Dublin has a serious housing affordability gap and it’s getting worse. What does this mean?
I’ve written elsewhere about the level of demand for housing in Dublin and how we might be underestimating the problem. It requires a big increase in output.
Recent data from the CSO show that there has been a big increase in activity in this sector. But it is still at a level that is only about 50% of what is required to address the crisis.
Prices continue to rise rapidly. But it’s only in last year or so that policymakers appear to have accepted that the problem is that there is an insufficient supply of housing.
The answer is not to provide incentives or assistance to people wishing to buy – desirable as this might seem from a political point of view. This only makes the deficit greater and pushes up prices further.
Together, these facts lead to a simple question: if there is insufficient supply of housing, why are the houses not being built?
Various reasons have been discussed in the media often concentrating on arguments about lack of suitable zoned land and land hoarding by developers who can make greater profits at some time in the future by not building.
There may be some elements of truth in this, but there is a far bigger causal factor: it is not profitable to build houses, and apartments in particular, in Dublin.
This has been the case for the past number of years and it is likely to remain so for some time.
Measuring Dublin’s Housing Affordability Gap
The evidence for this conclusion is laid out in two recent research reports on the viability of building apartments in Dublin.
The first is based on research by Society of Chartered Surveyors Ireland undertaken in late 2017. This provides an independent assessment of the costs of developing apartments and assesses this against the viability of the investment that would be required based on the prices prevailing in the current market.
The research examined the costs of developing 2-bedroom apartments of approximately 79 sq.m. in Dublin with data sourced from 28 actual developed apartment schemes consisting of a total of 2,146 apartments.
These were divided into three categories of apartment types: Suburban (low-rise), Suburban (medium-rise), and Urban (medium rise). The analysis was provided for a range of cost and price specification. The costs of provision identified were as follows:
- Category 1: Suburban (low rise) €1,700 to €1,925 per sq. m.;
- Category 2: Suburban (medium rise) €2,125 to €2,450 per sq. m.; and
- Category 3: Urban (medium rise) €2,400 to €2,800 per sq. m.
The research led to a very clear conclusion: the current market price would not be adequate to cover the costs of provision except for suburban low-rise development (Category 1 apartments).
The analysis shows that the gap between the cost and price – the viability gap – is in the region of 20 to 30% of the total costs for suburban and urban medium rise apartments.
This means that it is currently not commercially viable at current prices to build apartments in other categories given the current costs of doing so.
This finding has a strong implication: if the apartments that are required in Dublin to alleviate the current severe shortage and meet the city’s longer term housing needs are to be built, one of two things must happen. Either the market price of apartments must increase, or the costs of development must fall considerably (or a combination of both).
So, how is this likely to be resolved?
Prices have been increasing at close to 10% for the past few years and this could continue. However, the upturn in construction and in the economy in general has also seen increases in the costs of development so the gap is not closing adequately.
The research first examined the outlook for prices and approached it, not from the usual means of examining the balance of demand and supply to project future price trends – which is what economists in most markets would typically do – but by looking at the ability of people to purchase at higher prices i.e. affordability.
The analysis was done using CSO data on incomes and salaries for a couple where both are earning and Central Bank rules for first time buyers regarding the required deposit (10%) and the loan to income restriction of 3.5 times salary.
The analysis shows that the least expensive type of apartment i.e. a suburban low-rise apartment at the lower range, would require a combined, gross salary of at least €87,000 per annum. However, CSO data show that only the top 20% of households have salaries over €80,000 per annum.
The research then estimated the affordability of apartments in each category at the lower range given the market price data. The results show that for a couple with a combined annual gross salary of over €90,000 who are first-time buyers, the only apartments that would be affordable are low rise suburban apartments towards the lower end of the range. All others are out of their price range.
This conclusion is noteworthy because these prices would not cover the costs of building the apartments. The inescapable conclusion is that there is very limited capacity for ongoing price rises to bridge the viability gap.
