"Building more units is the only way to solve the housing crisis"

[Brendan Burgess]

I referred to this article by Dr John McCartney of Savills before, but it's so clearly written and so obvious, that it deserves to be shouted from the rooftops

Investors are not the enemy in the housing crisis and only building more units will fix it

Perhaps inevitably, this upsurge in buy-to-let activity has caused consternation among pundits who argue that commercially-motivated investors are crowding traditional homebuyers out of the market and driving up housing costs. ...


At one level, these concerns may be understandable. It is undeniable that every property bought by an investor leads to one less unit being available to an owner-occupier. Furthermore, by competing alongside traditional home-buyers, investors add to the demand for housing. In a context of tight supply, this undoubtedly drives up prices.




However, this logic only takes us so far. Because, while investors account for one element of demand in the sales market, they also represent the supply side of the rented market. One-third of Ireland's households rely on rental accommodation. And, just as tight supply is forcing up house prices, a scarcity of rental properties is driving up rents

 

[Brendan Burgess]

Summary of the cost of building
See attached Report on the cost of constructing a 3 bed house

House costs|€104k
External works|€16k
Site development|€16k
Site indirect costs|€10k
Contingency|€5k
Total Construction costs|€150k
Social Housing contribution|€10k
Development contribution|€12k
Finance, design and marketing|€23k
Total cost excluding site and profit |€195k

So how is the sale price determined?

Site cost| €30k
Cost of building|€195k
Profit| €30k
Sales price before VAT|€255k
VAT|€35k
Price paid by buyer|€290k

 

[Brendan Burgess]

I am trying to clarify my thinking on these issues

1) There is a severe shortage of housing units in Dublin and the surrounding area
2) This shortage pushes up the price of houses and rents
3) The only solution is to build more houses
4) It's less important whether those houses are sold to occupiers or landlords



5) It costs around €200,000 to build a 3 bed house before any allowance for profit and the cost of buying the land - see attached report
6) The builder must add VAT at 13.5% which brings the selling price to around €230k before any profit for the cost of buying land.
7) Adding a profit margin of 15% brings the sales price up to around €260k before site acquisition cost.
8) The only way to improve supply is to bring down the cost of building houses

 

[Padraigb]

You need to bear in mind that BTLs are still housing units and, with few exceptions, become homes for people. So driving investors out of the market won't do anything to solve the accommodation problem.

A few years ago people were prepared to undertake fairly long commutes so that they could have a nice family home. I think the appetite for that has diminished a lot. More people want to live closer to their workplace, and not spend 2-3 hours of their day travelling.

 

[Brendan Burgess]

You need to bear in mind that BTLs are still housing units and, with few exceptions, become homes for people. So driving investors out of the market won't do anything to solve the accommodation problem.

Hi Padraig

I fully agree with you. Is there something in my comments or the initial article which conveys the alternative opinion?

 

[Brendan Burgess]

Do we want house prices to continue rising?

If house prices rise, building will become profitable again and so the supply of housing units should increase.

But if house prices rise, would-be first time buyers will not be able to afford to buy houses.

So do we want to see house prices falling? If house prices fall, then there will be little or no new building.

The more I think about it, the only way to solve the housing crisis is to reduce the cost of building housing units.

This way we can increase the supply and reduce the price of houses.

 

[Padraigb]

...
I fully agree with you. Is there something in my comments or the initial article which conveys the alternative opinion?

No.

But there has been a general tendency to see "investors" as some kind of social evil. The high rents in Dublin suggest to me that the supply shortage is just as significant for investors.

 

[Brendan Burgess]

Ronan Lyons also wrote a good piece on the topic

Construction, not rent control, the solution to the housing crisis

 

[Dermot]

No.

But there has been a general tendency to see "investors" as some kind of social evil. The high rents in Dublin suggest to me that the supply shortage is just as significant for investors.

