A Cold House: post-Brexit Northern Ireland

The biggest, most significant practical consequence of Brexit for Ireland has not really been talked about to date. That is, that for the first time, the London government will not be in a position to continue to underwrite the Northern Ireland economy. Northern Ireland is headed for a massive economic shock.

It works like this. Northern Ireland is deeply dependent on fiscal transfers (essentially payments of money) from the UK, in particular the financial service driven economies of the British south-east. There is a net transfer of £10 billion per year (£200 million per week) from the rest of the UK to Northern Ireland. NI has the highest public expenditure to person in the UK, and is highly dependent on public sector employment, much more than any other UK region. The Guardian put it in quite a stark graph:

The UK economy is in decline as a result of Brexit. Growth is slow and debt is high. How bad it gets will depend on how Brexit hits. Some say there is a full-on recession coming.

This will hit tax revenues in the UK. Getting more particular,  the IMF is talking about a major reduction in sales of financial services from the UK to the European Union. Financial services alone is said to account for 11 percent of UK government tax receipts. The loss of revenues to the City will be in the tens of billions of euros.  And financial services is clearly not the only sector that will be effected. Jaguar is moving operations from the UK to Slovakia, for example.

Even a few percentage points reduction in the UK tax take will have massive knock-on consequences for Northern Ireland.

London and Great Britain are going to face big economic and social problems of their own. Even the Brexit optimists agree there will be a period of upheaval. Britain is already in a major austerity program. It can’t take much more without severe political and social consequences. Northern Ireland will not be a priority if there is widespread disaffection (and maybe even riots) on the mainland.

As UK tax receipts fall, it is hard to see the axe not falling on Northern Ireland expenditure. If Northern Ireland’s subsidy per person is cut back so that it was in line with where the next biggest beneficiary is today (Wales) that would be a 20 percent cut, or a £40 million a week reduction welfare, public employment and services like education and health. That would be a massive impact, far bigger than any benefits the DUP has gotten from its supply-and-confidence arrangement with the Conservative government.

Could Northern Ireland’s fragile political, economic and social framework really bear such a shock? Could it bear it in tandem with a cut in cross-border trade? What will all these unemployed Irish passport holders do, or where will they go? The impact of Brexit on Northern Ireland (and by extension Ireland) will be far more all-pervading than changes at the border.

‘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.

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Brexit leverage

The UK government is finding that it has very little leverage in negotiations with the EU over Brexit. What was Her Majesty’s Government’s plan, if there ever was one?

In retrospect, I think Teresa May and her cabinet were hoping that Ireland would be their leverage. Europe would accept a ‘back door’ for Britain into the Single Market in order to avoid startling the Northern Ireland horses.

This could never really work, for reasons that basically have nothing to do with the political situation in Ireland. European agricultural lobbies could never allow allow such a gaping hole in the border of the single market. And Ireland is just not anything like an important enough issue in the EU, population and votes-wise.

Having the DUP supporting Teresa May’s government made this ill-conceived idea completely impossible. The UK government was no longer a neutral actor, trying to get the best outcome for Northern Ireland. It now had a clearly partisan mission. This has made it impossible for the UK to blame the EU for the problems Brexit is causing in Ireland. The EU could now place the blame firmly at the feet of the British.

Three things that definitely won’t fix Dublin’s housing crisis.

The reason prices for accommodation inDublin are so high is very simple. here are more or less the same number of homes as there were ten years ago, but there are 10 percent more people. At the same time, the economy has moved from recession to growth. There is just more money around. As a result, prices go up.

The theory of supply and demand is that new demand should now come on-stream in response to the increase in prices. But that hasn’t happened. The reasons for this are many and they need to be addressed. But there are three things that won’t help.

1. Capping the price of accommodation. Capping the price of accommodation with some sort of rent freeze provides welcome relief to existing renters, but it doesn’t really help much for people who don’t have accommodation or who have to move because their family is growing. Accommodation availability has reached a record low. The fact that the rent is capped is not much good to you if you cannot find a place to rent.

