A discussion that relies heavily on numbers can be numbing, and turn us away. Don’t let that keep you from reading a recent study on the reality and causes of the housing debacle that exists in the Republic of Ireland (RoI), and that may well be with us for decades. Yes, there are numbers and data galore in the report, but they are such compelling numbers and data, and where they lead is where we all need to be — a deeper understanding of the extent of the housing problem, how it unfolded, and how it is in danger of reappearing.
The report is A Haunted Landscape: Housing and Ghost Estates in Post-Celtic Tiger Ireland, by Rob Kitchin, Justin Gleeson, Karen Keaveney and Cian O’Callaghan and published by the National Institute for Regional and Spatial Analysis, National University of Ireland Maynooth (July 2010). Sorting and filtering the data and numbers in such a thoroughly factual assessment is a challenge.
It comes as no surprise to anyone living on the island of Ireland that the RoI is suffering from property prices in a freefall and construction activity at a standstill. Such conditions are enough to ruin any economy, especially one so dependent on housing construction. From 2002 GDP growth was based not on exports, the backbone of an earlier Irish economy, but on the property sector.
Remember that in the 1980s the RoI suffered from interest rates at 15-20%, unemployment was around 18% in 1985, there were high rates of outward emigration, and Irish GDP was 63% of the EU average. Ireland was a “small country on the periphery of Europe with a weak economy.”
By the 1990s, with a heated up economy that kept Irish people at home and attracted others from the EU, there was a real need for more housing. Between 1991 and 2006 the population rose by 20%, due in part to a net immigration of over 340,000, and the size of households fell. There were more people with fewer sharing each house. The report also claims that there is a “strong cultural imperative to own one’s home” in the RoI.
The Changes Wrought
First, what happened? First time buyers were offered 100% mortgages so they could buy not just a new big house but also a new car or two to drive the long distances between work and home. Those who already owned a house got a bigger one or a second one. Some individuals seized the opportunity, with lots of cheap money on offer, to invest in buy-to-let properties. Many farmers in rural areas, especially if they were living in scenic areas, were hard pressed to resist the sale of a site (nothing lost with a bit of land gone) in exchange for a sum that often surpassed their income for several years or more. The report finds that more than a quarter of all new homes, in 2007, were bought for speculation.
Banks competed with one another to give as much money away as possible to big developers, new home buyers, and small investors. Everybody knew that their local authorities would approve almost any plan for the development of houses, whether one-off or clustered in group schemes, or for shops or other private projects, all of which generated development levees for the authorities. The report concludes, “local authorities adopted a laissez-faire approach in its positive presumption for all housing to be permitted, regardless of local priorities or demographic demand or market conditions.” At 39. The local authority planners were in turn subject to the final say of elected local councilors who were driven by “clientelism, cronyism and low-level corruption.” At 40. Many of the local councilors worked as planning agents or consultants or estate agents, raising practical if not legal conflicts of interest in deciding on development plans or projects.
The government fueled it all with fiscal policies that liberalized access to credit and that provided tax breaks for various “development” projects. Initially some of the tax incentives were designed to encourage housing growth in inner city areas, or rural renewal, but soon the tax-incentives were expanded and deepened and took on a pro development life all their own and social housing was largely ignored. The cozy relations between developers and government officials are well documented.
Regulatory authorities empowered to oversee the banking industry were nowhere to be found. One can only imagine the reaction of politicians if the regulators had raised their voices in caution.
Rational planning that paid attention to public or long-term interests was consigned to the dustbin. Other than An Taisce and a few other lonely voices, often berated as cries from a disgruntled fringe, ordinary citizens stayed silent and made what money they could from all the action, taking advantage of the free-flowing credit and tax incentives. Ordinary individuals as well as developers speculated with property.
