in housing, Ireland

‘Completion payment’ contracts – a structure to get Irish housing moving.

It’s interesting to dissect the Eamon Ryan’s article on the need for a new model for housing. Firstly, there is a sense of desperation, that we need to do something different. Secondly, Eamon and the Green Party recognises that social housing as we understand it is not the whole answer. The shortage of housing is not just something that is effecting the least well off. It effects people with pretty good incomes too. And thirdly, it recognises that there is something very broken about our whole housing market. Nothing near enough new accommodation is coming on-stream.

The cost-rental model is basically to rent to people for what housing costs, rather than for what the market can bear. The idea is that you base the rent on the cost of the mortgage to provide the house.

In parallel the Eurostat findings on Irish housing bodies indicate other troubles. The housing bodies are the vehicle through which the Irish government funds social housing at the moment. The idea is that these bodies are supposed to be autonomous and run as self-funding social enterprises, and so their debt is not added to the Irish national debt. Eurostat has decided, based on fairly overwhelming evidence, that the housing bodies are really just vassals of the government, carrying out government work with government funding. It raises some interesting questions.

It is commonly accepted that the cost of providing a three-bedroom home in Dublin is around €330,000 including land, all extra costs and taxes and a €39,000 profit margin for the developer (the developer doesn’t necessarily get to bank the profit – that covers the developer’s cost of finance and he needs the reserve for the next project). Around half the cost is the actual construction cost.

So, depending on the interest rate, a mortgage on €330,000 will cost €1770 per month (based on a 5 percent interest rate, which is typical enough for buy-to-let). There are other obvious costs too. There is management costs and insurance costs and the landlord will need to reinvest in the property over time, things like repainting, replacing boilers, maintenance and so on. Call these about 12 percent, to give you a rent of around €1982 per month. This is clearly not very affordable housing. (According to, you can rent a house for between €1500 and €1800 per month as things are.)

So this only works if there is a hidden subsidy in the form of a low interest rate. The only way to provide this is through some form of subsidy on the interest rate.

There is also another ‘secret’ subsidy. A regular tenant in the private sector is contributing (whether they realise it or not) to their landlord’s tax payment. If the property above were in the private sector, and rented for the same rent, the landlord would have contributed around 180,000 euros in tax (about €500 a month) over the 30 years. This tax money is then available for government services and projects that benefit the community.

So really, the Green Party’s concept is basically a subsidy to a relatively small group of renters who manage to get their hands on these cheap houses. It is paid for by reduced tax receipts, not reduced profits for greedy landowners. That said, it might work, at least in the sense of producing more housing.

But would it really be fair? Some people would get access to this new housing, but others would have to put up with lower quality, more expensive housing. The model doesn’t really explain how the the housing is allocated, other than that it is supposed to be open for everybody.

But there is a lot of value in considering the scheme, because it forces us to look at the fundamental problem with the market. And the fundamental problem is that it is just not economic to provide new rental family homes for what seems like a reasonable, affordable price of, say €1500/month. It doesn’t matter whether it’s the private sector, the public sector or the community sector.

So if cost rental isn’t the answer, how to do we get more supply in the housing market? Well, the reality we have to face up to is that to stimulate housing provision, we need to open the government chequebook. Once we accept this reality, we have to decide what is the best way to get the most houses as quickly as possible for the money available.

This is a technical question rather than an ideological one. The question is, how do we target our money in a way that gets houses built? It doesn’t really matter who owns them – once they are built, they will be sold or rented for people to occupy, and every extra unit of accommodation will reduce the pressure -.

The way I would do this is for the the government to provide a ‘completion payment’ to developers for every unit completed. The developer could be a local authority, an approved housing body, a commercial developer, a cooperative or a private individual. The payment would depend on when the unit was built (the sooner it is built, the bigger the payment) and where (rent pressure zones would attract the highest payments). There wouldn’t be any extra subsidy for building a ‘luxury’ or high-spec development. The payment would only be made once the home was completed and correctly certified for compliance with building regulations, and occupied for the long term (either by a tenant or a home purchaser). It would be combined with a scheme under which the government would promise to buy the property if another purchaser could not be found. This would make it easier and cheaper for the developer to get finance. This would mean the developer would require a smaller margin (say €29,000 instead of €39,000). The payment would be governed by a contract, which would set the final sales price.

The size of the payment would certainly be much less than the €180,000+ subsidy that the cost-rental scheme would entail. A subsidy of €40,000 combined with a purchase guarantee scheme would therefore mean that a home could be provided for €280,000. At this price it would be attractive to many families to purchase and move into a new home. The homes these families vacated would then provide extra supply for everybody else.

This formula would also allow approved housing bodies to build homes in a way that kept them off the government balance sheet. The ‘completion payment’ and the loan guarantee would be equally available to them as well as to private sector developers.

So what about abuse? There is a real problem that occurs, that developers absorb all of the benefit of state subsidies for themselves, and sales prices don’t actually go down. Well, if that seems to be happening, there are two things the government can do. Firstly, it can decide to only enter completion payment contracts with the developers who offer the best value for consumers, in terms of accessible prices. Developers will have to bid for the contracts. Secondly, the government can release land for development to new players. This will put pressure on existing landowners and players to release their land.

So there are solutions to the housing crisis. They don’t have to be particularly expensive, and they don’t have to prescribe a single model for building homes. A well structured ‘completion payment’ contract and loan guarantee can get building going. Having more homes available will result in higher standards and more affordable prices across the housing market, helping everybody.

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