||Last Updated: Dec 19th, 2007 - 13:17:15
State of Chassis: Artificial restriction on land supply puts Ireland and UK at bottom of property league in Developed World; Irish urbanisation at 4% is among Europe's lowest
By Michael Hennigan
Mar 24, 2006, 15:02
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The majority of Irish housing units built during the economic boom, have been small and of low quality. Trading up has resulted in a big surge in the prices of larger second-hand houses.
The global house price boom of the past decade has been fired by a number of factors and one of them is the artificial restriction on the supply of land. New houses being built in Ireland and the UK are among the smallest in the Developed World even though there is no shortage of land. They are also of low quality and contrast with France where the majority of new houses built are detached.
With an abundance of land in Ireland:
Over a period of more than three decades, real house prices (excluding general inflation) in Ireland, Australia and the UK went up by around 3 per cent per annum while they have remained stable in Germany and Switzerland. Why are some countries able to combine upward demand pressures with stable house prices and spacious housing, while others are not?
Estimated Urban Land Area: Selected Countries
|NATIONAL URBAN LAND ESTIMATES
||Urban Land Area/Total Land Area
||Urban Areas Over 1,000,000 Land Area/Total Land Area
||Share of Urban Land in Urban Areas Over 1,000,000
||Share of Urban Population in Urban Areas Over 1,000,000|
|.... Agricultural Belt
|. . England & Wales
|. . Scotland
|USA, France, Australia, Canada, Great Britain from national statistical authorities; EU Housing Statistics
In Ireland, approximately 4 percent of land is covered by urban development, while 8 percent is developed in England and Wales (approximately 6 percent in Great Britain). This compares to 12 percent in France, 20 percent in Italy and 28 percent in the Germany and the Netherlands. Urban development in the New World countries covers less land, from approximately 0.3 percent in Australia to 2.6 percent in the United States.
In the UK, a Policy Exchange think tank report says that in a March 2005 MORI poll, 50 per cent of those questioned favoured a detached house and 22 per cent a bungalow. Just 2 per cent wanted a low rise flat and 1 per cent a flat in a high rise block. But houses and bungalows use more land, so while in 1990 about an eighth of newly built dwellings were apartments, by 2004 this had increased to just under a half. Not alone has Britain has some of the smallest houses in Europe but it is also the oldest.
While Irish Government figures show that 6% of the housing stock is currently made up of apartments, apartment building has been a particular feature of recent completions. Apartment building made up 21% of all housing units built in 2004, or 42% of the Dublin region.
A Policy Exchange report says that the useful floor space of Irish built houses is smaller today than in the past; they are narrower with no garages and smaller gardens. It quotes Ronan O’Driscoll, the Director of the Dublin new homes division of Hamilton Osborne King, Ireland’s market leader in real estate as saying that he remembers that when he started to work in the real estate business some fifteen years ago, around 45 per cent of new houses were "family houses," with a floor space of around 125m2. This proportion has now fallen to less than 5 per cent. Liam O’Donnell from the Institute of Professional Auctioneers and Valuers added: “Spacious three bedroom houses of good quality are currently not being built in the Greater Dublin area.”
|Source: Policy Exchange|
The 2006 Demographia International Housing Affordability Survey using data from national agencies in Ireland, UK, Australia, Canada, New Zealand and the United States, the average new house constructed in Australia and the United States is approximately 2,200 square feet (over 200 square meters), including both detached houses and multiple units. New house sizes are nearly as large in New Zealand (1,900 square feet or 175 square meters), while new detached houses average 1,900 square feet (175 square meters) in Canada. However, new average house sizes are less than one-half that size in the UK (815 square feet or 76 square meters). Irish new house sizes are, like their UK counterparts, also comparatively small, at 945 square feet (88 square meters). Moreover, new UK houses are the smallest in the former EU-15, while new Irish houses rank ninth in size among the 15 countries. The average size of new houses in Denmark, a country that's comparable with Ireland is 1,475 square feet (137 meters).
Houses in Australia, Canada, New Zealand and the United States have increased substantially in size in recent decades. In just the last 20 years, the average new detached house in Australia and New Zealand has increased by two-thirds the total size of a house in United Kingdom. New house sizes have dropped more than 30 percent in the United Kingdom since 1920.