2. Increasing standards, implementing regulations for landlords. There are many good reasons to increase standards and implement new regulations. An example would be a deposit protection scheme. It provides a benefit for tenants, certainly, but it also adds a new cost and a new bureaucratic barrier. In general, regulations make it less attractive to landlords to be in the market. This means that there will be less rental accommodation. (It might result in more property to be available to buy, but that is not much good to you if you need to rent.)

3. Increasing building regulations and planning requirements. Building regulations today are a lot higher than they were 10 years ago. There are sound environmental reasons to increase standards, but ultimately, this means that houses are more expensive to build and take longer to build. Take the case of the iRES development in Rockbrook. This was originally supposed to be 456 homes, but an analyst reckons that this will now be reduced by 40 homes. There will also be a couple of months delay for a new application to be submitted.

We can’t wait any longer: get homebuilding going in Ireland

Things are pretty bad. Two public servants are moving to Abu Dhabi, so they can afford to buy a home in Dublin. We spend tens of thousands of euros to educate and train people, then they have to go to a tax haven to be able to afford to even live in our country.

We have to provide housing, and quite a lot of it, and fast. We are not building anywhere near enough. The basic problem we face is that when all costs are taken into account, new homes are too expensive to provide without government support. It is cheaper to buy a house (even at high current prices) than to build a house. There are a number of reasons for this and we need to address them for sure.

But we also need to get homes built, starting now. We need to be thinking in terms of hundreds of thousands of new homes over the next few years.

On the sidelines, there is an ideological war going on about house-building. Should the houses be built by the private sector, or by the state? The problem is that nobody at all is building houses at the moment at any scale. It is unaffordable for everybody.

There is one good thing however: the country is awash with young people ready and willing to buy a house, and with a strong economy, many of them are creditworthy and have deposits ready.

Here is what I would do:

Firstly, a straight incentive – €15,000 for every bedroom in a new build completed in accordance with building regulations and occupied by 31 December 2019 in the case of a house and 31 December 2020 in the case of an apartment. (There would also have to be conditions to avoid subsidising houses already underway). The figure would go up to €20,000 where more than 100 units are provided on the same site.

Why €15,000? Well, because for a three-bed semi, that’s enough to cover the shortfall between the price of an existing house and a new house in Dublin. The cost overall for 25,000 homes would be over a billion euros, sure, but all of that would be recovered through VAT and PAYE from the increased economic activity.

Every year after 2019, the amount of the incentive could be reduced if it is no longer required.

Secondly a finance structure is needed. Prospective home purchasers should be encouraged to put down a deposit, now, on their future home. Rather than putting the deposit with the builder, they should place it with a government scheme which would provide a guarantee for the prospective purchaser that their deposit was safe. The government could then loan the value of the deposit to the developer, secured on the land.

The government would also guarantee to purchase the property if the original purchaser ‘fell through’ and didn’t go ahead with the purchase, and if a replacement purchaser couldn’t be found. If it did exercise this option, the government would get a small discount (say 7.5 percent).

But if the economy keeps storming on, that is unlikely to happen. And even if the economy weakens and the government has to buy the houses, the country is still going to need these new homes for the long-term. These will be modern, high-quality houses. The government can rent them for the short term, and rent them later on.

Now the builder has a rock-solid, guaranteed purchaser, rain, hail or shine. With this guarantee, the builder can go to the bank and borrow the money they need to actually build the complex.

This scheme is really designed with private housing built by private developers in mind. But it can work for local authorities too. They can use this funding mechanism to build social housing, or they can use it to build houses for resale.

It can also potentially be used by people who want to buy property to let it, though the structure would need to be tailored to avoid abuse.

Is this the full solution? No. We also need to address the problem of land costs. And to do that, we may ultimately need to replan our transport networks to open up new land. We may need more flexibility in the planning laws. But it provides for immediate action and will mobilise the talent and capital we have available already.

Combined with a plan to utilise vacant housing in the most sought after areas of the country, and perhaps some form of site value tax to incentivise use of vacant or underused land, this would put us well on the way to building hundreds of thousands of homes for our growing population.

By the end of the year: providing some relief in the Dublin property market

The Dublin rental property situation is desperate, with population growing but little being built. Here is a simple first step to provide immediate relief, through a change in the tax code. It could be in place before the end of July if there is the political will.

