Reducing Construction Cost is key to solving housing crisis

A high level group of policy-makers has heard that the housing crisis will not be resolved until there is a reduction in the cost of Government levies and taxation estimated to be 36% of the value of a new homes at a forum hosted by the Construction Industry Federation.

Hubert Fitzpatrick, Director of the Irish Housebuilding Association, CIF, stated; “Due to the cost of construction, many Irish homebuilders are finding residential development unviable.  In many parts of the country, the cost of construction is so high relative to asking prices of existing houses they would be building at a loss.  As a result, housebuilding activity outside the Greater Dublin Area is stalled.

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In the capital and other urban centres, there is insufficient supply to meet growing demand.  Dublin is an economic engine, its population is growing rapidly and unemployment is dropping faster than other parts of the country.  The Central Bank’s mortgage rules are freezing many first-time buyers out of the market. More people are forced to continue to rent well into their 30s as they save for the average deposit of €51,000 for a home in Dublin.  This in turn is putting upward pressure on rents and forcing some people into homelessness and onto the social housing lists and forcing people to buy their homes further from their work.”

The event also featured:

Ronan Lyons, Assistant Professor of Economics at Trinity College Dublin and Economist with
Marian Finnegan, Chief Economist, Sherry Fitzgerald
Micheal Mahon, chairman, Quantity Surveying Professional Group SCSI
Hugh O’Neill, Chairman of the IHBA

Chairman of the Irish Homebuilders Association, Hugh O’Neill said; “The Government must now examine every cost they add to construction with a view to reducing it and make building viable again.  VAT, levies, the time involved in the planning process and the impact of the Central Bank rules on access to finance must all be examined as part of the urgently required solution to the housing supply shortage.”

The Central Bank mortgage rules has effectively put the average deposit or adequate mortgage for a home in Dublin out of reach of first-time buyers.  Mortgage approvals for first-time buyers have dropped 27.1 % year on year in three months to end of February this year.  As a result of this shortage of potential customers, banks are reticent to provide housebuilders with finance at viable rates.  Finance from non-bank sources is traditionally more expensive, driving up the costs of construction that in turn acts as a disincentive to house building.
We’ve asked the Central Bank to refine its mortgage rules to generate a sustainable increase in supply to meet pent up demand.  To ensure the banking system is protected, potential mortgage holder’s track record at paying rent can be taken into consideration by a mortgage provide before applying a higher loan to income ratio for select first-time buyers.“

The CIF has also called on the Government to reduce the VAT rate on construction at 9% up to the point where Ireland is building the agreed sustainable level of 25,000 homes per year.   The CIF estimates at this level of activity the Government would generate €1.85b on the basis of an average sales price of a new home of €230k even with a reduced overall tax take by the Government of 32% due to a reduction in VAT.  

The CIF outlined a number of other initiatives including a reduction of development levies, streamlining of the planning process and a help to buy scheme aimed at first-time buyers.