We examine the factors influencing the housing crisis in Ireland and explore effective ways to address the problem in 2017.
There has been much discussion recently about a post-truth environment and yet, as far as real estate goes, we are still in a pre-truth condition. This is because we never have all the facts, we do not fully understand and cannot predict all the consequences of policy decisions and market forces. Striving to obtain complete information to enable fully informed decision making is both impossible and essential. There is no better example of this than the Irish residential real estate market.
We have a housing crisis, with homelessness rates continuing to rise despite the economic improvements we are achieving as a country. The main real estate challenge in Ireland for 2017 is the same as that which faced us in 2016, namely housing.
Everyone wants to solve the problem, but there is no consensus on how best to do so. So what should we do?
The State needs to be more active in housebuilding. When the country had no resources in the 1930s and the 1950s local government built tens of thousands of homes. During the boom years, the private sector was left to do everything with little in the way of Government action. We can borrow at historically low rates. This will not last forever, so we need to grasp the opportunity while it still exists. After all, we mortgaged our future to bail out foreign buyers of Irish bank bonds – we should do likewise for our fellow citizens.
Market changes are helping – so let them. Recent years have seen an increased professionalisation and internationalisation of the Irish real estate market. 2017 will see private equity funds continuing to reduce their presence to be replaced by more long-term holders of real estate assets such as REITs and pension funds, both national and international. New asset classes have emerged such as student accommodation, multi-family developments and well-planned town centres. High demand for top quality hotels in key areas will mean a considerable number of transactions in the coming year. In 2016, we changed our tax law for real estate vehicles – we should not repeat that tinkering in 2017.
Proper standards, not gold plating. Poor construction leads to increased regulation, but the pendulum swung too far and failed to address major issues, such as self-certification. Some welcome changes occurred in 2015 but we need a debate about what we are trying to achieve and how to produce reasonable accommodation with laws that are actually enforced rather than regulations which are very expensive to comply with and yet produce little in the way of practical benefits for occupiers.
During 2016, Minister for Housing, Simon Coveney produced a strategy for dealing with housing and homelessness. He followed this up with a detailed strategy for the residential rental sector, including analysis with specific steps and timeframes.
Media coverage has concentrated on the 4% cap on increases in rents in newly created rent pressure zones. Cork city and Dublin are the first areas to have been designated and the commuter belt around Dublin will probably be included by February this year. This misses the most important point, which the Minister acknowledges in his introduction to the report that the main issue is providing more housing units. The catchphrase for what is key for real estate investment is “location, location, location”. For Ireland, the chant should be “supply, supply, supply”.
Some market participants, such as David Ehrlich, CEO of IRES, an Irish REIT, have pointed out that we need to focus on how to make the construction of new housing units more economically viable.
More needs to be done and the current Minister is open to listening and making changes which he considers to be appropriate. The challenge will be to have regulations at a level which produce high-quality accommodation while not placing too high a burden on those who invest in and finance the developments. Investors need predictability on regulation and taxation. Owners of vacant properties need to be encouraged to become landlords. Derelict sites should be acquired and developed. The State, through direct ownership and the National Asset Management Agency, controls many buildings and tracts of land. As well as encouraging others to better utilise their resources for the good of all, the State needs to act as well.
And let’s remember the admonition of a great Irishman, Edmund Burke - “It is not what a lawyer tells me I may do; but what humanity, reason, and justice tell me I ought to do”.
For more information, please contact Kevin Hoy or another member of our Real Estate Law team.