Despite the crisis, there are reckoned to be 20,000 vacant homes in Dublin alone. If these could be brought onto the rental market, it would make an immediate difference to the housing problem.

UPDATE: latest statistics from CSO for vacant homes in Dublin counties for 2016 are now provided below. There are said to be over 32000 properties vacant.

over 32000 vacant houses in Dublin

over 32000 vacant houses in Dublin

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Housing 160,000 more people in Dublin

There is a somewhat lily-livered leader in the Irish Times today about housing. I say that because it is big on telling us what we must avoid, but it doesn’t face up to what we do in order to avoid it. There are some ‘right-on’ ideas about the government having to play more of a role, but that’s about it.

There is a shortage of houses. Dublin’s population is growing at a pretty fast clip, and has been for decades, through good times and bad. There are 160,000 more people in the county than there were 10 years ago, and yet we have build hardly anything. We could easily absorb 100,000 extra housing units in Dublin.

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Why water meters were a bad decision (still)

Lots of spin going on today about why water meters are a good idea and how many leaks they are finding. Apparently, Irish Water has already identified 20 houses that were using loads and loads of water. But this is only one million litres a day of water.

That is obviously great, but greater savings, and a lot less aggravation could have been had by taking much simpler and less expensive measures in relation to finding leaks, and by using the 600 million euros to replace water pipes. The 539 million euros being spent on this metering program is enough to replace thousands of kilometres of water mains (and incidentally, meter boxes could be inexpensively fitted at the same time as doing this work).

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The political price of complexity.

When will politicians learn the political price of complexity?

Look at Irish Water.

First things first. Establishing a national utility out of a local authority patchwork of pipes and personnel is complicated to begin with. There are a lot of people to satisfy, a lot of metaphorical buried bodies, and a whole load of politics.

But layering on even more components makes the project even more complex. Look at how Irish Water has made a complicated assignment into a labyrinthine project.

Firstly, there’s the accelerated meter installation program. The plan was to have a large proportion of the two million remotely readable domestic meters installed by the beginning of this month. That didn’t happen. Installing and commissioning one of these meters requires many steps and a lot of things can and do go wrong. Dodgy pipes, bad workmanship and shared water supplies are just some of the obstacles. At the wider system level, these remotely readable meters are a new technology in Ireland and there is relatively little expertise in making them work. There are no statistics that I know of on how far Irish Water has gotten with its meter project, but it looks like they are less than half-way there.

There was really no need to install such complex meters on the first go out. A simpler in-home non-digital meter which water users could opt into having installed would have been cheaper and faster. The fancy meters could have been rolled out over a number of years, as the mains got upgraded.

Secondly, there is an ultra-complex system of charging, based on a structure of allowances and estimated assessments of water use (these assessments are critical because the meter program is so far behind schedule). The official description of the charging structure is some 31 pages long.

The simple alternative to this charging system and was described by Richard Tol in 2011. With this system, meters would be opt-in. The same allowances for children and usage could have been provided through increases in social welfare and through adjusting tax credits to put more money in people’s pockets to pay the charge.

Finally, the two factors above have converged to create a requirement for an extremely complex IT system. The requirement to collect personal information to assign allowances to individuals means that there are extremely complex issues around privacy, which Irish Water does not seem to have fully grasped.

This complexity has also resulted in a pretty odd website, a disastrous PR campaign based on some pretty dodgy conceptual work described in this fascinating PowerPoint presentation. There are ‘tribute’ sites inspired by and devoted to the topic of Irish Water and which give (un-useful) tips on what to do if Irish Water should happen to try to install one of their new fangled gadgets outside your house. The long term comedic value of the Irish Water ‘ecosystem’ should not be underestimated.

The end result of this is that Irish Water is wasting a lot of money on effort on a metering system that doesn’t really do anything to help it achieve its goal. Instead of focusing on driving down the cost of water, encouraging water saving and fixing the leaks in our rather dodgy national water network, Irish Water has gotten itself bogged down in an expensive, unpopular and ultimately unnecessary project which is going to deliver a lot of problems and very few benefits. But it isn’t Irish Water who will have to bear the cost. It will be citizens, and their elected politicians, who will pay the price.