Ireland- subsiding housing market failure

Economics has a lot to say about market failure, its causes consequences and resolution.  The government know these. Indeed, at the cabinet table sits a man with formal economic training, in Richard Bruton, who knows these things. If they don’t, or have forgotten, then a phone call to the Government Economic Service will refresh or remind. Yet, despite this they have determined to reinforce the failure in the housing market with more failure. What fresh hell is this? In an environment where we have record homelessness the government adamantly sets its face against the acceptance that the market alone cannot, will not, is not able to even if it wished, provide sufficient homes for people, whether rented or purchased.

(Site) Tax the bejazuz out of them…

Take a walk, or the Luas,  down Abbey street, past the Jervis Center (converted from a major hospital back in the 80s), down towards Heuston Station.   Get off at Heuston, and walk, weather permitting, back up the quays, the north quays in particular. I have been travelling this route , along that axis, since the late 1990s when we moved from leafy south Dublin to ineffably leafier north Kildare. What strikes me, and I warrant would strike anyone, is the sheer amount of vacant land. In some cases these plots have become overrun with  fully-grown mature shrubs, city gardens of buddleia and willow and hazel.  A particularly large plot is, with irony that would make Myles Na GCoppaleen bilious with envy, right beside the land registry. Google Maps tells me that this plot alone is some 50,000 sqFt.  Another plot, derelict also, is beside the pubic appointments commission, some 40,000 sq ft.  Smaller plots abound, such as a 20,000 sq ft plot on ushers island. So these three together have 100,000 sq ft of land. Right in the city center, serviced, accessed and ready to go. They have lain idle for years.  At 1250 sq ft  per apartment and allowing 15% for overage (curtain walls, entry etc) theres room for 70-80 apartments each story, and at 10 stories…well.

The same story persists in Cork, limerick, Galway, sligo, Tralee, every large and medium sized town. We have land lying idle. At the same time, we have managed a feat unique to world history. We have simultaneously a housing shortage and a massive amount, numbering in the hundreds of thousands at the upper end of estimates, of empty houses.  Rents are at a level never before seen even at the height of the madness, and that is with some degree of quasi-rent slowdown or control in place. Pity the renters when the brakes come off. We have 2000 children in emergency accommodation, homeless. This is a scandal and an affront to our humanity. But, we have a committee. So thats ok then.

House supply has all but collapsed. Having built all the houses in the wrong place the market is now building no houses in the right place. Blessed be the market.

Local Authority housing, which up to the early 1990s had accounted for about 30% of the new builds, and from then to about 2010 10% has dwindled to almost nothing. We have, willy nilly and after an economic calamity caused by an overenthusiastic worship of the private housing sector, decided to place all our housing eggs in that selfsame basket.   Words are not adequate, and libel laws too loose, to speak of the folly of this action. Private housing markets in Ireland do not deliver a socially optimal mix of houses. There is a massive market failure. In the face of market failure governments, no matter how much they worship free markets, they intervene.

Houses take time. Take the 5y average of population and a 5y average house build, and from 1970-1995 we had a fairly stable relationship of about 0.5%. A population of 3.5m, a housebuild of 16,000 -17,000. Now that stands at .2%. We have a supply problem. Everybody is aware of this . We are 20,000 housing units short per annum with little evidence that these will be built anytime soon. So we have a supply problem

The leaked draft report from the Oireachtas committee on housing and homelessness , and it is as yet only newspaper reports on a leaked draft, seems to suggest that the politicians only partially grasp this.  The headline issue is one of they decrying the central bank macroprudential actions, the loan to value and loan-income ratios. These, lets recall, were they in place the last boom, would have gone a long way to cool it down. So, the central bank has taken action, appropriate and sensible action, to clamp down on any demand led house price boom. That is their job, and to critique them for so doing is perverse, given they did not do it in the last boom. Thankfully in Philip Lane they have a governor who is I  suspect mostly impervious to the bleating of politicians.

Right now we don’t have an issue with house affordability per se. We have an issue with house availability. Suggestions on reducing VAT, on more sensible (but no less stringent please) standards, all these are useful in terms of making homes more affordable. But that presumes they are built.

We know, we have known for decades, that we have an issue with land hoarding. We need to intervene in the market at the source of failure – one main such is the hoarding, the non use, of land. It is seen as more potentially profitable to hold onto land in hope of its value rising than to build homes. Lets have a sensible and savage land value tax. Planning permission for homes on a plot should result in rapid movement towards utilization. If after a year there is no building on the land a 10% value tax. Every 6months another 10%, and so on. This would in short order sort out land hoarding.  At the very least we would eliminate that element of supply failure from the housing value chain. We can then move to examine the other elements. If, as is claimed, it is not profitable (but might be with freed up land…) to build, then we need to move to social provision, as we did for decades, as an integral part of the mix. It is simply inexcusable, unconscionable, that we have let this fester.

The government have been like a deer in the headlights for years, facing the oncoming train. If they are overwhelmed that’s one thing. If they refuse to move as they are in thrall to ideology, that’s quite another.

