Housing shortage – whatever happened to the workers?

James Wickham: There’s a lot of building to do: Ireland needs a housing building programme, a renewal of infrastructure, investment in public transport especially in Dublin. Meanwhile, office construction is already growing (count all those cranes). It’s hardly surprising that firms are trying to persuade emigrants to come back home. Who’s going to do the building?

Can Special Purpose Vehicles help alleviate the Housing Crisis?

Tom Healy: A Special Purpose Vehicle (SPV) is a technical term that refers to a wide variety of arrangements where a financial entity is established for a ‘special purpose’ as the title suggests.  The National Asset Management Agency is a type of SPV set up to buy distressed assets from bust banks and seek to work off these loans over time and recoup some of the loss for the state.  In this case, the vehicle established is said to be ‘off the books’ (of the state.

Apollo House Homeless Occupation

Paul Sweeney: Last week the Irish state borrowed a load of money. The interest rate we will pay was minus 0.42% Yes, the lenders competed with each other to PAY the NTMA to take their money. The offer was 2.6 times oversubscribed. 

We Have the Money

Yet when the nationalised banks, AIB etc. are sold off by the state, the money is all to be used to help repay the national debt. Why repay some of it when interest rates are negative? 

Never a reckless lender be

Tom McDonnell: One of the images below is from Patrick Honohan's paper in the Economic and Social Review June 2009.  If you combine the two you can see how the foreign banks (as they were the main holders of the Irish banks' bonds) were what funded the last 1/3 of the Irish bubble, i.e. its wildest phase.[click to enlarge images]

The other gives the BIS's latest figures available on foreign banks claims on Irish banks (see the second line in the Ireland section). (See the bottom of the page for the reference). Some of this has been paid back, especially in August-September as a considerable amount of bonds were redeemed then at Irish people's expense, but most still remain.

In other words, the Irish people are bailing out the German, UK and other banks for funding the most crazy stage of the Irish bubble, which simply could not have happened without their investment in it. Now they want the Irish people to bail them out fully for their bad investments and the damage they have done. This is what the IMF/ECB loan is essentially about.

The clear implication is that these private institutions fuelled the boom through their unwise lending. They are at least partially responsible for it. Bubbles will go to the extent that banks will lend – that is the primary determining factor. So it is these private institutions that must take the vast majority of the pain – not the Irish taxpayer. If the ECB wants them bailed out then they should do it themselves.

We shouldn’t exonerate the IMF from blame either. We need to bear in mind the IMF's clean bill of health and encouragement to the Irish banks and their regulation in their assessments of the Irish banks (Honohan Report).

House Swap on Ghost Estates

Nat O'Connor The Department of the Environment has published a report into the state of 120,000 dwellings in Ireland's unfinished, 'ghost' housing estates. (RTÉ news report here and report summary here). It will be some time before a full set of solutions are proposed as to how we deal with the surplus houses. And different decisions (knocking them down versus investing in them to make viable communities) will please or displease different sectors in the economy.

I want to suggest is that there are innovative, low-cost solutions available for people trapped on unfinished estates, and we should discuss a wider set of possibilities than are necessarily permitted by a legalistic or bureaucratic mindset. One solution would be to allow people on ghost estates to swap houses. Allow people in unfinished estates the option of moving - cost-free - to a same-size dwelling in another ghost estate. This would be a quick option to create viable communities, where vital infrastructure like sewers, road surfaces and lighting can be finished more cost effectively.

Such a proposal would require the Government to twist the arm of the banks a little, to allow mortgages to be moved from being secured on one asset to another. And stamp duty should be waived on the transaction, and 'first time buyer' status moved, which will require our bureaucrats to be flexible.

I imagine many people living on mostly unfinished estates have massive negative equity. Combined with the unfinished nature of the estate, these properties will be difficult to sell - which lessens people's ability to move after job opportunities or for family reasons. Allowing them to move to estates where the infrastructure is consolidated would relieve all of this.

But the main goal would be to allow people to get on with their lives sooner, and allow them to contribute to society and the economy, without spending years more trapped in 'limbo' (or hell in many cases).

Yet, as well as the administrative issues, one of the barriers to this kind of solution is the lack of any kind of coherent urban policy in Ireland. Our attitude to planning has been as laissez faire as our approach to financial regulation. Hence, the idea that the state could create such a house swap scheme comes up against the mental (but no less real) barrier that 'we don't do that kind of thing in Ireland'.

Just as we belatedly come to appreciate the merits of regulation, we should also begin to seriously consider the need for better urban policy built around the needs of people who are trapped in the many sub-standard built environments that resulted from the last decade.

