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Housing for homes - a classic case of market failure

Posted on June 02, 2017 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

‘What is the concept of market failure and give an example’ was once asked in a school examination of economics. Here is a tip if you are studying economics, yourself: take housing in Ireland as an example. It ticks lots of boxes:

  • A chronic under-supply of housing at current cost, credit, demand and policy conditions.
  • A chronic failure on the part of some policymakers and politicians to recognise and admit the scale of the problem.
  • A chronic failure on the part of many to see a connection between policies pursued consistently over recent decades and the current housing crisis.
  • A chronic failure to tackle powerful vested interests that link in land ownership and speculation, corporate balance sheets and the private developer agenda.

The surprising aspect of all this, perhaps, is that such a market failure is bad for capitalism – at least in Ireland (that is, apart from the fact that it impacts on hundreds of thousands of workers and their families who struggle to save for a deposit or meet rising rents year on year).  It is bad for capitalism because, whether we like it or not, under-investment in infrastructure, including affordable accommodation, is a significant consideration in terms of competitiveness for valuable skills and inward investment. We pay a price for the mess that is the housing crisis – not least in the Greater Dublin area where private rented accommodation is at an all-time premium because of scarcity. And when it comes to bargaining over wages (whether in the private or public sectors) housing matters greatly. Get housing costs and supply under control and it is possible to have a real and evidence-informed debate on pay recovery or the living wage as the case may be.

It is not that policymakers and officials do not care about housing as a social need. It is, rather, a case of not being able to see the situation for what it is: a crisis of supply due to a model built on private profit and exacerbated by land speculation. 

In a recent research paper published by the Nevin Economic Research Institute (NERI), we have made the case for a radical and new departure through the establishment of what we term a European Cost Rental Model (ECRM). The idea is simple enough and is used in some other European countries including Austria. It involves using a public company or association to undertake the building of high-quality housing, and renting them out at levels high enough to cover costs and low enough to be affordable for most people (combined, where appropriate) with public subsidies to households below a certain income threshold.  To get up and running a combination of already existing financial sources such as state equity in the ‘pillar’ banks could be put to productive use. Might a future Minister for Finance and Taoiseach be so bold as to seek the forgiveness of the European Commission for doing what the Commission has already urged the Irish Government to do: deal with the Supply problem and stop further stimulating house prices by tax breaks to first-time buyers? Might Ireland follow the examples of Germany, France and Spain at various times and in various ways to apply the ‘fiscal rules’ more rationally and flexibly? Are Rules not made for humanity and not the other way round?

To develop such a model would take time and resources and the gains might not be fully apparent for many years. But, such a model could begin to have an immediate impact not only in terms of meeting ever-rising housing demand but in shifting the supply curve of accommodation with the result of putting a natural market break on the incessant upward pressure on market rents. While rent control is necessary, in my opinion, to deal with the scale of the housing emergency and affordability right now it does not solve the underlying problem of supply which is causing an escalation in rents over recent times.

But, how could we afford a brave new world of cost-rental? Surely, it would take billions of Euro of investment which the Government does not have (fiscal space is now close to the area around which a finite number of angels one could fit on an economist’s pin)?  A key aspect of cost-rental not appreciated in this part of the world is that it breaks with traditional UK/Ireland thinking and practice because:

-        It facilitates the growth of a large-scale, affordable, long-term and secure rental sector (in other words renting for the rest of one’s life is quite OK and is not a sign of irresponsibility of social failure)

-        It does not treat ‘social housing’ as a residual which goes, exclusively, to some social groups housed, educated and socialised in separate locations.

-        It involves significant levels of capital outlay and activity that are funded by long-term streams of commercial rental income.

If all of this sounds radical – it does.  However, it is far from pie-in-the-sky as it is very mainstream in many parts of Europe.

What about local authorities? There is no reason why local authorities could not continue their lead role in social housing provision. It might be possible for local authorities to avail of significant leasing arrangements with our proposed Housing Company of Ireland (see Ireland’s Housing Emergency: time for a game changer).  Local authorities have been starved of funding for capital investment over many decades (but catastrophically in the last decade).  To add to local government woes, various ‘populist’ decisions dating back to the abolition of domestic rates in 1978 have robbed local authorities over a stable and property-based source of revenue.

The current model and approach to funding and provision are simply not working. Local authorities need a significant boost in capital funding and, also, incapacity to coordinate land management, public services provision and planning of new communities as well as the adaptation of existing spaces, especially in urban areas. However, a social housing initiative led by the local authorities and linked in with a European Cost Rental Model operated by a single, national commercial agency (The Housing Company of Ireland) could begin to make a significant difference to the lives of hundreds of thousands of people who have suffered disproportionately from the fall-out of the property-lender-developer crash of 2008-2013.

Recent announcements of an ambitious plan to roll out public-private partnerships and use publicly owned land in the bargain fit with the traditional thinking, assumptions and interests of the (failed) UK/Ireland model of housing development.  Even if PPPs could relieve short-term pressure on public finances (a claim which has not been usually supported by convincing evidence and facts) they fail to come to grips with the wider role of local authorities and communities in coordinating the many complex aspects of creating sustainable and ‘liveable’ new homes in new community settings. Moreover, many PPPs (as with PFIs in the UK) have had a disastrous history and record in terms of delivering ‘value for money’ to ‘The Taxpayer’ not least in the domain of social housing.

At least one big advantage of ECRM over PPPs is that the latter are much more susceptible to the building industry business cycle while a cost-rental model can be largely insulated from short-term fluctuations in public funding and credit conditions.

  • Think long-term
  • Borrow long-term and, if possible, off balance sheet
  • Cover your costs quickly
  • Prioritise those who are most vulnerable to homelessness
  • Plan at the national level and deliver locally
  • Diversify the market and curb the dominance of a developer-led sector

Will we learn before it is too late again?

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