 

a longer version of an Irish Examiner column published 11 June 2016

Taxes, Land and Wealth

This is an expanded version of a column published in the Irish Examiner 25 August 2012. One of the defining characteristics of Irish governance is the inability to make decision based on evidence. All to often we substitute evidence-based policy, where a careful weighing of the consequences and analyses of different positions leads to a debate on alternatives and eventually to a rational decision, for political based policy. While democracy is, as Churchill stated, the worst form of government apart from all the others, it would be nice if once and a while political expedience could be put aside in favour of rational decision making. The emergent discord on land is one area where, as so often and to so much detriment, we see again that rational debate is being cast aside in favour of political point scoring.

Two examples in recent weeks show how strong the hold of the land remains, 120 years after the land war. We seem to be hurtling backwards in relation to household tax and to be ignoring evidence and history in relation to student grants. Both of these reflect an ongoing conflict between evidence and politics. The evidence of the past is that when these come into conflict politics wins. As we know, this time is never different.So it seems that there might not now be a site value tax, due, we are told (by Deglan De Breadun in the Irish Times and Fionnan Sheehan in the Irish Independent) to “anomalies” in the tax.

These anomalies seem to boil down to the fact that if I have a tumbledown shack and you a spiffy neat dwelling , next to each other, then we will pay the same tax. De Breadun states this explicitly ” Property tax is the new rates and, if it is not to incite serious public ill-feeling, must be seen to be fair. Although it’s still early days, the notion of a higher rate for owners of larger homes is being floated. That’s the way it is already with income tax: the more you earn, the higher the percentage deduction.How you assess the value of a house in the current uncertain market is another issue. Using the site as a basis for valuation doesn’t always make sense: you can have a mansion or a shack at a similar location” while Sheehan states ” The Government is moving away from a site-value tax because it would throw up anomalies. For example, two houses — one rundown and one modern — on the same-sized site would have the same property tax bill.In urban areas, houses on the same road tend to be more uniform — with the site and the house being, more or less, the same size and value.But in rural areas there are often houses of different sizes and values built side-by-side.”

Far from being an anomaly, defined as a deviation from the normal rule, this is in fact one of the points of such a tax. There are many issues which we would like to see in a tax, but theoretical arguments aside the reality is that tax can be and is used by governments to incentivize or discourage particular activity. Thus we had property based tax breaks in the boom period to encourage living over the shop, building in particular areas and so on, and we have carbon taxes that are at least in principle to act as a dampener on the use of particular fuels. The beauty of a site as opposed to what-is-on-the-site tax is that it will, all things being equal, encourage people to make maximum use of the site. In and of itself it will not be a silver bullet but it will encourage. If you have a site and have poor quality use made of it then the incentive is to make better use – build a house, improve the one that is on it, or sell the site to someone that is willing to make better use (as they see fit) of the site.

Instead, apparently the intention is to instead use a self reported market value of the property, to rely on the good citizenship of a society where over 40% are still avoiding paying a self reported tax (the household charge). This in an environment where a) there is as yet no public database of sales values, b) where the only data available are disjointed asking prices across various agencies, c) where the market for residential property can hardly be noted as being whatever might pass as “normal” and d) where there is no clarity on what the situation will be if one disagrees with the revenue. And the sad thing is that we have had exactly this tax before from 1983 to 1997. It was a massive failure, widely evaded and avoided and proven to be unworkable.

Leaving aside the advantages of site value taxes, repeatedly and lucidly explained by Ronan Lyons and Constantin Gurdgiev, for example the fact property value based taxes are prone to procyclicality (stamp duty anyone? ) while site value taxes are not, and the fact that the site tax captures to the state some value from increased infrastructure, the reality is that the political pressure is to avoid the perception of penalizing urban dwellers whose sites are inherently more valuable than those of rural dwellers.

The ultimate logic of the site tax would be that it would extend to all forms of land, residential, commercial and agricultural. And in dealing with land tax it is the principle that is important. At present there is a rift in cabinet on the issue of the inclusion of the capital value of farmland in the determination of third level student grants. For decades it has been clear that farmers and self employed persons can have significant levels of wealth but low (declared) income, and evidentially gain disproportional access to such grants. But again, in the face of evidence we have done nothing. If we are to move to the logic of land taxes we will begin to further incentivize farming to move activities to higher value uses of existing land. The underlying idea is that land assets convey an “imputed rent” and one should be incentivized to make best and most productive use of them. But there is a logical end point that leads to wealth tax. If a farmer has land valued at €500,000 and is to be assessed on this then we must for equity also assess the self employed person with a shop or business worth €500,000 the same. and what of people with non-capital asset wealth? It’s a good job logic is not a strong point in Irish political discourse…. A wealth tax will not bring in tens of billions, the dreams of the ULA notwithstanding. But it would bring in some, and would crucially show that while the rich are different (richer for one) they are not in fact running the show. Coupled with a proposal I have made before to link citizenship with tax status, and we could see the bitter pill of increased taxation being sugared by a recognition that we are in fact all in it together.