Consequently, addressing the demand will require that the costs of providing the required housing units are reduced.
The conclusions of the SCSI are confirmed by research that has recently been published by Department of Housing, Planning and Local Government (DHPLG). This research examined the issues of commercial viability and affordability in a broadly similar manner but using a different dataset based on hypothetical developments.
The research looked in considerable detail at the factors that influence costs but did not specifically compare the costs of construction with the market prices that would be available. Instead, it looked at the viability of development in terms of the prices that might be available in the market based broadly on an approach similar to the affordability analysis above.
This research described a broadly similar prospective purchasing couple and identified that housing would be affordable if priced in the price range €239,458 to €319,277. It then compared this with the cost of developing a range of apartment types in urban locations.
As with the SCSI report, the analysis found that none of the range of apartments developments examined would be viable.
What Can be Done?
Both reports emphasise the importance of the need to reduce costs. Changes in planning requirements – such as requiring perimeter parking only – and changes in the mix of apartments, with a higher number of 1 and 2 bed apartment, could help.
However, this was still inadequate to make the developments that were examined commercially viable.
The research also looked at the viability of a hypothetical build-to-rent scheme, but the outcome was the same. The development would not be commercially viable unless it was assumed that rents would exceed €1,500 per month.
This is problematic as this would exceed the level of rent that is affordable for households on or somewhat above average disposable incomes as it would require an income of €54,000 if expenditure is to remain at or below one-third of income. Consequently, the units would be out of range for most prospective renters.
Site cost is an important element of unit costs. The SCSI cost breakdown shows that site cost per apartment unit ranged from €33,000 at the lower range of Category 1 to €125,000 at the higher range of Category 3.
The research looked at allowing higher developments to see if this addressed the losses as it would result in a greater number of units on any given site. However, in contrast to what is sometimes assumed, unit costs rise rapidly with height, particularly in buildings above 6 levels, and the developments would remain non-viable.
The research discussed the costs of obtaining sites. Site cost has a significant impact on viability and is the key determinant of non-viability in for many types of apartments. However, site cost is a market outcome and trying to address it through direct intervention would be difficult to implement.
This makes it clear that the market for housing in Dublin is seriously distorted.
Prices are rising because of under-supply, particularly of apartments. It not viable to build the required housing at current price levels. However, prices cannot rise adequately as most people would be excluded from the market.
This is the housing affordability gap.
It is clear that there is no easy solution without innovation in terms of the type of housing that is developed. New guidelines on apartment design have been published and offer some assistance.
But the gaps will not be bridged by individual changes in a small number of the cost elements that make up the total. New thinking to increase density is required.
Shared accommodation is an innovation that holds promise in this regard. This is illustrated by the following hypothetical example based on an existing site of 0.35 ha (0.86 acres) in the Dublin area and using metrics from a recent scheme in London.
At 143 units per ha (58 units per acre), planning permission would be available for an apartment building of 50 apartments comprising seven 1-bed and forty-three 2-bedroom units.
This would provide living accommodation for between 93 and 140 people on assumptions of occupancy of 1 or 1.5 persons per bedroom.
If the site is developed as a shared living accommodation building there is potential for 246 units i.e. bed spaces, plus the communal areas, broadly within the same footprint and outline.
This approach increases the accommodation potential of the site by up to 160% over the traditional apartment block.
Shared accommodation is not going to be to everyone’s liking. But it will suit some people at certain stages of their lives.
This is the type of thinking that is required to achieve the increase in density that is required to address the situation by closing the viability and affordability gaps.
SCSI (2017) The Real Costs of New Apartment Delivery. Report published by Society of Chartered Surveyors Ireland
Daft.ie (Quarterly) Irish House Price Report
Department of Housing, Planning and Local Government (2018) Review of Delivery Costs and Viability for Affordable Residential Developments
Department of Housing, Planning and Local Government (2018) Design Standards for New Apartments – Guidelines for Planning Authorities