I agree. It is always particularly popular for politicians to bash investors/Landlords. There has been to many decisions made by governments against landlords dressed up as good for social policy but turned to be detrimental to tenants.
We need a long term fair and balanced policy to both Tenants and Landlords/Investors which is not being chopped and changed at the whim of a Government.
To go back to the central theme the only solution is supply. If you have 20 loaves and you have 30 people wanting one each it does not matter whether you are giving them away for free or charging 4 times their value there will be 10 people short.

 

[Protocol]

5) It probably costs around €250,000 to build a 3 bed house before the cost of buying the land

Although I admit I have no proof, just chats with builders, the build cost of a 3-bed semi in a scheme is well below 250k.

A 100-200 unit scheme means economies of scale, bulk discounts, etc.

Excl land+financing costs+dev levies+VAT, I'd be confident that a no-frills 3-bed semi can be built for under 150k.

 

[Delboy]

Investors should'nt really be competing with FTB's or young families in the suburbs for new housing developments, at least not with the shortage we're currently going through.

We need more and more Apartments built in central-ish locations...every time I hear of a new job announcement by Facebook, Google etc, I just think of more immigrants coming in looking for housing. And as they can't find accomm (mainly apts) in the city centre where I'm sure most of them would probably like to live, they are coming out to the inner suburbs (bit of a contradiction there, but you know what I mean) renting houses.
Look at the top of O'Connell St around the Bolton St/Dorset St area....lots of empty and boarded up delapidated buildings, and pityful looking social housing/flats. Was looking around there the other day and how this area wasn't regenerated from the 90's on with all the tax incentives around the place is beyond me.It's less than a 5 minute walk from O'Connell St!!!!

While getting building of new houses up and going along and beyond the M50 belt, surely it's time to start building up in these type of city centre locations...and quickly

 

[fearbeag]

Do we want house prices to continue rising?

I would hope the current spurt in house prices in Dublin would tail off and only rise in line with inflation or at least only a few percentage points above inflation. Continual uncontrolled rise in prices in the double digits will only lead us back on the painful road of the past.

The continual very strong rise in both house prices and rents in the Greater Dublin area clearly indicates there is a problem with supply. Obviously building more houses should help alleviate this. However there is often a scarcity of development land in areas where the demand is greatest. I would like to see a lot more development of properly planned apartment blocks, i.e. two /three / four bedroom apartments, that are designed with families in mind. I have lived in both poorly designed and well designed apartment blocks and the difference is immense.

 

[Brendan Burgess]

Investors shouldn't really be competing with FTB's or young families in the suburbs for new housing developments, at least not with the shortage we're currently going through.

Hi Delboy

Have a read of the article linked to in the first post.

The key point is that investors are also suppliers of accommodation to renters. If you banned investors from buying housing in the suburbs you would be artificially restricting supply to the rental market.

Brendan

 

[Brendan Burgess]

Although I admit I have no proof, just chats with builders, the build cost of a 3-bed semi in a scheme is well below 250k.

A 100-200 unit scheme means economies of scale, bulk discounts, etc.

Excl land+financing costs+dev levies+VAT, I'd be confident that a no-frills 3-bed semi can be built for under 150k.

Hi Protocol

I have attached a report done for the Irish Home Builders Association to the second post in the thread. It estimates that the cost of a house in a 100 unit development is €225k. Add VAT and the selling price must be €253k to cover the cost of building i.e. before site acquisition costs.

The gap to your estimate is around €40,000

Your estimate| €150,000
Financial contribution|€12,400
Part V|€12,000
Finance|€7,000
Total before VAT| €181,000
Including VAT |€210,000

They are allowing €30,000 for profit and €8,000 for marketing.

I have updated my figures accordingly.

So, the selling price before any profit is about €220,000.

 

[Purple]

Brendan,

The main cost is still construction. The article you linked doesn't break down labour and materials but I'm surprised that rainwater harvesting and solar panels are now a basic requirement on residential builds.
As I have said in previous threads the construction methods used in this country are archaic and hopelessly inefficient. Until the construction sector addresses these issues then tax breaks and incentives in the sector will have the same effect as subsidising Irish Steel or any other industry that refuses to engage in modern work practices.