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Cost Rental made simple

Posted on July 13, 2018 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

‘Cost-rental’ is a term that has come into popular use in the last year or two. While most people declared themselves supportive of the idea, it is not always obvious that people mean the same thing when using this term. Let me explain briefly and concisely what it means.  ‘Cost-rental’ is a social arrangement where anyone can avail of secure, quality rented accommodation in a way that covers the cost of such accommodation in full but avoids inclusion of a profit margin in the overall cost of renting. Let’s be clear what this does not mean by referring to the following four misconceptions:

  1. That every individual, couple or family necessarily pays the same rent everywhere for the same type of dwelling;
  2. That ‘cost-rental’ is the same as ‘social housing’, in other words, subsidised housing for those who cannot afford it otherwise;
  3. That ‘cost-rental’, on its own, is the answer to the housing crisis; and
  4. That ‘cost-rental’ is a way of getting around Eurostat or CSO rules and interpretations to engineer public expenditure ‘off-the-books’.

First, the principle of ‘cost-rental’ is, as the name suggests, a mechanism where rent is pitched at a sufficient level to cover the cost of design, site acquisition, building and long-term maintenance. However, because ‘cost-rental’ would be undertaken by a public, commercial enterprise body – as proposed in a research paper published last year by the Nevin Economic Research Institute – it would not include a profit margin in the cost. It should, also, be possible to pool and grow scarce expertise and resources including access to public land banks to keep average rental costs below going commercial rental levels especially in areas of acute excess demand such as in the greater Dublin area.

Secondly, ‘cost-rental’ is a departure or, better still, a complement to existing local authority public housing development. Local authorities have and should retain a responsibility for social and affordable housing. The programme or programmes to build more social housing should be scaled up and accelerated in all areas. However, we are talking about something different and complementary. We are suggesting that a single national agency be responsible for designing, building and maintaining a stock of high-quality, energy-efficient and mixed-income homes suitable for long-term renting.  There is a demand for such accommodation including demand from couples or families who for one reason or another do not want to buy a home. Individuals and couples reaching retirement may not simply want or cannot afford to buy a home. Long-term, secure public rental homes provide a solution in some cases. It may be possible to vary rent levels around an average so that high-income households participating in such an arrangement cross-subsidise those on lower income. It might also be necessary for the Exchequer to divert some Housing Assistance Payments to a new Cost-rental model to enable some tenants to afford cost-rental amounts which will be higher than those in the existing local authority schemes but lower than those in the private rental market.

The third point is that such an arrangement would take time to develop, money to get started and political and popular support to grow and be sustained. It would not be the answer to the current supply crisis, at least not entirely. However, over time, it could make a significant contribution in three ways:

  • It would help ‘calm’ the housing market that sees periodic busts and booms followed by periods of low construction activity giving way to periods of over-building and/or property price inflation (including construction in the wrong locations). This is why we refer to the proposal as a potential ‘market game changer’.
  • It would provide a greater range of choices to those seeking homes including in some cases workers and families who may not stay long-term in an area or in this country.
  • It would open up a new sector that is ‘not-for-profit’, publicly owned but operated on a cost-recovery basis.

My final point concerns the intractable question of ‘on-the-books’ and ‘off-the-books’. It may be that a cost-rental model, if properly designed and developed, could become a candidate for being treated as ‘off-the-books’ for the purposes of estimating Government expenditure and debt. However, this is not the main argument for ‘cost-rental’. And, I believe it would be wrong to make the case for ‘cost-rental’ as a way of ‘getting around the rules’. The first priority is to undertake a sensible social and economic policy that changes market behaviour, provides for a social need and ensures continuity of supply, standards and a mix of households by income and other characteristics. If it proves possible, in time, to do this ‘off-the-books’ such as is the case in Austria then that would be a positive development. If not, the idea still makes good economic and social sense.

 

 

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