The 'Prodigal Son' Dilemma in Irish Mortgage Debt

Nat O'Connor: Mortgage payments are on a lot of people's minds these days, and there has been a fair deal of coverage in the media about negative equity. One stark snippet from the Irish Time's today is that "Irish households are among the most indebted in the world – more so than any of their euro zone counterparts. The vast bulk of their debt is accounted for by mortgages." This should worry us all greatly.

The interim report of the Mortgage Arrears and Personal Debt Expert Group suggests some good practice guidelines for lenders. The detail of these has been reported elsewhere (e.g. Irish Times gives an outline, a Q&A, and an analysis, as well as reporting the Financial Regulator's reaction).

I think there is a background assumption around the perception of state intervention in personal debt that needs to be teased out. An extreme contrast illustrates what I see as the 'prodigal son' dilemma. The story is something like what follows. John worked for ten years, saved €500,000, and bought himself a house. That house is now worth €300,000. John can kiss goodbye to €200,000. The value of his investment went down, not up. Meanwhile, Seán got a 110% mortgage to buy an identical house priced at €500,000, next door to John. He borrowed the extra €50,000 (10%) to do up the house, but managed to fit in a holiday and several cases of champagne while he was at it. Seán's house is also now worth €300,000. Both John and Seán are complaining of negative equity. Seán is looking at the spectre of rising interest rates in the medium term and his ability to pay is coming under strain. John would be sickened if Seán got bailed out in some way, as he paid the full price for his house and €200,000 of his money is gone and no one is suggesting he should get it back. State intervention to help Seán often invokes the term 'moral hazard' – that is, encouraging prodigal, reckless, extravagent behaviour.

Some version of this prodigal son idea seems to me to vex a lot of people. Yet, like the original parable, envy or spite might be masking a more reasonable reality.

John has no monthly payments to make, and so he is comfortably off. He lost €200,000 on his investment, but he must take some personal responsibility for choosing to buy when and where he did. Meanwhile, Seán borrowed €550,000, but with interest rates over a long period (say 30 years), Seán will pay back at least €800,000 in total (assuming interest at a relatively low level, like 3 per cent). And Seán could well pay back over €1,000,000 if interest rates go to 5 per cent, and they could go much higher. Meanwhile, house prices may not make any significant rise for the next 30 years. After all, other countries, like Germany, have a very stable market. So Seán could be paying €1,000,000 for a house that in 2040 will still be worth something like €300,000, maybe €400,000, in today's money. Of course, not all of that €1 million will be paid in 2010 prices, but it is still a lot more money than the house is now worth or will be worth. In sum, Seán has 30 years of steep payments to make, while John can live comfortably, save money and make other investments. In the long-term, it was Seán who made a worse investment than John.

It would be one thing if John were to shrug his shoulders, say 'you win some, you lose some' and look to tomorrow. John lost money on his investment, and equally the bank (as a business) will lose money on the loan to Seán if they have to write off part of it. But banks are no longer operating as purely private businesses. John knows that the banks are all being bailed out by the taxpayers. So John is, in a real sense, being asked to swallow his own losses and then help his ‘prodigal’ neighbour too.

Yet clarity on this issue may again be blinded by envy and spite. John is not a heartless capitalist. He believes that the state has a role in providing people with their human rights, such as education, access to healthcare and housing. This is where John needs to put aside his emotions and think business again. He is willing to pay tax to house people who need to be housed. And if the state has to rehouse Seán in social housing or through rent supplement payments, this may represent worse value for taxpayers’ money than assisting him to pay his mortgage. Even if that means writing off €100,000 or €200,000 of his debt.

John might initially think that instead of writing off €200,000, why doesn’t the state buy a house with that amount of money and stick Seán in it. The problem is that if this happens, Seán may default on the whole €550,000 mortgage. And the banks won’t absorb that loss, the taxpayer will – including John.
The best scenario is thus for Seán to be kept going in his house, paying as much of his debt as he can afford, while still living a reasonable quality of life. ‘Affordable’ for housing costs is typically defined as a third of after-tax income.

And because the state is different from commercial entities, it doesn’t even need to write off any amount of Seán’s debt. Instead, the state can take a long-term equity stake; effectively freezing a large chunk of Seán’s mortgage but clawing it back whenever Seán sells the house. The state can even wait until Seán dies and, like the tax inspector, have first claim on Seán’s estate. The state won't make the kind of profits banks make from charging compound interest, but Seán's debt to the state could be linked to house price inflation to avoid it dwindling away.

