What happens when the left hand doesn’t know what the right hand is doing? At the very least, you drop the ball.
Looking at the Dublin property market and the capital’s population strategy in general, it would seem that we are in a bizarre position where different state agencies are doing different things and, in the process, are strangling land supply in the city, driving up rents and pushing would-be city dwellers out to the commuter towns – again.
Seems crazy, but it’s true. The people who are suffering are young renters and would-be homebuyers, while those who are benefiting are the already rich who are holding on to land banks in the hope of speculative gain.
This time round, the players may be different, the names might not be so familiar, but the upshot is the same.
Let’s examine the objectives and the unintended consequences of the actions of two of the main state players in the property market: Dublin City Council and Nama, the left hand and the right hand.
Dublin City Council’s aim is to make the city more liveable. This explains the recent initiatives of making Dublin more cycling-friendly and pedestrian-friendly. In short, the objective is to make it more Copenhagen, less Coventry.
But it doesn’t matter how many cycling lanes and pedestrian zones you have. Unless you have somewhere for people to live, then by definition the city can’t be liveable. You need accommodation, and lots of it.
Dublin is full of vacant plots, and there are loads of people who want to live in the city, so why are these plots not being built on right now? Why don’t we have a sea of cranes building apartments in the city?
One of the reasons is the unintended consequences of the council trying to do the right thing. After much criticism of “jerry-built” apartments during the boom and horror stories of cowboy builders, the council has designed minimum standards for apartments.
One of these is a ban on north-facing and east-facing units. I am not too sure that many people care if their flat is east-facing; sure, it would be nicer to be west or south-facing, but let people choose. It’s not as if Dublin is blessed with consistent tropical weather which makes those long, lazy, sunny, south-west-facing evenings so essential.
The main problem for supply of this east and north-facing apartment ban is that it renders half the site worthless to a developer. So the developer will only buy the site if it comes down in price rapidly. This is one clear impediment to development, and it is a classic example of too little regulation being followed by too much; as if too much regulation now will in some way compensate for the sins of the past.
This type of regulation affects the willingness of the developer to develop, but other regulation affects whether a potential buyer can afford a place.
Take another new regulation about the minimum size of an apartment. Again, as a result of tiny apartments built in the boom, the council has deemed that the minimum size of a two-bed apartment in Dublin must now be 90 square metres. So the idea was to protect the consumer. But what has happened?
Because only half the derelict sites in Dublin can be used due to the north and east-facing ban, this rule has pushed up the cost of building.
Based on current costs (according to Ronan Lyons of Daft), a typical couple earning €45,000 can’t afford an apartment of more than 60 square metres.
Unless the Central Bank loosens its credit criterion for first-time buyers (which it won’t and shouldn’t), the average first-time buyer is being squeezed out of the city by the consequences of regulation that was supposed to protect, wait for it, the first-time buyer.
But surely the costs of sites should fall to reflect this reality? This is where the left hand/right hand dilemma comes in.
At the margin, Nama controls the property market in Dublin. It has contributed enormously to the speculative frenzy in sites.
Nama’s objective is to recover as much money as possible from the calamity of the bust as soon as possible. Therefore, it wants to get the best price possible for development land.
As huge US investment funds and Reits have come in here with lots of cash, they have driven a speculative mania in development land.
Once prices rise (and, more importantly, are allowed to rise) dramatically, the market changes. It becomes a speculative market where bids are not based on concrete cost analysis but the speculative element of “flipping”. Again, does this sound familiar?
When a market becomes speculative, land banking starts, whereby investors hoard land in the expectation of further land price increases. Nama is orchestrating this.
The foreign private equity funds that now own the prime land in Dublin are not developers; they are fund managers who are driven by spreadsheets and targets, rather than building plans and ambitions.
They might as well own stocks or bonds.
The upshot of Nama’s policy of selling to US private equity outfits is that the land is being hoarded, rather than built on. This, of course, is at odds with the government’s stated objective of making Dublin a more liveable city, and of providing affordable accommodation for Irish citizens.
So we have a situation where people who want to live in the city can’t afford to, because of too much well-intentioned but ill-conceived regulation and Nama creating a hyped-up market in land, which excludes developers and rewards speculators.
A “use it or lose it” tax could be introduced to force speculators to sell to developers, who then undertake to develop with less stringent guidelines, which in turn allow affordable apartments to be built and to be lived in.
This tax or penalty for land hoarding would bring down the cost of land and rekindle the value in city sites, allowing the true liveable potential of Dublin to be fulfilled.
All we need to do is allow the left hand and the right hand to know what each other is doing.
That can’t be too hard. Or can it?