Why does it cost so much to build apartments in Dublin?

[T McGibney]

Agree......but this piece above can follow in a few years?......you want the limited construction workforce engaged in highly productive (in terms unit output) activities in the first instance......doing kitchen extensions is not the highest and best use of scarce capacity right now etc.

Agreed.

Indeed if king for a day - i might only do the VAT holiday for super high dense - high volume apartment stuff for the first few years.....really kickstart that sector and get (hopefully) an avalanche of supply in a couple of years that gets noticed.....

The problem with this is that the easiest and quickest wins in terms of generating additional housing units will be in rural new-builds and restoring derelict units.

 

[Purple]

The problem with this is that the easiest and quickest wins in terms of generating additional housing units will be in rural new-builds and restoring derelict units.

It would be a real indictment of the construction sector is refurbishing derelict homes was more cost and, in particular, labour efficient than high volume new builds.

 

[T McGibney]

It would be a real indictment of the construction sector is refurbishing derelict homes was more cost and, in particular, labour efficient than high volume new builds.

Hardly if refurbishment is confined to replacement of doors, windows, insulation, decoration and contents rather than the groundwork, foundations and everything else, including planning, involved in a high-volume new build.

 

[Purple]

Hardly if refurbishment involves replacement of doors, windows, insulation and decoration rather than the groundwork, foundations and everything else, including planning, involved in a high-volume new build.

I suppose it's down to how derelict the dereliction is.

 

[rungun]

Increased housing capacity is increased housing capacity- a home can be extended and/or renovated using fewer resources than the equivalent new build, so there's a pretty strong argument that those are more efficient than new builds even if the raw metrics don't appear as good as they don't get recorded as new homes even though they very often are.

On a macro level , renovations will usually include energy efficiency measures which will give even more return on resources employed than a new build in the longer term.

Retrofitting will imo reduce the redundancy levels of houses and is not something being considered in our housing supply need / fresh supply. The various housing supply need include some wild assumptions around this.

 

[letitroll]

construction industry will build more homes out of the goodness of their hearts is even crazier than i am...

Yep - pure madness......if/when Glenveagh or Cairn start generating outsized returns relative to builders in the UK or US and one can somehow claim that they are profiteering or whatever......but its funny to watch social lunatics get up in the Daill and talk about greedy developers making a killing when the returns in the sector are just pedestrian and not something thats going to get any capitalists hearts pumping faster.....indeed one can argue that a period of outsized returns to developers is exactly whats needed to bring MORE developers/capital/labor into the sector to generate an avalanche of supply.

I've always thought if these socialists had any true strategic thinking.....they would in the words of the Lenin "hang the capitalists with the rope that they sold us".......which is to say a socialist should have a look at the record of capital intensive long lead time industries (like home building)...its characterized by booms and busts.....read a book like Capital Returns by Edward Chancellor about capital cycle investing....its not hard to pull in an avalanche of international capital here to build stuff......build enough stuff and invariably those capitalists start experiencing negative returns......but with other people money suffering who cares if returns go south a little bit in five years time.....what a massive capital cycle produces on construction is by defintion nailed down to the ground and immobile......

If this Government or even a socialist one had their head screwed on they would make the returns to construction just so irrestablile in this country that we get a a flood of international investment money come in......which means a flood of supply.....capital cycle investing tells you what happens next.....returns go up, investment goes up, supply goes up, prices come down, returns go down, investment goes down......you want to solve the housing crisis.....ride the capital cycle!...implement Pharaoh's dream.....seven fat years (for internatioanl fund investors profits), followed by seven lean years (for the same capital)..........which is exactly what happens when you get an investment boom in capital intensive industry.

 

[BIG-notorious]

If this Government or even a socialist one had their head screwed on they would make the returns to construction just so irrestablile in this country that we get a a flood of international investment money come in......which means a flood of supply.....capital cycle investing tells you what happens next.....returns go up, investment goes up, supply goes up, prices come down, returns go down, investment goes down

Well yes. If you want to encourage an activity you need to reduce taxes and (to the extent that is reasonable) regulation on that activity. Which brings us back to VAT and making far more developments exempt from the requirement to obtain planning permission, and looking at the building regulations again.

• I disagree with the commonly held belief that homes should become more affordable. I think it's far more important that they should become more available. It is in my opinion far better that the average 25 year old is able to buy (or rent) their first home even if that means the wolf spends several years at their door (and sometimes gets through it) than the average 40 year old can more comfortably afford their first home. Water finds its own level, and the 40 year olds will either max out their borrowing capacity or opt for something more modesty according to their preferences.

 

[letitroll]

I disagree with the commonly held belief that homes should become more affordable. I think it's far more important that they should become more available.