All of this can be worked out in a businesslike way. What blocks this kind of transaction is the ‘prodigal son’ culture, which could otherwise be termed class prejudice. John doesn’t want to live beside Seán. If Seán is getting state assistance, John wants him to live in inferior quality housing, in a less desirable location. Or at least, John feels that he should get better quality housing in a better area because he paid for it all by himself.

Yet, housing studies consistently argues that social mix creates the most thriving residential areas, with busy shops, less crime, etc. There are also sound economic as well as social arguments for keeping people in their homes, while making their mortgages more affordable.

Ireland can solve its crisis of mortgage debt. But it can only do so through solidarity. The example of John versus Seán is extreme, but as people nurse their wounded pride (and their ‘loss’ in their ‘investment’ in housing), they need to be persuaded of the rationality of helping their prodigal fellow citizens, while also reassured that more responsible borrowers in negative equity will also benefit.

And don’t forget that one in four households pay rent in private or social housing, and they all pay tax too. These are the citizens who are not too interested in the jealousy between one middle class homeowner versus another, as they wrangle over bailing out themselves and the banks. The renter households in Ireland need to be convinced that any mortgage rescue for others, will also involve a whole new national housing policy that will benefit them. That means the state’s role in providing housing must be to ensure everyone receives equally good housing, in a good location with good amenities. We have the means through NAMA, massive quantities of vacant housing and plenty of skilled people who can build the amenities like schools, transport infrastructure, etc that are required to add ‘locational value’ to Ireland massive stock of badly located housing.

And it is the locational value – proximity to services like schools, shops, playgrounds, public transport, green space, etc. – that is the real fundamental in the housing market that will determine quality of life through quality of the built environment.

In this context, the Mortgage Arrears Group’s recommendations really pale into insignificance. They are taking some steps to stop the banks making the situation worse some people by getting them off lower interest tracker mortgages. But the group’s remit does not extend to dealing with the massive crisis in Ireland’s housing system.

In fairness, it is an interim report. The Irish Times reports that “It had been hoped by those struggling with excessive mortgages that the group would recommend some element of debt forgiveness, or introduce debt-for-equity swaps, which would help them to reduce the overall size of their loan. However, this report makes no such suggestions ... In a follow-up report, which is due to be completed by the end of September, the group indicated that it will address the issue of ‘borrowers with unsustainable mortgages’.” But this is not just a problem for those borrowers. The cost will be passed by the banks to all taxpayers. Hence, we need a radical rethink of how we as a society will respond to a crisis that affects all of housing policy.

Portable Mortgages

Nat O'Connor: Two contradictory pieces in the news about mortgages. On the one hand, it was reported that some lenders are preparing to offer 'negative equity' mortgages of up to 125 per cent (Irish Independent). However the Central Bank proposes to restrict how much customers can borrow (Irish Examiner article and Irish Independent take on same story). Presumably, the new lending rules will make negative equity mortgages difficult, if not possible. Yet, do we want people 'trapped' in their homes, when job opportunities or other circumstances might require them to move?

An example of the negative equity mortgage goes as follows: John buys a house for €300,000 with a mortgage for €250,000. However the current market price of his house is only €200,000. Hence he is in 'negative equity'. Let's say John wants to move and has located another house priced at €200,000 that he wants to buy. Normally the bank won't permit him to sell, as his original mortgage is secured on his first house. However, the 'negative equity mortgage' is a loan of €250,000 to buy the house for €200,000. In other words, John ends up in the same position of negative equity but gets to move to a new house.

The negative equity mortgage could be a good thing, if it allows John to move to where there are job opportunities or if it allows him to move closer to his social networks. Currently, renting is not going to cover the mortgage, so it's not a viable option. Hence, John is either stuck in his first house or he needs to sell it.

But there are risks. The first risk is that house prices may continue to fall. But that's not a major problem as that would affect John in his first house anyway. The worst scenario would be if John bought a new property for €200,000 that was more over-priced than his current house, but it's really John's responsibility to shop around and get advice.

The second risk is that John will incur extra costs in moving that will weaken his ability to pay his mortgage. Stamp duty is the main cost there. Brian Cowen recently strongly defended his decision to not cut stamp duty, but it is a significant barrier to labour mobility. (Aside: Mr Cowen argues that the tax dampened property prices and speculation. It may have deterred quick buy-and-sell of property, but it seems likely that much of the pricing of houses was designed to recover the cost of stamp duty; so stamp duty may actually have boosted price inflation rather than dampened it. At any rate, it might be phased out in favour of property tax. The sooner the better).

