Viability for Affordable Residential Developments, Building on Shaky Ground

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Last week (12th April 2018), the Department of Housing, Planning and Local Government released its Review of Delivery Costs and Viability for Affordable Residential Developments, which enumerated the many reasons why providing affordable homes was difficult.  There are many issues with this report, primarily with the lack of urgency in the Government’s response to this national emergency, however one glaring problem is its viability and affordability model.  It is neither viable nor affordable.

The starting point in determining viability, the report suggests, is to “work from the baseline of what is affordable from the disposable spending power of the broad swathe of the target market”.  It then bases this “starting point” on the average earnings for full-time employees as indicated by the 2016 CSO Labour and Earnings Survey, of €45,611. 

To further compound the problem, the report then uses the Central Bank macroprudential lending rules to test affordability for a couple living in a double-income household on average earnings, assuming that couple are first time buyers.  These rules use loan-to-value (LTV) and loan-to-income (LTI) ratios to determine affordability.  In the case of first time buyers, the LTV is 90 per cent of the value of the property, and the LTI is a maximum of 3.5 times the gross income for the couple.  Using these figures, with both either earning the stated average wage for a combined annual household income of €91,222, affordability, the report suggests, would be €319,277.  Allowing for one earner to work half-time for a combined household income of €68,416.50, which, the report suggests, accounts for a “wider population base”, the affordability range becomes €239,458 - €319,277.  The financial viability models within the report are then based on this level of affordability. 

This begs the question – affordable for whom?

• Research on income distribution conducted by the Nevin Economic and Research Institute (NERI)[1] found that 65 per cent of those with market income received €35,000 or less. 
• According to the EU SILC for 2016, the mean equivalised disposable income per individual was €23,599 – almost half the average earnings cited in the report.
• The Summary of Housing Assessments 2017 indicated that 78.1 per cent of households in need of social housing were outside the labour force (57.5 per cent were unemployed, 7.8 per cent were one-parent families, 2.5 per cent were homemakers, 2.4 per cent were training, 2.2 per cent were pensioners, and 5.7 per cent were classified as ‘other’).  That’s over 67,000 households.
• 74.8 per cent of households in need of social housing were headed by single adults, taking them outside of the scope of the two-adult household used in the viability model.  That’s over 64,177 households.
• The Central Bank rules refers to the 3.5 LTI multiplier as the ‘high loan-to-income ratio’ and permits its use for a maximum of 20 per cent of home loans issued by a lender in a relevant period.  Subject to some lender discretion, this multiplier will not be available to 80 per cent of borrowers in any given period.
• The report assumes the availability of a 10 per cent deposit, or between €26,606 and €35,475, depending on the income profile used (both full-time or one full- and one part-time earner).  The Central Bank rules only permit this ratio in the case of first time buyers.  For second and subsequent buyers, a 20 per cent deposit is required (€53,212 to €70,950).  These deposits are out of the reach of many on low incomes in need of affordable housing.

The current Government is making the same mistakes it and successive previous Governments have made to date, in designing housing policy on the basis of flawed data and unfounded assumptions.  The ‘affordable homes’ delivered on the basis of the model proposed in the report will be out of reach of those in most need of affordable accommodation.  If pursued, only investors and those with incomes and savings able to sustain the level of borrowing or investment required will be in a position to purchase these houses, thereby perpetuating policies which view housing as an asset rather than a home and risking the expansion of another housing bubble.

Social Justice Ireland calls on Government to develop real viability and affordability models, based on that proportion of the population most in need of affordable accommodation.  We also urge Government and its development partners to ensure cost-saving through advances in construction methodologies and to take advantage of economies of scale when procuring construction materials.  Government must also look at alternative models for provision of affordable, social and public housing that are not so heavily reliant on private ownership.  It's time for housing policy to be built on solid foundations.

Social Justice Ireland recently published our Socio-Economic Review 2018 - Social Justice Matters: 2018 Guide to a fairer Irish Society, containing chapters on Income Distribution and Housing and Accommodation.

[1] Collins, ML (2015):  ‘Earnings and Low Pay in the Republic of Ireland: A Profile and Some Policy Issues’ NERI Working Paper, 2015/29. Dublin: NERI.