Years ago, I had the wonderful opportunity to work for Jack Welch of General Electric fame at close quarters.
It is the sort of invaluable experience that is hard to replicate, even if, at times, his pace of work was shocking for someone 30-odd years his junior.
During the period, we had time to chat about all sorts of things.
At one stage, we were talking about crises or challenges, not just in business but in life in general and he sat me down, almost pointing his finger at me, and stated that there are three things to do in a crisis, or when faced with a challenge.
First, define your reality, not as you would like it to be but as it is.
Second, do something about it.
Third, face into the challenge and it won’t be as traumatic as you first feared once you have defined your reality.
Our new government has to define its reality and that reality is that Ireland has a housing crisis.
This column documented, well before it was fashionable, how we catapulted from building an abundance of housing units in the wrong places, to building none at all. But there are solutions.
The key thing to appreciate is that the market acting alone can’t provide decent housing at decent prices for our country.
It was the free market, not the State, that built ghost estates.
It was private banks, not State banks, that blew their balance sheets and ransomed the national finances with the explicit “bail us out or we will take the economy down” threat.
Rightly or wrongly, fixing the housing problem will take massive government intervention.
It will be done via government borrowing and that government borrowing has to be ringfenced explicitly to build houses.
These are not social houses; they are houses. Let’s drop the social bit.
Before I explain how it will work, let me tell you about the true cost of houses.
If you want to write about building houses, who do you talk to? A builder, of course – these are the lads on the site.
An old mate is a builder in Dublin. He is a small builder, nothing too fancy.
He reckons it costs €110 a square foot to build an extension on your house. To build a whole house, that figure could come down a bit, and to build lots of houses, that figure comes down a lot.
He suggests that if you are building hundreds of houses, the cost could come down 30pc because of volume.
This implies that a new build house on an estate should be costing about €70-€75 a square foot.
Like most Dubliners, I was brought up in a three-bed semi, which would have been about 1,400 square feet.
This means that these houses should be costing €107,800 to build.
Now let’s say the new government were to build 50,000 such houses in Dublin over the next two years. This would meet demand and still have some change to go around.
It would also cause the price of all houses to fall, as such a supply shock often does.
So, how much would that cost?
It would cost €5.3bn.
Our new government can borrow for 30 years today at 0.7pc per annum.
This implies that a ringfenced special purpose borrowing vehicle for Irish State housing would have to pay around €38m per year.
Now we are talking. This is a tiny figure.
How much annual rent would you have to charge on these State houses to cover this interest rate cost?
The actual figure would be €760 per house per year. Not per month, per year. This would be affordable housing, wouldn’t it?
And what would happen to the lion’s share of the €5.3bn that the State borrowed to cover the cost of the houses?
When you think about it, most builders will tell you that 70pc of the cost of building is wages, so there would be a net injection of €3.7bn into the economy in terms of wages.
This has a multiplier effect on spending and taxes, which all leads to a boost in demand.
Obviously, there are other costs and charges you could add to these base figures but this gives you a sense of how the creative use of State borrowing at very low interest rates can get us out of this hole at almost zero cost.
If you wanted the State to pay back more, you could increase the rent paid on these houses.
Now, obviously, the other big cost is land. It is land prices, not building costs, that are sky-rocketing.
In this case, you simply rezone agricultural land and pull the carpet from under those who are hoarding land.
A more sensitive way might be a “use it or lose it” scheme, where the land owner has to start building within one year or the site reverts to agricultural use and the State can enforce a compulsory purchase order.
The State would simply be the buyer, as all these houses would be built by private building companies.
To those developers who are suggesting, rightly, that super-levies are increasing the frontloaded costs of building, the State could help them out.
For example, in Cherrywood/Kilternan/Glenamuck, which is a massive site in south Dublin, the levies on units are huge.
Levies are to pay for roads, drainage and special services such as the Luas.
Standard levies are €9,000 per unit, the Luas levy is €6,000 per house but a local surveyor told me that the super-levies in Kilternan/Glenamuck are as high at €40,000 per unit.
This is crazy and, as these levies are frontloaded, the levies are preventing developers from building, which may explain why so many sites are vacant.
The State could again smooth the payment of these levies over years by again deploying the 30 years’ grace the bond market gives any sovereign government.
The levies will be paid, but not all at once and not all at the beginning.
It is time for the new government to take Jack Welch’s advice regarding the crisis.
Define reality, do something about it and once you are prepared to face it by taking action, the crisis doesn’t appear so bad at all.
As I started to read this article, I was thinking pie in the sky, so now we know David knows Jack Welch – big deal.
As most people know, to solve problems you need to break the problem down into it’s constituent parts.