Another cost is that John might lose first time buyer's mortgage interest relief (if applicable to his first house). And moving house inevitably costs money (from movers to legal fees), but then again John has to compare his income in the first house and his income in the second. If a job opportunity beckons, it might be worth the cost. Of course, there are many other factors in the cost-benefit analysis. The new house might be closer to friends or family, or to schools, or whatever.

A third possible risk is that people would seek a negative equity mortgage as a way of gaining access to cash. In our example, that might involve John seeking to borrow €275,000. This could be to pay the stamp duty or it could be to get cash for doing up the new house. In any case, there is a risk that adding to his mortgage debt could be the final straw and bring about an inability to pay.

Despite the above risks, it seems likely that there are some scenarios where something like the negative equity mortgage would be a good thing. If the proposed central bank regulations do not permit this to occur, then maybe some other options need to be considered. For example, in other countries mortgages can be portable. The legal detail is different, but it would work the same way as the above scenario. John would simply move his existing mortgage and secure it against the new house. He'd buy the house for €200,000 and still owe his bank €250,000.

Portable mortgages would also prevent a situation where people 'top up' their mortgage and take on extra debt. It would also benefit those who have mortgages without negative equity. Overall it would be a way of getting movement in the property market. Hopefully the Central Bank's rush to control risk will not elimate the possibility of innovative solutions to the housing crisis that could allow people to continue to make choices to improve their own situations.

Property Tax

Nat O'Connor: The Taoiseach has been talking about the introduction of property tax (Irish Independent, Irish Times).

A part of this is tax on people's residences, although it is important to remember that 'property' has a much wider meaning, in terms of financial assets, other material goods, etc. There is a real risk that discussion of any new tax will focus solely on people's homes and not on other assets.

In the UK, 5 per cent of people own 40 per cent of non-residential assets. The situation in Ireland seems likely to be similar. This is also property wealth and a legitimate question to ask from an equality perspective is what other assets will be taxed by any future property taxes? Given the scale of the gap in the national finances, there is no doubt that assets beyond housing will need to be taxed and could make a vital contribution.

Additionally, on the subject of residential property, there are four inter-related issues that ought to be tackled at the same time: the moral hazard of any mortgage rescue scheme, stamp duty, private renting and local authority funding. But first of all, how much money could property tax bring in?

How much?
One factor affecting property tax is how many housing units are there in Ireland? The 2006 Census reports 1.46 million occupied dwellings, of which c. 1.1 million are owner-occupied. I'm assuming social housing won't be included and landlords (and therefore tenants) are already meant to be paying the €200 per year charge on second or subsequent houses, so let's assume 1.1 million dwellings will be eligible for the tax.

If property tax was also €200 (on average), this would generate €220 million in a year (less operating costs and assuming full compliance). Not bad, but not on the scale of really dealing with the €8.3 billion non-cyclical gap between tax revenue and spending identified in an earlier blog. So, you'd really need to be talking €1,000 per year (on average) before making a real dent, which would bring in €1.1 billion. To put this in context, the projected tax take for 2010 is c. €32 billion.

The next question is how much can people afford to pay? Well, this varies a lot. However, many people on low incomes in rented accommodation won't be affected. A flat tax of whatever amount will be regressive; costing proportionately more to those on lower incomes. Hence, there needs to be a strong link between the tax and both the value of property and people's ability to pay. Wealthier people in bigger houses in nicer locations should pay multiples of what lower income people in small apartments in peripheral areas pay.

In terms of those who can afford to pay more, there is an opportuntiy to introduce something like the (now dropped) policy of the UK's Lib-Dems to introduce a 'mansion tax' of 0.5 per cent of the value of houses over ST£1 million (which was estimated to cost 250,000 householders over ST£4,000 per year)? Given that house prices grow steeply at the high end, it seems reasonable to expect that property tax will also be high for so-called 'trophy homes'.

Those reliant on the state pension who own their own homes will be the most vulnerable, as they may be 'asset rich but cash poor'. People in these situations could be allowed to defer the tax with no interest until their decease, whereon their estate could pay.

Yet, to return to the possible figure of €1.1 billion from property tax (at an average of €1,000), this would play a useful role in closing the €8.3 billion gap. However, the remaining €7.2 billion indicates the need to look beyond residential property. Hence, taxes on other non-housing assets may be a necessity.

