The supply of new housing in 2019 was 21,000 while the need was between 35,000 and 45,000, depending on which analysis you read.
The Government has agreed to set up a Housing Commission to examine our current dysfunctional housing system. One item for attention must be how we overhaul the current constrained supply process.
Some commentators are attributing the shortfall in supply to lack of skilled labour. I do not agree. The problem lies in the procurement and funding structures currently in the industry. Ireland has one of the most flexible and quick reacting construction industries in the world, but one that only responds when correctly organised and motivated.
We have seen the commercial construction sector go from almost zero output in 2014 (the first full year post our EU-IMF bailout programme) to high volume now. Think of the absence of cranes in Dublin six years ago and now look at the large numbers on the skyline. Something is wrong that we can build offices but not housing.
To increase the annual output to 35,000 or 45,000 homes each year requires a focus on procurement processes and funding mechanisms. Building houses is riskier and requires more capital than building offices.
The traditional speculative developer is carrying four separate risks as follows:
1. The risk of getting planning permission and other regulatory approvals;
2. They have to finance the land purchase usually over a period of years while securing planning per mission;
3. They have to construct the houses and infrastructure at a viable cost; and
4. They are dependent on a purchaser being able to afford the house.
Each of these four processes involve relatively high risks and are big barriers to ramping up housing supply. Navigating the public procurement process to supply the State constructive services is another risk, particularly for small operators who have traditionally provided the bulk of new housing.
Looking at housing output, the speculative developer supply model has an in-built output limitation in that developers will only construct the number of houses that they can expect to sell.
However, getting a mortgage in the current environment is challenging for potential buyers and requires a household income approaching €100,000 per annum. This affordability barrier automatically precludes a major chunk of the workforce from acquiring such housing.
So who should build the affordable housing that these aspiring homeowners require?
Historically, the answer was for the State to build council housing and to lease these at almost nominal rents to those who could not afford to become owner-occupiers. At one time, half the housing output of the construction industry was for council housing, but that stopped when the State turned off the money tap.
No substitute process was put in place and the seeds of the current crises were sown. Many are calling for that old process to be restored but that is impractical for two reasons. Firstly, an absence of the required State funding and, secondly, the inability of councils to build up their design and management teams to the scale required to turn out 10,000, or 20,000 houses each year.
To put the scale of such design teams in context, Cairn Homes, a listed Irish housebuilder, is probably the biggest developer in the country. It built 1,080 houses last year, with a design and management headcount of just 200.
For the councils to ramp up staff and use the contractor method of procurement would take years. So we need to change our housing procurement process to release the energy and inventiveness of our construction industry.
In the UK and Europe, in between the contractor and speculative developer approach lies a third procurement model that is ideal for providing high volumes of houses at affordable prices. It is known as the "'Turnkey" approach. It is used extensively by UK housing associations and by large investors. The core difference in approach is that the four risks of development outlined above are managed and mitigated by spreading those risks among the stakeholders.
Here's an example to illustrate: Landowner A wishes to sell his land and believes that planning permission and services will be available for a housing development. He comes to an arrangement to sell his land to a Turnkey developer B, but the deal is subject to B securing planning permission that B then applies for using his specialist professionals.
Meanwhile, an investor or housing association C, seeking to acquire finished housing on a Turnkey basis is willing to commit to buy the completed houses.
Developer B enters a Turnkey contract to sell the completed houses and offsets his buyer risk. A deal gets done and documented and the risks go to the parties best suited to take them.
The landowner A takes the planning risk (for which he receives a higher land price). The investor C takes the risk of the being able to find occupiers. That leaves only the construction risk for B. But by specialising only in this niche part of the housing market, B builds up a high degree of expertise both in design and in achieving economies of scale.
Generally, such arrangement works well but they do need skilled management. It is this skill that the Government needs to acquire and use if is to meet its housing output. The Land Development Agency is one small step in that direction but not enough to bridge the housing deficit. A big step for the State would be to modify its procurement process to accommodate the Turnkey approach.
Dr Bill Nowlan, founder of Oracle Real Estate Strategies