Second, how crazy did things get in the period of the Celtic Tiger. Between 1996 and 2005, over 500,000 housing units were built, and between 2006 and 2009 there were 244,590 units built even though in 2006 there were 266,322 housing units unoccupied. That is indeed crazy, and a little stupid. By 2007 18 houses per 1,000 of population were built in Ireland, compared to 2 houses per 1,000 in Germany and 3 in the UK. In 1991, the average price of a new house was €66,914 and in 2007 it was €322,634, a 382% increase. At the same time, house building costs and wages doubled. In 1998, land cost about €10,000 per hectare (2.47 acres) and in 2006 it cost €58,400/hectare. Total value of mortgage debt went from €47.2 billion in 2002 to over €139.8 billion at the end of 2007. Between the private home mortgages and uncontrolled loans to developers, the share of bank assets in property-related lending rose from less that 40% before 2002 to over 60% by 2006.
So much housing was changing hands that the percentage of total tax revenue from the property market (stamp duty, capital gains taxes and VAT) went from 5% in 1998 to 17% in 2006. By 2007 13.4% of all workers were in the construction industry, compared to 8.2% across the EU.
Unrestrained greed blew across the island like a force gale winter wind knocking down anything that tried to slow it down. Money was flowing and homes and developments appeared everywhere, planning be damned. Everybody seemed to be making money and nobody wanted to be left behind.
Third, how bad have things gotten. Pretty bad. GNP has fallen by about 17% from its peak and unemployment is at double-digit levels, three times its level before the fall. By the end of 2009, the gap in public finances was rising at over a billion euros a month. House prices are headed for a 40-60% drop, the differences depending mostly on location, and 250,000 households are worth less than their mortgage with over 4% of all mortgages in arrears. UCD economist Morgan Kelly has opined that failures of private mortgages will soon and finally sink the banks, and bankrupt the government because of their guarantees of the banks. Commercial properties are even worse. The Irish Gas Bottle site in Ringsend was bought for €412 million in 2006 and is now estimated to be worth about €50 million.
The total value of construction output fell over 47% and the number of construction workers decreased from a peak of 269,600 in 2007 to an estimated 129,000 in 2010. Property related tax receipts (stamp duty, capital gains tax, VAT, development levies) crashed, some by as much as 43%. By 2009, housing commencements were down 90% off their peak in 2005.
So where does this all leave us? The report indicates that the data for assessing the exact outfall, in terms of vacant properties and oversupply, is hard to come by, or non-existent. Interestingly, the local authorities in Fingal, Kildare, Meath, South Dublin and Wicklow — areas around Dublin but not Dublin City — constructed housing basically in line with demand and so with a recovery the oversupply will disappear relatively quickly. In Dublin City, Dun Laoghaire-Rathdown and Cork City houses in excess of demand were constructed, partly due to planned urban development and renewal schemes started before the economy crashed.
Counties in the north midlands and along the border — Cavan, Donegal, Leitrim, Longford, Mayo, Roscommon, Sligo — constructed houses almost irrespective of demand or rational planning guidelines. The irony is that these same counties had the highest rate of vacant housing at the same time they were overbuilding. For example, Leitrim had a vacancy rate in 2006 of 21.5% and yet it increased its housing by 19.3% between 2006 and 2009. The reason is traced, in part, to the government’s Upper Shannon Rural Renewal Scheme, in 1998, which provided generous tax incentives for owners of residences, with the cost of all or part of the expenditure on his/her main residence as an additional tax-free allowance, and for rented units, with the owner allowed to deduct all or part of the expenditure on a rented house in calculating his/her rental income. Housing units were built not to meet demand but to avail of tax breaks.
Anticipating a never-ending housing boom, the local authorities also zoned huge swaths of land for housing. Again, it was the counties with the highest level of excess housing that over zoned land for more housing. In effect, “housing and land supply and household demand became uncoupled from early on in the Celtic Tiger era and progressively grew further apart.” At 30.
Ghost estates liter the Irish countryside. The authors define a “ghost estate” as a development of 10 or more houses where 50% are either vacant or under-construction. These housing developments were built on speculation, not demand, and the report estimates that there are probably 620 ghost estates with 19,262 units across the country. Again it is counties in the border and north midlands region that have the most such estates, especially Leitrim and Roscommon. Since the estates were built without considering demographics or demand, and since these rural areas generally recover slower than urban areas, the report suggests that these units will likely remain empty for over a decade. Whether anyone in 10 years will be even interested in by-then old and maybe decaying houses is as depressing a question as asking what quality of life is available for the poor people who already bought into these ghost estates that often are without pavements, street lights, green areas, or transport.