The Moral Hazard of Any Mortgage Rescue Scheme
One of the real consequences of any residential property tax is that it may push householders struggling to pay their mortgages over the edge. Yet, any waiver for people with problems paying their mortgages must be seen as a type of mortgage rescue, which therefore invokes the question of moral hazard; that is, why should the State help people (who perhaps borrowed too much) to pay their debts so that they can own property, when other taxpayers did not put themselves in this situation. This question will need to be addressed. Either property tax will be allowed to be the final straw for thousands of mortgage-holders, or else (if there's a waiver) the moral hazard question arises. One solution would be to allow tax deferral, like for people with valuable housing but low incomes. This way everyone pays their fair share, but people with high mortgages are not pushed into default.

Stamp Duty
One suggestion of the 2009 Commission on Taxation report was that "homeowners who have paid stamp duty would be exempt from the annual property tax for seven years from the time they bought their property." (Irish Times report). This is a small compensation to those who paid tens of thousands in stamp duty. Yet, is the current proposal to eliminate stamp duty, or will property tax add to it? If we eliminate stamp duty (projected to provide just under €1 billion in 2010) residential property tax won't add much to tax revenue in the short-term, but it should stabilise revenue from this source (e.g. stamp duty collapsed from a height of €3.7 billion in 2006, and is unlikely to return to anything like that level). Given the crisis in the national finances, it makes sense to keep stamp duty in place as well as property tax.

Private Renting
Property tax will raise the cost of home ownership. Combined with everything else that's gone wrong in the economy, this factor is likely to lead more people to rent long-term. Yet another reason for the State to strengthen the protection of tenants to make renting a family-friendly option and an older age-friendly option.

Local Authority Funding
One possible role for property tax is to fund local authorities, which are set to spend a large chunk of the Department of the Environment's €2.2 billion allocation in 2010 (Revised Estimates 2010). On the local government scale, €1.1 billion in property tax could form the backbone of a coherent funding system (along with commercial rates, motor tax, waste charges and water charges). This would open up the possibility of local authorities varying the amount of property tax they charge, which might be more appropriate than a one-size-fits-all national formula, given how housing prices vary greatly across the country.

The original decision to abolish domestic rates undermined local government funding (followed by the legal case that removed agricultural rates also). The introduction of property tax is an opportunity to fix this system, above and beyond merely adding another patch to the national finances.

More on vacant houses ....

Last week, Nat O'Connor posted on vacant houses and the research carried out by the ntional Institute for Regional and Spatial Analysis. click here to read more on this by Eoin O'Broin.

Counting Vacant Houses (And Their Cost)

Nat O'Connor: A lack of reliable information about the housing market contributed to the housing bubble and subsequent crash.

The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.

This level of disparity about the basic facts is madness.

You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).

We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.

Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.

Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.

What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.

Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.

Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie

It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.

Yet, at the same time, there are over 300,000 vacant housing units in Ireland.

There are worse things than 'negative equity'

Nat O'Connor: There continue to be stories about falling housing prices (for example). We need to get some sense of what are reasonable housing costs and use this as a basis to co-ordinate policy and aim for stable housing costs.

Earlier in this blog, An Saoi has suggested that the current incarnation of NAMA is dependent on reinflating the property bubble. It's not the only state policy that may inflate property prices: the state pays the rent of over half of the private rented sector, it uses major tax expenditures to incentivise development and home ownership, and the move to leasing as the main source of social housing will also have a major effect on the rental market. None of these policies may have the explicit goal of propping up property prices, but there is no denying that huge state involvement in the property sector will have a significant effect.

High property prices sustained through public expenditure would be wasteful and are unsustainable. So, we need some kind of objective yardstick that might give us a sense of what housing costs would be reasonable. It is difficult to objectively identify a 'market' price when the state has such an influence on prices.

In the US housing market, long-term house prices appear to settle between 12 and 20 times annual rental yield value. In other words, if I can rent a house for 10,000 a year, it is worth somewhere between 120,000 to 200,000.

Irish house asking prices vary between 20 and 34 times their annual rental yield, for 3-bed houses in County Dublin, Galway City, Waterford City and Cork City. (Comparison based on DAFT house prices versus rent snapshot, Quarter 2, 2009). This suggests that they have further to fall before we get to some kind of sustainable position.

The above Irish Times article concludes (despite the weakness of the available data) that "it is likely that most people who acquired their home in the past five years are now experiencing some degree of negative equity."

Yes. There can be little doubt that the overdue, massive correction in the housing market means that house prices may have to fall a great deal and they may never again rise to anything like the equivalent of their inflated value. Remember, we had a crazy unsustainable situation where we generated a massive surplus of housing stock and yet prices rose steeply. So, 'negative equity' is definitely going to happen for many people.

But is negative equity such a bad thing? Well, first of all we need to separate the whole concept of housing-as-equity from the more basic concept of housing costs; that is, how much it costs to live somewhere in terms of rent or mortgage and associated charges.