The survey reports says that Ireland’s smallish houses are built perplexingly small as the nation emerges as one of the most affluent in world. Average house lots are much larger in the United States (and Australia, Canada and New Zealand) than in the UK. In the United States, new detached houses are built at 2.7 per acre (6.6 per hectare). In Australia, new detached houses are being built at 5.5 per acre (13.3 per hectare). By comparison, in the UK, new houses were built at an average of 16 per acre (40 per hectare) in 2005.
The survey report using data from the Irish Department of the Environment, Heritage and Local Government Housing Statistics report, that was published in November 2005, says that future lot sizes are likely to be even smaller in Dublin, where present zoning calls for 20 houses per acre (49 per hectare), which would require five (5) more houses to be crowded onto an acre than just four years ago (13 more houses per hectare).
Seven Dublin houses or six United Kingdom houses could be built on the average new house lot in the United States or three to four compared to Australia.
The survey says that much of recently built housing stock in many continental (Western Europe) markets is detached. For example, single family houses comprise two-thirds of new house construction in France. The United Kingdom has some of the most tightly packed suburbs in the high-income world, at densities nearly double that of Western Europe and 60 percent greater than in Japan. Strikingly, new houses, adjusted for size differences, are more than twice as costly relative to incomes in Ireland and the United Kingdom as in Australia and New Zealand. Moreover, new houses in the UK and Ireland are approximately five to six times as costly, adjusted for size differences, as in affordable markets such as Indianapolis or Winnipeg.
HOME OWNERSHIP IN EUROPEAN UNION
The European Foundation says that most people in the new Member States of the European Union are homeowners; more than half of the population own their own home, and in some cases – Estonia, Hungary, Lithuania, Slovakia, Slovenia, Bulgaria and Romania – the figure is over 80%. There are two exceptions to this rule: the Czech Republic and Latvia. In the former EU15, the rate of home ownership is only above 70% in Ireland, Italy, Luxembourg and Spain, and none of the other EU15 countries exceed the 80% line.
THE IRISH MARKET
Last year, 2.05 acre (0.83 hectare) UCD Veterinary College site in Ballsbridge, South Dublin, was purchased for €171.5 million. This week, news broke that businessman Denis O'Brien purchased a house in Ballsbridge for €35 million.
According to the latest edition of the permanent tsb / ESRI House Price Index, published this week, The average price paid for a house in Dublin and outside Dublin in February 2006 was €378,822 and €245,925 respectively.
28% of the average Irish house price is tax.
The latest earnings data from the Central Statistics Office is in respect of 2004. The average annual pre-tax industrial wage for a male is €30,620 and €21,200 in respect of a female. In the private sector beyond the almost 1,300 foreign firms, which dominate the economy, the majority of workers do not have a company pension.
Economist Jerome Casey, who is editor of the Building Industry Bulletin in a report in 2003, said that site costs account for 42.5% of a house nationwide. Casey said that typically in the mid 1990s, Durkan Brothers sold apartments off O'Connell Street for £35,000 to £40,000 (€44,440 to €50,790) for which the site cost was £5,000. Currently, both the Irish Council for Social Housing and private house builders are reporting city house site costs at up to 50% of the house price. Outside the cities, site costs can represent up to 40% of the house price. For the country as a whole, site costs may now constitute 42.5% of the house price, an increase of almost 30 percentage points on the pre-boom position. In Dublin that increases to 50%. Overall the Irish figures are grossly out of line with the rest of the developed world.In the US land accounts for 20% of the total cost of a house. In Denmark the figure is similar while in Portugal the land factor drops to 15%.
It is similar for the rest of Europe. Casey estimated that the 30% differential between land prices for houses in Ireland accounted for about €6.6 billion of the total new and second hand housing market, estimated to be worth €22 billion in 2002.
By applying the 30% margin on the cost of land, Casey said the amount of surplus profit for the key landowners was estimated at €300 million. In his report Casey said the major issue was that just 25 individuals or companies controlled more than half of the housing development land in the Fingal area. That includes Balbriggan, Lusk, Donabate and other well- known areas targeted for development on Dublin’s expanding north side.