And then the lights came on :-
David did exactly that.
This is a great article. Read (reed not red) it a couple of times.
It’s a road map in commonsense problem solving.
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After the banks went to the wall, the banks were carrying massive negative balance sheets. And the state was tied to this. The state system expanded massively to take in the banks, and the housing sector. And like always occurs when the state takes things over, paralysis ensues. In addition, we have had very effective pressure being applied by political parties to prevent urban residential development in urban residential areas. This is utter madness. It condemns a generation of young people to living in Carlow, and working in Sandyford. Interestingly enough, the Greens sat on their hands on this and… Read more »
Just wondering, but is it not still the case that substantial land holdings on the edge of the city are held by a defined number of developers – and that these are in NAMA / or have been in NAMA ? Also, a suggestion – future planning in the urban Dublin area, be contingent on a minimum number of residences being contructed in a defined area. So as to push the developers to building more units. That would do more than “use it or lose it” taxation, in the short term. Perhaps change levies per area, instead of per residence.… Read more »
Ok. Get a windfall from Apple. This is exactly what we do.
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David McW. I would like to commend you on taking this topic on and bringing a serious economic voice to the national debate on this. Really it is great to hear you put the case forward in clear and plain terms. It is a huge national issue with repercussions all round and I am glad to see it put out there strongly, as you have with the last couple of articles that you have produced for various publications in Ireland. You are correct that the State needs to lead on this and that State has the capacity to borrow money… Read more »
David McWilliams claims in his article that “it was the free market, not the State, that built ghost estates”. First of all, the pace of credit expansion accelerated sharply in the years preceding the crisis because of the low interest rates, and these were imposed by ECB. Secondly, David writes about private banks blowing their balance sheets; however, the Irish Central Bank had not issued any directives to the Financial Regulator that would have indicated that their business was being conducted in a way that was contrary to overall Central Bank policy aims; furthermore, a report by the Oireachtas Public… Read more »
‘The key thing to appreciate is that the market acting alone can’t provide decent housing at decent prices for our country.’ The key thing to appreciate is that there is no such thing, anymore, as a free market. There is so much regulation, zoning, at so many levels that I personally wonder that anyone thinks it is worth the years of hassle to go through to get the requisite approvals. From concept to production takes so long that the market conditions or economic conditions will have completely changed to the point that the project will make no sense as it… Read more »
‘Rightly or wrongly, fixing the housing problem will take massive government intervention.’ Massive government and central banking intervention caused the problems in the first place. Only a confirmed opinion that the state knows best would think otherwise. You David need to go home and be under the dictates of your parents for your life to find out what you would have succeeded at or not. Only they would know best thing for you to do to be a success. Doing more of what caused the problem is insanity. Government is not the mother hen that provides all the remedies for… Read more »
‘It will be done via government borrowing and that government borrowing has to be ringfenced explicitly to build houses.’ So more debt is the solution. Well, well, how stupid have we become. Wealth is gained by getting into debt. More debt the better. Ludicrous. Let us look at the debt. Where does it come from. It comes from borrowing in order to get today what you ordinarily would not have until further in the future. Thus debt mortgages tomorrows income for today’s gratification. Originally money was coin. Coin carries no debt and charges no interest. It has no counter party… Read more »
http://godfreygrant.ie/2015/04/the-cost-of-building-a-house-in-ireland/ So let’s crunch the numbers; Per Unit: Amount: Site Cost € 50,000 Build Cost @ €100 psf, Size Average 1,100 €110,000 Roads & Infrastructure € 15,000 Utility Connections € 2,000 Legal Fees on Acquisition and Disposal, Marketing, Estate Agency Fees. € 6,000 Architects, Quantity Surveyors, Consultants, Homebond and Stamp Duty. € 2,500 Part V Contributions € 5,000 Council Levies € 10,000 Cost of Finance € 7,500 Total Costs €208,000 Sale Price €236,080 VAT @ 13.5% € 28,080 Net Sales €208,000 If the developer was a not-for-profit organisation he could sell houses at €236k to break even. However, the simple… Read more »
http://www.jsmineset.com/ The Republican Party says it can fix who their candidate will be. The Primaries do not matter. Democracy in the US is dead. It is pretty dead everywhere. We are ruled by cabals and autocrats. If you get another chance vote for other than the mainline party. Pick a devoted democrat (not the party in the us). DDI would be my choice. Get yourself restored ideals such as referendum, initiative and recall. Return to constitutional government. Be involved. Remember, the best government is the least government. A good start would be to accept the fact that government and money… Read more »
Getting back to the article.
The numbers may not exactly add up but the basic approach is right and even a bad plan is better than no plan.
The main difficulty is to get the right people to plan organise manage such a project.