If a lot of people cannot keep their housing costs to a reasonable proportion of their income, then that is a big problem. How much is a reasonable level of housing costs? It is suggested that housing costs shouldn't be more than a third of net household income. A household might choose to pay more in order to own or to live in a bigger house/nicer area, but this should be a choice. The state's goal should be for households to have the option of reasonable housing costing no more than a third of their income.

When households have high housing costs, it dampens their ability to do other things (which lessens overall economic activity). High housing costs also lowers Ireland's competitiveness. And when households cannot afford housing, the state currently expends resources assisting them: e.g. rent supplement, social housing, etc. It would be perverse for the state to also be expending resources that (intentionally or not) artificially maintain high house prices and rents. Essentially, the state would be raising costs that push more people to seek state assistance to meet those costs! That's unsustainable, but perhaps not so far from the current situation.

The only way out is for the state to allow a lot of households to enter negative equity; in the sense of the state avoiding actions that will inflate house prices. If households can meet their housing costs, then they will remain housed. So, that's problem number one taken care of.

If housing costs can be met (at a reasonable proportion of income), what is the remaining problem with negative equity? There seem to be three aspects to this: One is that the mobility of the household is constrained; Two is the loss of households' capital; and Three is that owner occupiers may end up paying unreasonably high housing costs.

1: A lot of people are perhaps realising that their 'starter home' may be for more than a few years. It's a pity we built so many small houses. The problem of mobility is really one of lack of uncertainty in the market, combined with a lack of credit, exacerbated by lower incomes. In other words, people are hanging on to see if they can sell for more and/or buy for less. However, if the house you sell and the house you buy are both down say €100,000, then you don't really lose out. But only if you can find a buyer for your house and only if the banks will remortgage you in your new house on the same terms as the old one.

2: The second aspect of negative equity is that people lose money that they could have spent elsewhere. Worse, they haven't lost it yet, but will continue to 'lose' it over the years where they pay more in mortgage payments than they would either in rent or if they bought when prices crashed. There is really not a lot the state can do about this. The news, like for bank shareholders, is that "the value of your investment went down, not up". Depending on how interest rates turn out, some people might actually be better off selling, write off their losses now and start again; although that may mean renting for life. Having said that, once the cost of the mortgage is even close to the cost of renting, the mortgage holder still gets to keep an asset at the end of the day, which the renter doesn't. The asset just ends up being more expensive than initially hoped for.

3: There is a risk that some owner occupiers will end up paying way above a third of their income on housing costs. Especially the newly unemployed, those who took out sub-prime mortgages or those who have lengthy fixed-rated high interest periods built into their loan. And if people get into arrears, penalty charges and a higher rate of interest can apply.

Which brings me back to the beginning. There would be a lot to be said for a state target of stable house prices in the long term. So, the state needs to examine carefully all the ways in which its actions affect the property market. Above all else, we must avoid another property price bubble, or we'll just repeat the madness all over again.

Now for the bad news, for a small number of mortgage holders in arrears, negative equity is part of a worse situation; that is, negative equity plus the inability to meet housing costs. Due to unemployment, a 100%+ mortgage or 'equity release' loans, or because their home was particularly high priced, these mortgage holders' property is not worth as much as what they paid for it AND they are unable to make their payments on it. The risk here is that these households will throw everything they've got into trying to pay arrears and punative interest rates, but in the end, despite years paying far too much for housing, they will eventually be repossessed. Not only that, but they are likely to still owe a large sum to a lender, which will not only prevent them buying again, but will take a chunk of their net income and limit their life options in many ways.

The state should have access to data about arrears and the level of household indebtedness, either through the Financial Regulator or through asking lenders directly for it.

It is the nightmare scenario of a combination of negative equity plus an inability to pay that will affect hundreds, maybe thousands of households; often those who signed up to sub-prime mortgages or who were pursuaded to 'release equity' from their homes. Yes, there was individual choice in this - but the lax regulation of credit certainly did not help. Those who get foreclosed in this above manner will end up seeking housing assistance from the state (either through rent supplement or social housing). There is an opportunity for the state to act now, to save these families much hardship and to help them restructure their debt while they still have more ability to manage it.

For example, the state (or NAMA) could act now to freeze their penalty payments, restructure their debt, and maybe fund the local authorities to buy half their property in a reverse version of the current shared ownership scheme. This will cost money, but it could be cheaper than waiting for them to become impoverished and then housing them; and it would certainly be more decent.