Casey's conclusion means that up to eight years in the life of a normal 25 year mortgage now goes to pay for the excess in the price of the site.
IRISH ZONED DEVELOPMENT LAND EQUIVALENT TO 5 YEARS AVERAGE ANNUAL HOUSING OUTPUT
Given the foregoing, it may seem suprising that there is a large amount of land that has been zoned for development.
The Annual Housing Statistics Bulletin 2004 that was published by the Department of Environment Hertiage and Local Government last year, says that the 6th housing land availability survey undertaken in June 2004 indicated that there was over 12,500 hectares of zoned serviced land nationally, with an estimated yield of 367,000 housing units. This equates to sufficient capacity nationally for residential development for over five years, based on recent average housing output.
|Source: Irish Annual Statistics Bulletin 2004|
At the end of June 2004 Dublin City and County had approximately 2,300 hectares of zoned serviced land with an estimated yield of over 112,200 housing units. There were 800 hectares of zoned serviced land in the Mid-East Region with an estimated yield of about 22,400 units. In the other major urban areas, there was sufficient zoned serviced land to yield about 32,500 units in Cork, 27,700 units in Galway, 10,300 units in Limerick and 6,700 units in Waterford.
However, in the early years of the economic boom, the supply response to rising housing demand was poor.
This is examined later in the article.
Click here for a Jan, 2006 report on the Irish land development system:Josef Stalin and the crazy Irish development land system
LAND SUPPLY RESTRICTION
Planning systems coupled with accelerating NIMBYISM - the Not In My Backyard syndrome- has created an artificial scarcity of land in many countries.
In Ireland where the central government provides most of the funding to local councils, there is simply no local incentive to encourage an inflow of people as there is in Switzerland.
In the UK Policy Exchange says that by using only a further one or two per cent of the 90 per cent of land that is undeveloped, the quality of British houses and neighbourhoods could be dramatically improved. Yet the system of town and country planning too often imposes the views of politicians, officials and planners on the population at large.
In the report Better Homes Greener Cities Policy, the Policy Exchange says that new development takes place on the kinds of green spaces people actually use – like allotments, playing fields, parks and gardens – in order to save agricultural land. Nearly half the UK’s playing fields have disappeared in the last fifteen years.
Front gardens 22 times the size of Hyde Park have been lost in London alone. Cities are becoming grey deserts. This has serious implications for the health of the 50 million Britons who live in urban and suburban areas. Fewer trees means less oxygen, which inhibits good mental performance. Neighbourhoods with less greenery are associated with lower levels of physical activity, leading to higher obesity rates. Easy access to green space also brings mental health benefits. Reversing the trend of high density development in favour of ‘garden city’ living is not just what most people want, it is good for us too.
The Economist reported last week that Mayor Richard Daley of Chicago, who is a convinced environmentalist, has had 200,000 trees planted in his city, since coming to office in 1989.
In the US, Susan Wachter, a housing economist at the Wharton School at the University of Pennsylvania and an assistant secretary at the Department of Housing and Urban Development during the Clinton administration, says that "the fundamentals of supply and demand have shifted in the U.S." Wachter said in an interview last October with The New York Times that she believes the widespread adoption of controls on growth and building - beginning in the mid-1990's, have pushed up prices in so many regions that it is increasingly difficult for one desirable city to relieve the pressure in another. Wachter says that a smaller supply of land and a stricter regulatory environment make building significantly more expensive.
Recently, Joe Gyourko, at the Wharton School, and Edward Glaeser, at Harvard University, used sample prices from 25 areas to show that the cost of housing in a metropolitan area appears to be in direct correlation to its degree of zoning ordinances.
HOW SWITZERLAND AND GERMANY MEET HOUSING DEMAND?
Professor Sir Peter Hall, Bartlett Professor of Planning, University College London, writes in a forward to the Policy Exchange report Bigger Better Faster More that competition is especially fierce where development directly brings local tax values with it, as in Switzerland, or in regions desperately seeking an economic shot in the arm, like the German Ruhr area. In Ireland, perhaps the country with the most directly comparable planning structure to the UK, a laxer system has produced much more new housing than we have managed but has also irretrievably wrecked huge tracts of precious countryside, as any holiday visitor immediately notices.
