While the construction industry might have been preparing itself for a 12- to 18-month slowdown, it was not ready for a global credit crisis and a recession, writes Barry O'Halloran
BUILDERS MORE than most people, except possibly the banks, will not have taken much comfort from the events of the last week. The crisis in world financial markets means that getting credit is not getting any easier. This is a particular problem for builders, because both commercial property investors and house buyers borrow most of the cost of the properties they buy.
Friends First economist Jim Power says that after this week's implosion in world credit markets, it's hard to see it coming back on stream for several years.
"Consumer confidence is shot for lots of reasons," he says. "House prices will fall further and no one in their right mind is going to buy a house in the current environment".
Power adds that there are more houses for sale than the number of people who want to buy them, a problem that will have to be ironed out before the industry can turn around. In short, there seems to be little light at the end of the tunnel that the industry entered with surprising speed after hitting its all-time peak two years ago.
While the industry might have been prepared for a 12-to 18-month slowdown, it was not ready for a global credit crisis and a recession. All this means that the construction industry is looking with even more urgency than usual to next month's Budget to take at least some of the strain off its shoulders.
There are three key elements to what it wants. The first is some means of kick-starting the housing market, largely by getting first-time buyers back into it. The second is a Government commitment that it will continue to spend money on the big projects that it has pledged to deliver in the €180 billion National Development Plan (NDP).
The third is restoring some of the buoyancy to the commercial element of the industry, which is slowing far more rapidly than anyone expected. The Construction Industry Federation (CIF) is leading the charge on the sector's behalf.
Its director Tom Parlon says that the Government has to "restore house buyers' confidence". Broadly speaking, the industry is proposing that the Government use the State's Housing Finance Agency to provide subsidised loans to first-time buyers to enable them to cover the cost of their deposit.
In return, the State would get a share in the property for a period of years. The logic is that while first-time buyers can get mortgages, banks are looking for bigger deposits, because they want to keep the loans to about 80 per cent of the property's value. With house prices at an average of €300,000, this means a buyer has to raise €60,000, which is a major barrier to anyone who does not already own property.
A number of economists have criticised this, arguing that the market needs to work out issues like supply and demand for itself and that Government intervention may make matters worse, or prolong the agony. Power agrees. "There is nothing that the Government can do at this juncture to restore confidence and get people buying houses," he argues.
"That excess supply has to be taken out of the system before the market begins to pick up again". Parlon says these arguments are "textbook" economics and don't necessarily apply in what are exceptional circumstances.
He says that the federation is looking for some balance in the industry and warns that house buyers could pay the price down the road if this is not achieved now. "Last year, when we met finance officials, we told them that we expected 45,000 houses would be built in 2007; they said that it would be 68,000" - in the end it was only 40,000," he says. "This year we think it will be just 20,000. What will happen when things pick back up is that there will be a housing shortage, and prices will be driven up again."
Power says the real solution is for developers to cut their prices, but Parlon says that this has already happened and the average cost of a house in the Dublin area has come down from €400,000 a year ago to €300,000 today.
Parlon and Power do agree on the National Development Plan, designed to address the Republic's social and economic infrastructure deficit. "We will be making a very, very strong case that all projects that support the economy should go ahead," the CIF director says. "Roads, rail, schools, hospitals and social housing, these all give a superb return.
"We should also be taking advantage of the great value that is there now. The cost of building one kilometre of road is €5.1 million, but it's being tendered for at €3.8 million".
He says 66 companies recently tendered to build a new courthouse in Drumshanbo, Co Leitrim. Power says the "must-have" elements of the National Development Plan, such as roads, hospitals and schools, should go ahead, but believes that the "nice-to-have- but-not-necessary" proposals, such as the €5 billion Dublin metro, should be put on hold.
Stamp duty has long been an industry bugbear, as builders see it as an extra transaction cost that puts off both buyers and investors. Parlon says that the federation wants to see the rate on commercial buildings cut from 9 per cent, which he says is double what is charged in the rest of Europe, to 4 per cent.
He points to the fact that the big buyers of commercial property here over the last decade have been Irish, with no overseas interest, despite the Republic's prowess at attracting mobile investment. The industry believes that the 9 per cent rate is a major barrier to this.
"We will be pushing to have that brought back to 4 per cent," he says. "We are already able to attract big multinational players here because of our low corporation tax rates. If we cut stamp duty, there will be nothing to stop them investing in office blocks here as well."