We deserve it

Michael Taft: Just to ensure that everyone knows why we must all share the pain coming down the line, Cathal O’Loughlin (writing in today's Sunday Business Post) reminds us: it’s because we are all responsible for the economic meltdown. Every one of us is implicated in the economic crimes of the past decade. Therefore, we must all do our appropriate ‘hard-time’. For instance, Cathal writes:

‘Willingness to pay house prices grossly out of line with Irish incomes . . . motivated developers to keep acquiring lands at inflated costs, and to keep building.’

Now we know. If only we had all said no, stayed in our parents’ house, stayed in those bedsits and one-room flats (even if we had children); it was because we wanted to live in a house that we owned (rather than pay high rents to landlords with no equity in return) – it was we who gave the wrong market signals to developers and land owners and bankers and Ministers. Serves us right.

On the way to making to making us feel guilty, Cathal makes other points about our over-indulgence. One fact he pulls out is that between 2001 and 2007 we doubled our expenditure on foreign holidays. This sounds pretty indictable until we look behind the numbers to see what it really means.

Using the CSO’s National Accounts, we find that ‘expenditure outside the state’ (which is not the same as holidays; it includes business and other purposes) increased from 4.8 percent of total consumer spending to 6.3 percent in the seven years that Cathal surveys. Okay, an increase – but 1.5 percentage points.

But, of course, there would be an increase in foreign holidays – the advent of low-fare airlines, the discovery of low-price destinations, competitive tour packages. For hundreds of thousands of people, this opened up new ‘luxuries’ that in years previous they couldn’t have availed of. But another reason for the increase is the fact that the population increased – by half a million in those six years. That’s likely to raise expenditure on all items, not just foreign holidays.

What did that increase amount to annually over six years on a per capita basis? €116 per person per year. That could not, for huge swathes of the population, be called extravagant.

However, it’s when we break down the expenditure on foreign holidays that we get an interesting picture. Though this data comes from the 2005 Household Budget Survey, the decile breakdown shows the distribution of income. Obviously, the wealthiest 10 percent spend more on foreign holidays – more than twice as much as households in the middle deciles, and nearly six times as much as those on the lowest decile.

Seventy percent of households (amounting to nearly two-thirds of all adults) spent less than the national average on foreign holidays – which shows the extent to which such expenditure is concentrated among the top earners.

This is of a piece. Take global numbers and assign a political value to them, without reference to the concentration of income, wealth or expenditure (on non-essentials, anyway). That political value then becomes a stick to beat ‘everyone’ with, even if ‘everyone’ only gets a small slice of the action.

But Cathal needn’t worry. Spending on overseas trips fell by 28 percent in the first quarter of this year. Fewer people are going abroad. Unemployment, wage freezes, fear over the future will do that. And if that spending decline disproportionately hits low and middle income groups – well, according to Cathal, we deserve it.

Guest post by Mike Allen: NAMA must generate social dividend

Mike Allen: Most of the debate on NAMA, both from the left and the right, has concentrated on questions of nationalisation or good bank/bad bank strategies. Several commentators have stated that ‘the left’ thinks that NAMA should have a social remit – but you would have to look very hard to find anyone actually arguing it, let along saying what this would mean.

Focus Ireland entered the debate over the weekend, arguing that NAMA must have a ‘social dividend’, and in particular that ‘social objectives’ need to be recognised in the legislation that governs the new agency. There are broad arguments that can sustain this case (about the need to link social and economic objectives), but the real issue is more pressing: NAMA is about to become the owner of a vast property portfolio of land and housing.

The vacant housing, which is the distressed assets of developers, can be used to salvage a vestige of equality from the tail end of the housing boom. The land is a crucial asset in ensuring that the next wave of housing development proceeds on a more equitable and sustainable (in all its meanings) manner - for, despite the current collapse, Ireland will need more new homes over the next decade.

Focus Ireland’s contribution drew on earlier work by the Irish Council of Social Housing. Beyond calling for the ‘social dividend’, Focus proposes that there should be a full audit of the potential social value of homes and land which come under NAMA control, that appropriate housing and land should be transferred to Local Authorities, that there should be a ’Land Management Strategy’, and that a special unit in the Department of Environment should act as the holding body for this.

We will have to wait until Thursday to find out whether these considerations penetrated to the Cabinet Table but even if they did not, there is the summer to bring this argument much more to the fore.
Mike Allen is Director of Advocacy with Focus Ireland.

More Cutting Times (Rent Supplement)

Nat O'Connor: Today’s Irish Times suggests that rent supplement (along with child benefit) is being targeted for cuts by the Special Group on Public Service Numbers and Expenditure Programmes (aka 'An Bord Snip Nua').