Definitely not NAMA.
” Our new government can borrow for 30 years today at 0.7pc per annum. ” Jesus Christ. There are 1700 families on front of Irish courts for reposessions. Most of these people have been mentally tortured by the failed pillar bankers that overvalued debt by 900% for landbanks, 200% for apartments and 100% for houses. Noonan and Kenny failed these people for five years We are told that there were more than 1000 suicides from not restructuring false value debt. At the age of 52 I have never heard of anyone complain of house prices. BUT They are devasted at… Read more »
My Opinions.
Im sure school teachers Noonan and Kenny’s oponions are different.
Opinions.
No I don’t buy it. The plan outlined in this article may well represent the best form of submission to the state and private /state alliance in the particular context, but it is still an unwarranted submission to either or. It seems, at lease to me, that the false dialectic is no longer persuasive nor is it as effective as it once was. Neither private business nor the state managed communes are acceptable masters. The synthesis of the public and the private, that diabolical partnership must be recognised as an intolerable arrangement and resisted. Ben there, Dunne that, bought the… Read more »
The size (within reason) of a countries’ black market is a measure of it’s freedom.
When David turns from kissing up to the Brits while excoriating the Germans and instead concentrates on finding Irish solutions to Irish problems I often find myself in agreement with him, as in this case. It is true that it will take massive government intervention to solve the housing crisis, just as it took massive government intervention to save the banks and thus our international credit rating, which may turn out to be our salvation. Access to the bond markets is the economic system we’ve got and within which we must work. If the Irish have done anything smart since… Read more »
Quite an irritating article I must say, David. As if it is that simple.
“” The word meitheal describes the old Irish tradition where people in rural communities gathered together on a neighbour’s farm to help save the hay or some other crop. Each person would help their neighbour who would in turn reciprocate. They acted as a team and everybody benefited in some way. This built up strong friendships and respect among those involved in the meitheal. GIY meitheals are small groups of 6-10 people who meet up approximately monthly to carry out some growing-related task in one of the meitheal member’s garden”” It sounds similar to the traditional “barnraising” as prairie farm… Read more »
Stockmarket rebouding in the US – up 10% over the past 5 weeks.
So much for the Great Impending Crash.
You made some good points Mike. I saw the earlier post before but I didn´t get to reply. The Dutch model of using a widespread interlinked and ultimately self supporting network of Housing Associations to provide social and affordable housing about 30-40% of all housing stock is a good target to aim for. The financing model of the system is stronger and more sophisticated than what you are suggesting with the Co-op / Credit Union approach. There are a few other other points are are instructive about the Dutch situation; one is that the percentage of rented social and affordable… Read more »
EugeneN That’s 1) allowing people who haven’t paid mortgage repayments off the hook. 2) increasing credit again. Unless you build houses that will just cause another bubble. 1) An industry best practice split mortgage restructure is defining the ratio of debt that is affordable for a mortgage with very high debt to income or debt to rent ratios. It is not letting anyone off the hook. It is where you warehouse the false value portion of debt that made the mortgage unaffordable in the first place. Today for a home we are told that 3.5 times joint incomes is affordable.… Read more »
” When you think about it, most builders will tell you that 70pc of the cost of building is wages, so there would be a net injection of €3.7bn into the economy in terms of wages. ” I dont think that 70% of the cost of building is wages. I dont think that you will build 50,000 houses of 1400 sq ft for 110,000e a piece. Best of luck David if he can. That would be a true patriot achievement if he could pull it off. What would Tom Parlon think of Davids construction maths ? David needs to go… Read more »
Bingo
Good article. However . i am still at a loss to understand how people still feel that the Government has a desire to provide Housing , social or otherwise. The first thing to be done is for people to accept and acknowledge that Governments , in our case , a right wing Government has no desire to assist those in need of Housing. The Americanization of the Irish Government & its policies is well under way. It is shockingly simple… If you make it , great , if you don’t , you will be cast aside , some people already… Read more »
“”That this metamorphosis in the banking industry was made under the supervision of Washington’s political class and their market regulators best explains the establishment’s current deranged reaction to the prospect of either Senator Ted Cruz or Donald Trump becoming the next President. They must fear the consequences of one of these strong-willed outsiders appointing officials loyal to themselves, (and not to the current clique now in control of Washington’s financial and criminal investigating apparatus) to key positions in the Federal bureaucracy. Small wonder a number of supposedly “conservative” Republicans have publically professed a preference for Hillary Clinton as our next… Read more »
[…] benefit everyone in the country except the banks and landlords, but they won't be implemented. With a few simple steps, State could provide social houses for So if you want to blame anyone for repeating unsustainable policies then blame the Government. […]