The Housing Market is a numbers game. Since 2017 the supply of new builds houses has doubled but the underlying challenge is affordability. The average sales price of a new home is now €500,000 in Dublin and nationally over €400,000. This housing is beyond the reach of average earners as prices are just too high. The need is considerable, but market demand is restricted by the capability to pay.
The approach that the Government has is to fill the ‘affordability gap’ with benefits, but this is very costly at scale. The supports that the State now offer reach up to €150,000 per home. If required for just 10% of the housing programme it could cost €4.5bn in subsidies alone.
Intense scrutiny to this “opening” is needed. The Society of Chartered Surveyors (SCSI) draws from submissions by developers across a range of projects to produce estimates of costs for building homes. These are not audited projects –detailed costs are commercially sensitive– but rather a summary estimate. Currently, the SCSI calculate that a new 3-bedroom house costs €397,000 nationally, and €461,000 in the Greater Dublin Area (the GDA is defined by SCSI as counties Kildare, Dublin, Wicklow and Meath).
On Claire Byrne’s RTE Radio 1’s Today Show, there was a discussion on how inflation has affected building costs. With builder Mark Whelan and quantity surveyor Claire Irwin
On the other side of it, the Department of Housing, Local Government and Heritage compile market data from competitive bids to build homes for local authorities. These are lower, with average ‘all in’ costs of €318,365 nationally and €392,975 in the GDA. ‘All-in’ cost reflects a composite figure/unit to include the addition of allowances for site purchase costs, design team fees, utilities, site investigations, surveys, public art etc. as appropriate.
Noticeably, building contractors and speculative developers do not have the same cost base. Design and specification, procurement methods, site conditions and local markets all have an impact. However, these figures are a useful benchmark.
Firstly, the ‘hard building costs from the SCSI are €224,730 (nationally) and €257,645 (GDA), compared to €251,379 (nationally) and €296,263 (GDA) for local authorities. Even so, these local authority costs include normal site works, whereas the SCSI add an extra €55,000 per home for “site works and site development”, largely closing the gap. However, it is very notable that market prices paid by the local authority increased by 11% nationally and 13% in the GDA in the year to Spring 2023, and by a staggering 50% since 2017 (in the time that housing supply has doubled).
In Jan 2023 from RTE News, The CSO reports that nearly 30,000 new houses were built in 2022
Where does the remainder of the money go? Land is a component. The SCSI presumes a site cost of €70,000 (ex VAT) per home in the GDA, although actual prices paid for land are difficult to determine, and it may have been bought much cheaper years earlier. NAMA sold sites with the potential for 86,000 homes, many for a fraction of this €70,000 cost, and the majority of these have not yet been developed. So some ‘land cost’ may in fact be profit, depending on what was paid originally.
In the beginning, the Land Development Agency (LDA) promised access to 150,000 sites in public ownership, which could considerably reduce the cost of homes. However, this ambition has been scaled back to 10,000 homes in five years, and with estimated costs of up to €500,000 per new home. It seems even “unlocked state lands” may come at full market prices.
The SCSI estimate a developer’s margin of €53,864 (ex VAT), although this will vary, particularly in a time of high inflation and uncertainty. Speculative development (buying land in the hope of timing house sales for maximum profit) is a high-risk/high-reward business, which is very cyclical and vulnerable to external factors, including interest rates, construction inflation, market conditions and Government policy. A high margin may therefore be required by those financing development as their safety net.
In April 2023, the RTE Six One News report on the 12-month exemption on development levies coming into effect
Next, the SCSI estimates development levies of €18,645 (ex VAT), although currently, developers benefit from a waiver, so this is not incurred in 2024. Although noted in the SCSI’s report, it has not been deduced from their €461,000 sales price.
The cost of borrowing money (finance) and marketing are assumed to cost €36,000 (a ‘deposit’ for many first-time buyers). The SCSI estimate interest rates at over 7%, with an assumption of 55% borrowed to buy land, and 90% borrowed to build on it. Notably, these costs are expensive because of the business model, not the actual construction of homes.
In other sectors, private and public organisations pay building contractors monthly, without the risk or cost of financing construction for long periods. Houses and apartments can also be designed to be built and occupied in small phases, so that finance can roll over, negating the need to finance entire developments in one go.
From RTÉ Radio 1’s News At One, the SCSI’s John O’Sullivan on their Annual Residential Property Review & Outlook 2023 report which found housing completions to decline as property price inflation falls
Inflation is a risk and a reality. It is not only a factor of labour and material, but also of markets and sentiment. As noted above, tenders to local authorities have increased significantly in recent years. Prices rise when capacity is constrained, but prices may also rise in the short term when order books are uncertain. According to the latest BNP Paribas survey, activity in residential construction has reduced in every month since Autumn 2022. Output in residential construction is down, and the volume and value of production in residential construction are lower than any time since 2018 (excluding the pandemic closures).
Overall, capacity in the construction sector has still not recovered to Celtic Tiger levels. Typically every new home needs two new workers. Yet there are 30% fewer people employed across all sectors of construction now, only 167,400 compared to 242,000 in 2005. The sector is very fractured through sub-contracting and sub-sub-contracting, which in itself is a barrier to capacity building, recruitment, skills development and quality control. Under-capacity and contractual complexity can also be inflationary.
The European Commission questioned whether the lack of affordability in Irish housing “may be partly explained by an increase in margins in 2020, which may indicate inadequate competition”. Market growth is what drives competition, innovation and keener prices. Yet, house-building in Ireland has very significant barriers to new entrants, including lack of access to finance and land (exacerbated by land-banking by others), and policy that favours complex, large-scale apartment developments.
On Radio 1’s Today programme with Claire Byrne, understanding the growing costs of building a home with Kieran McCarthy from KMC Homes and Cheap Irish Homes and quantity surveyor Claire Irwin
Whether it is wise to rely on a relatively small speculative sector to deliver the majority of new homes has to be questioned. The SCSI confirms that 51% of the sales prices does not go into bricks and mortar, rather it is a factor of the favoured procurement model.
Traditionally, contracting builders to build for the State has evened out the peaks and troughs of the private market, ensured competitive prices, prompt delivery, certainty of employment and retention of skills in a downturn. A leaner process would make rents and mortgages more affordable. Moreover, it could save the state billions of euro in subsidies.