is something I havent gotten my head around yet. As you know the Housing Commission recommended merging the cost rental and social housing sector into one sector with cost rents applied throughout. Perhaps not likely to happen but would change the role of CR if it did
A few comments on financial sustainability. I'll break it down into (i) the sustainability of schemes once launched and (ii) the sustainability of the flow of new schemes.
Sustainability of schemes once launched
I don't see this as a significant risk because:
Cost rents are unlikely to fall below market rents. Even during the GFC rents were only more than 25% below peak (Apr 08) for three months (Nov 2010 - Jan 2011). This makes a high level of empty apartments unlikely. Existing tenants who are unable to pay rents can qualify for HAP
Cost inflation on maintenance, repairs etc is unlikely to undermine the finance model as only 30-40% goes to cover these costs. The balance covers the repayment of loans which are fixed in nominal terms.
Finally the models have built in buffers - they assume 5-7% vacancy (cf with Iris REIT who regularly report vacancy of circa 1%) and must include a 5-10% buffer for loan repayments
Sustainability of new schemes
This is where the real risk lies. The most significant risk is the high level of subsidy required . Budget 2025 allocated €300m for 1,000 AHB delivered units. In the event of a budget crunch its easy to see how this level of subsidy could evaporate.
The role of Private Finance
Its worth elaborating on the nature of private finance used in cost rental in other European countries. Private finance can come from either households or capital markets. In my opinion the models in France and Austria which provide low cost finance from households, channelled through tax efficient deposits accounts with local banks are the ones to copy. Livret A accounts in France allow literally millions of private households to invest up to 20k and to earn tax free interest. This funding is stable and low cost. It also fosters political support for the sector. The challenge with capital market finance (as opposed to equity investment - more on this below) is its high cost (relative to State funding) and volatility,.
The role of private ownership in Cost Rental
There is an appetite in official circles to involve private investors in Cost Rental provision in order to scale up more quickly. There are at least two huge issues with such involvement. The first is that the homes would after 40 or 50 years fall out of cost rental controls and become part of the PRS. The second is that the private owners would adopt a profit maximising approach, raise rents by the maximum allowed and skimp on maintenance. So far this hasn't happened as even with STAR the economics are not sufficiently attractive. In fact STAR itself may have been designed solely for the LDA. One important protection in the Cost Rental legislation is that providers can only make 'limited equity returns.; This mirrors the 'limited profit' provision in the Austrian scheme.
Thanks Colm for those detailed points. I didnt know that 5-7% vacancy rate was built in to the calculations, that's very interesting to read. Also I really like the points about household savings based finance models. These would also tie into the wider need to have more domestic based sources of finance given the pillar banks are not providing a whole lot of development finance.