Sir Peter say in relation to the UK that the unholy alliance of Tory shires, bent on pulling up the drawbridge, and Labour cities, equally hell-bent on keeping their populations packed into substandard housing at high densities, continues to frustrate efforts as it has for half a century.
The authors of the report looked at systems operating in four different countries: Germany, Switzerland, Ireland, and Australia.
The report says that there is probably no other country in the world that is as decentralised and devolved as Switzerland.
Even taxes are determined and raised at the local and the regional level. This has an important effect on the Swiss house market. Councils trying to attract new inhabitants – and expand their tax base – have to make sure they provide the right kind of housing. As a result, Switzerland has managed to build bigger and better homes while keeping house prices stable.
The corporation tax rate in one canton is 6.6%.
The following is a summary from the report:
All five countries show similarities in the factors affecting the demand side of the housing market, such as growing populations, smaller households and increases in wealth. But while demand factors are not too dissimilar, housing outcomes and prices are:
• Age of dwelling stock – 38.5 per cent of homes in the UK were built before 1945, compared with just 27.2 per cent in Germany and 17.9 per cent in Ireland.
• Average new dwelling size – the UK and Ireland are building small new homes at just 76 m 2 and 87.7 m2 respectively, compared to 109 m2 in Germany and 205.7 m2 in Australia.
• House prices – over a period of more than three decades, real house prices in Ireland, Australia and the UK went up by around 3 per cent per annum while they remained stable in Germany and Switzerland.
We investigated why some countries were able to combine these upward demand pressures with stable house prices and spacious housing, while others were not.
Green and Pleasant Cities:
Germany’s Localised Planning System
• Central government grants are linked to population and tax revenues, so local politicians compete to make their cities attractive – both in the sense of pleasant places to live and places that draw more inhabitants.
• The right to develop property you own, subject to conditions developed by all the federal tiers of government, is enshrined in the constitution.
• The main responsibility for planning lies with local planners and politicians, so plans are responsive to local needs and the environment. Plans are binding and subject to judicial review.
• Germany’s planning system has delivered house price stability, spacious homes and green cities despite a similar population density to the UK.
Competing for Taxpayers:
Why Swiss Planners Build What People Want
• Switzerland’s political structure is highly devolved. It allows the cantonal and sub-cantonal tiers of government to determine local tax rates.
• Tax autonomy leads to tax competition between councils and cantons. Providing inadequate land for housing means councils risk losing inhabitants – and therefore tax income – to neighbouring areas. On the other hand, council areas attracting new inhabitants are able to lower their tax rates or improve services.
• There has been virtually no real house price inflation in Switzerland for more than three decades, while at the same time Swiss houses have become bigger and better, allowing more and more Swiss to live in the houses they desire.
Housing the Celtic Tiger:
Ireland’s Short-sighted Construction Boom
• Ireland’s housing boom has led to impressive increases in house building, but these came too little and too late to prevent rampant house price inflation.
• Ireland’s unresponsive, centrally planned system of development failed to react to the demand pressures of the economic boom. This resulted in a ‘quick fix’, with large numbers of small, often low-quality houses on monotonous estates added to the bottom segment of the market.
• However, the lack of additional housing at the top end of the market means that, as first-time buyers seek to trade up, they find themselves unable to afford better homes for their families.
The report says that it should hardly need stating that nobody wants to live in a badly-built house, where for example the walls are so thin that you can more or less take part in your neighbours’ lives.
It is thus quite clear what will happen to these large numbers of mainly first-time buyers currently occupying the units that Ireland’s construction boom has delivered over the past few years: They will want to trade up and move to bigger, more traditional family houses with nice gardens, situated in an environment with neighbourhood shops, schools, cafes, clinics and so on. It is quite unlikely that they will want to stay in their existing houses for decades, as their parents’ generation did when they bought their first homes thirty years ago. The whole strategy of quickly delivering large numbers of small houses and apartments for first-time buyers is therefore problematic.