The Fall Out
The lucrative tax incentives delivered on the tax breaks, and people got rich, or so they thought, but the socio-economic rationale failed miserably. While more houses were built in Donegal and Leitrim and Cavan, there was little impact from these housing schemes on economic activity in rural areas. All we got was a glut of houses and ghost estates.
The government also gave us NAMA, the National Asset Management Agency to address the banking crisis — over extended property lending secured on assets that have a market value well below the amount of their mortgages/loans, i.e. negative equity. Details about where the properties are located and how they will be managed remain unclear making it difficult to assess the realistic chances for any success for NAMA, especially since real estate value is largely based on location, location, and location. Irish banks have neither the money to repay the international banks for the money borrowed nor any money to lend developers and businesses. The government chose to invest or nationalize certain banks and to take certain bad debts and place them in the hands of NAMA to manage. These conditions keep shifting even as this is written in late November with each week delivering yet more news, changes, and reasons for despair.
The report points out that since NAMA is managing these bad-debt properties for the benefit of the public purse, it has a vested interest in seeing a re-inflated housing market. The danger exists that NAMA will pursue its goals by resisting planning reforms that would further devalue these inflated properties, and by opposing attempts to dezone land since that also may reduce the value of its assets. Finally, the authors note that in other countries when rescue efforts similar to NAMA have been tried, economic conditions were very different and it is questionable whether the assets will produce any positive return in light of current and expected economic conditions in Ireland.
The authors also offer a cursory critique of the neoliberal capitalism that fueled the boom: narrow tax base with low corporate and income tax, high indirect taxes, no property tax, and a laissez faire planning and regulatory regime. It is argued that any remedy based on this same ideology likely will merely perpetuate the conditions that got the country in this mess in the first place.
We have seen what happened to the banks for their sins, although they have been allowed to remain in limbo rather than confined to hell. The politicians responsible presumably will pay their price sooner rather than later. And a serious critique of the free-market, neoliberal capitalism underlying the Celtic Tiger boom has begun to emerge, including in this report. In the meantime, everybody else continues to suffer the consequences.
The report, A Haunted Landscape, makes it clear that those consequences are deep indeed and will likely last for some time, maybe decades. The focus of the report is on the planning process that contributed to the catastrophe and it calls for an independent review of the planning process and its role in the creation of the property bubble similar to the Honohan report on banking. At the beginning, the authors make clear their assessment that much of the problem can be traced to “localism, cronysim and clientelism”, all staples of the way things get done (and undone) in the RoI. While not included in this report, any independent review of the planning process, and its role in the demise of the Celtic Tiger, needs to address ways of educating and training local authorities and local councilors in their role in this process if long-term rational planning is ever to replace “localism, cronyism and clientelism.”
Whatever steps are taken to resurrect the construction industry, it is argued that new housing cannot be allowed except in a few narrow circumstances (e.g., social housing and areas that limited new construction based on planning guidelines, actual demographics and existing infrastructure). Construction can be reinvigorated with investment in public facilities, including schools and hospitals, and infrastructure, including public transport, energy and broadband. These investment opportunities are central to the Green New Deal promoted in the RoI and Northern Ireland, as well as the UK, by various environmental organisations. See “Green New Deal” in the iePEDIA section of irish environment.
Rob Kitchin, Justin Gleeson, Karen Keaveney and Cian O’Callaghan, A Haunted Landscape: Housing and Ghost Estates in Post-Celtic Tiger Ireland, National Institute for Regional and Spatial Analysis, National University of Ireland Maynooth (July 2010). www.nuim.ie/nirsa/
Morgan Kelly, “If you thought the bank bailout was bad, wait until the mortgage defaults hit home,” The Irish Times, November 8, 2010. www.irishtimes.com/newspaper/opinion/2010/1108/1224282865400.html
Frank McDonald and James Nix, Chaos at the Crossroads (Gandon Editions, 2005).
Frank McDonald and Kathy Sheridan, The Builders (Penquin Books, 2008).