Rent supplement is a reasonably large area of expenditure in the national budget. The 2009 Revised Estimates for Public Services give a total spend of nearly €11 billion for Social and Family Affairs, of which the package of supplementary welfare allowances make up €1.1 billion or around 10%. Rent supplement is estimated at €490 million; that is, 4.5% of welfare spending. This represents a steady increase in recent years; for example, it has increased from €151 million in 2000, when rent supplement represented 2.8% of a total social welfare expenditure of €5.3 billion.

The Comptroller and Auditor General conducted a value for money exercise about rent supplement, published in April 2006. Without going into the detail here, the report noted that the payment was not being used for its original, temporary purpose, but is relied on for long-term housing by many households. The long waiting time for social housing can partially explain this situation.

Now, it is generally acknowledged that rents are currently in decline, although there is a lack of available data. Frustratingly, the state body, the Private Residential Tenancies Board (PRTB) has a great deal of information in its database about the actual level of rent paid that could provide a detailed rental index. Likewise Revenue and the Department of Social and Family Affairs may have data on rent levels that could be used to construct a rental index. A limited picture of current rents is available through DAFT, but this data is limited to asking prices not actually paid rent, and only applies to properties currently to let through the DAFT website. Nevertheless, it is possible to use the DAFT report (Quarter 1, 2009) to show the limits of the current level of rent supplement.

DAFT gives an average monthly rent for every county in Ireland, with a breakdown of this information for the larger cities. Although Rent Supplement might be expected to be paid to properties at less than average rent levels in some cases, it is reasonable to assume that rent supplement will provide an equivalent level of support across the country.

This does not appear to be the case, as there is a wide range of difference in how much of average rent will be covered by rent supplement in different areas.

For example, maximum rent supplement for a single person or couple sharing a dwelling varies from €66 to €92 per week. Although this variation is meant to be in line with different rent levels across the country, the payment – plus the €24 weekly contribution the household makes – represents anything from 37% of the average rent level of South County Dublin or 46% in Galway City to 78% of average rent levels in Leitrim or 79% in Laois.

A single person on his/her own is paid a maximum of €85 to €122 per week, depending on the area. Adding the €24 weekly contribution, this equates to 47% to 103% of average rents, depending on where the person is living.

What this variation shows is that there is seemingly a poor alignment of rent supplement with local rent levels (despite the regional rent supplement maximums). This means that households in some areas are much less well supported than households in other areas. One basic anomaly is the fact that average rent levels vary considerably in the city versus the county in Cork, Galway, Limerick and Waterford, but rent supplement remains the same. Similarly, rent levels vary enormously across Dublin, yet there is only one level of rent supplement for the capital, which essentially means that people who rely on rent supplement are effectively excluded from living in large sections of the city.

In this context, it is worth reminding ourselves of the overall aim of Government’s housing policy, which is to “enable every household to have available an affordable dwelling of good quality, suited to its needs, in a good environment and as far as possible at the tenure of its choice”.

It is true that rent supplement levels for families with two or more children can be above the average market rent in some cases. However, caution must be exercised in interpreting this, as rent levels for larger houses are also going to be above average.

It is a very simplistic argument for the Government to make that rents have decreased across Ireland, hence it can universally reduce rent supplement. Cuts across the board will fail to address the fact that rent supplement is already distributed in an illogical and unfair manner. Not least, some of the most vulnerable people (especially single people) already do not receive sufficient assistance to pay for decent housing in many areas. Organisations such as Threshold and the Peter McVerry Trust have long pointed to the fact that many households are required to top-up their rent with additional payments, leaving them with very little to live on.

The Government may have some margin to reduce rent supplement in a few cases. The Comptroller and Auditor General’s value for money report noted that landlords have no incentive to ask for less than the maximum payable and it is possible that the maximum may now be above average in a small number of areas. But the Government can only reasonably proceed to lower rent supplement if its decision is based on good evidence of local rent levels. The current wide variations suggest that the levels of rent supplement are not evidence-based.

Given that the Government has access to data with which it could generate a much more sophisticated national rental index, why is it not using this data in order to more fundamentally revise the level of payments based on local rent levels?

If the Government simply introduces cuts across the board, this indicates to me that not only are they unfairly punishing some of Ireland’s most vulnerable households, but they are incapable of the basic competence required to operate the rent supplement system as it stands, never mind developing an alternative housing policy that would be more sustainable and give the taxpayer a tangible asset (like social housing) for the large amount of money currently paid out to private landlords.
Dr. Nat O'Connor is Policy Analyst with TASC