There are, of course, economic implications to this very one-sided supply: If increasing demand at the bottom end of the market is (more or less) well served, prices for this kind of housing are likely to stabilise. This is what is actually happening. According to Ronan O’Driscoll of Hamilton Osborne King, prices for this kind of housing are rising only in line with overall inflation. At the same time, people trying to trade up are experiencing increasing difficulty in doing so because a) there are many more people in a similar situation and b) the kind of housing they are looking for has not been built for many years.
What will happen in such circumstances is predictable: The price of older,more spacious houses will rise strongly. Again, this is already happening in the Dublin, where prices in this segment of the market are increasing by up to 15 per cent per annum. So while the price of small houses is stable, bigger ones are getting more and more out of reach of the ordinary second home buyer wishing to trade up from his tiny first home.
“The gap between small new and large old houses is widening,” says O’Driscoll. “The prices for old spacious houses are getting through the roof and we increasingly observe that people simply cannot find, let alone afford the houses they prefer.”
The report says that because of high land prices, the best strategy for developers was to develop large numbers of low-quality, standardised, high density housing – which was exactly the type of housing that planners and politicians preferred as this was the easiest option to provide the completion numbers that central government wanted to see. Another factor in favour of such developments was shortage of infrastructure.
Death of a Dream:
Planners versus the Traditional Australian Home
• The Australian desire to create a home away from ‘home’ (their European roots) has led to a strong cultural preference for spacious houses with big gardens – ‘the Great Australian Dream’.
• Various Australian (state) governments have threatened this dream by reducing the quantity of land released for housing and by levying homebuyers to provide infrastructure.
Both policies have had a strong upward impact on Australian house prices.
• In Sydney, 78 per cent of the purchasing price is typically paid for the land, not for the house itself. So land-use planning has actually created a shortage of land – in a country with a population density of only 2 persons per square kilometre.
Ireland heads global property cost rankings in respect of both residential and commercial property even though we have plenty land. Our capital city is not landlocked but industrial occupation costs exceed those in Tokyo.
We have 40,000 full-time farmers and the number is forecast to fall to 10,000 by 2025.
The excuse that the Irish Constitution prohibits any change to land rezoning laws that can increase the agricultural value of land in even rural areas thirty-fold when rezoned for development, is an excuse for inaction. Farmers who receive most of their income from European taxpayers make a killing from taxpayers again when they have the opportunity to have land rezoned.
The Irish property system has a direct impact on our competitiveness and also the health of people in Dublin, much of which is a grey concrete wasteland.
The NIMBY syndrome has also to be more assiduously challenged as every development elicits a protest usually primarily motivated by self-interest.
To borrow from Joxer Daly in Sean O'Casey's Juno and the Paycock, the property system is in “a state of chassis.”
Politicians are scared to tamper with a system where self-interest kicks in once a non-owner in the residential market, becomes a first time buyer.
Rising prices have become an addiction and many Irish people have bought second houses.
Standard Life Investment recently said that Irish investment in UK property amounts to €17 billion.
In recent years a visionary government would have built a second Dublin Airport south-west of the city in the area stretching to Portlaoise. Rather than a hodge-podge distribution of Government Departments to Ministers' constituencies, Malaysia's example could have been emulated with all the central government's functions sited in one location, near the new airport.
However, such a bold move would have required a challenge to many vested interests. It's indeed ironic that Tom Parlon, the Junior Minister who was given responsibility for the decentralisation programme, was accused in 2001 by the Irish State agency, the National Roads Authority (NRA), in relation to a campaign for an increase in compensation for land acquired by Compulsory Purchase Order, that Parlon, then President of the Irish Farmers Association (IFA), was one of the senior IFA officials who had made pronouncements claiming that:
Policy Exchange has shown that there is an alternative to poky houses at rip-off prices.
- the State, through the actions of local authorities, has no right to appropriate farmland;
- the compulsory acquisition of farmland for the national roads building programme is unjust, inequitable and seriously damages the livelihood and viability of 8,000 farm families;
- CPO legislation is outdated and compensation paid to farmers is inadequate;
Irish Housing Statistics Bulletin
Irish house prices rising at 1% each month in 2006; Average price of house in Dublin at €378,822