Well they go hand in hand obviously.....supply/demand......but we had a period of super affordability that I'm sure would please Eoin OBrien.....2009, 2010,2011,2012.......it led to effectively zero supply being added.......inside every affordability crisis is the seeds of more supply 7 availability.....a Government can water those seeds by getting out of the way or watering those seeds with supply side incentives.....this is what wise governments do......dumb ones can't help but interfere and put in rent controls, higher building standards, call the providers of development capital (vultures) and kill the seed

 

[BIG-notorious]

Well they go hand in hand obviously.....supply/demand

Peak-crash house prices coincided with peak supply levels ever. Supply dropped to near-zero and it still took a decade and a half for prices to get back to that peak. Even longer if you take into account the 29% increase in the CPI index since 2007, despite an acknowledged housing shortage for most of that period.

So no, they don't.

 

[rungun]

Peak-crash house prices coincided with peak supply levels ever. Supply dropped to near-zero and it still took a decade and a half for prices to get back to that peak. Even longer if you take into account the 29% increase in the CPI index since 2007, despite an acknowledged housing shortage for most of that period.

So no, they don't.

Rent was significantly more affordable. You aren't comparing like with like when people were getting second and third mortgages to beat the band.

Any relative measure should look at the primary housing costs per person. Average renting costs are about €600 higher a month than at the Celtic Tiger peak. House prices went through Celtic Tiger levels about 18 months ago, at the time they were about €500 higher or around 36% higher.

Renting should absolutely become more affordable. I'd probably agree on house prices, although they have got toppy in the last 12 months imo.

 

[letitroll]

Peak-crash house prices coincided with peak supply levels ever.

True - but a very unusual case.....an outlier. So you need to acknowledge that a third element entered and began to act on the housing market in an exogenous way....and that is credit.....an avalanche of credit that distorted the housing market.....in effect houses became a trading sardine in a global financial shell game inside the global financial system.....asset backed securities, rolled into CDOs and CLOs, rolled further into synthetic CDO's then securitized. This is not the natural order of things.

So your right to point that out - and I should have said that that relationship holds true as long as the tool that is used to purchase homes (credit) remain anchored to normal macro prudential rules for banks........when they are.....house prices in an economy effectively undulate around a multiple of median income....sometimes high when supply is low and sometimes low when demand is low........but anchored within a range which reflect the fact that the vast majority of homes are purchased with mortgages and those mortgages are underwritten on a multiple of income.

 

[Protocol]

1-bedroom apartments, yet to be built, on the Clonliffe road in Drumcondra, to be sold by developer to the LA or an AHB = 570k.

Remove 13.5% VAT = EUR 502k

Convert to GBP at 85 pence = GBP 427k

1-bed apts in Birmingham = GBP 180k to 300k.

There is an approx EUR 150k premium.

 

[letitroll]

There is an approx EUR 150k premium.

Quick look shows that there is ~15% income differential between Birmingham and Dublin, so we can scale up Birmingham’s housing price to reflect what it might be if Birmingham residents earned Dublin-level salaries. Taking the high-end Birmingham one-bed price ~€350,000, multiplying by 1.15 yields about €402,500.

So there's about one 1/3 of the 150k differential explained.....what I would say also is this income differential of 15% looks at the median.......the Dublin market is highly skewed (indeed distorted) by folks earnings salaries that exist more in what one might call the global economy than the Dublin economy (i.e. FDI)....my guess is the top 10% of earners in Dublin have an average salary that is perhaps 30% higher than the Top 10% in Birmingham.

We admittedly have higher building standards here (now slightly changed) and we've also got a more advanced housing shortage imbalance a decade plus in the making.....the ability to mezzanine fund an apt complex in Birmingham is my guess way cheaper than Drumcondra (cause like it or not the UK has deeper more liquid capital market than ours we have no City of London to call for sterling funding..... and so developers there have better funding mechanisms etc.0

Anyway I say all that to kind of say I'm not shocked......and the differential we can control to a certain extent is really the building regulation piece......lazily I'm kinda saying the best we could hope for is to get the Drumcondra apartment down to maybe €420-€450k. Maybe James Browne's building reg changes will do that hopefully!

 

[Protocol]

the ability to mezzanine fund an apt complex in Birmingham is my guess way cheaper than Drumcondra (cause like it or not the UK has deeper more liquid capital market than ours we have no City of London to call for sterling funding..... and so developers there have better funding mechanisms etc.0

And yet our banks are flooded with low-cost deposits.

 

[letitroll]

And yet our banks are flooded with low-cost deposits.

Yep agree - but fundamentally Irish banks, despite abundant deposits, face severe regulatory constraints under Basel III, forcing them to allocate prohibitively high capital against riskier mezzanine debt would drive up RWA's and lower the return on equity.....this is not a great business for a bank......its a great business for private credit vehicles.

So what everybody dreams of (using Irish banking deposits for housing development) would need to be done outside the banks balance sheets.......effectively private credit vehicles....argument for it but in effect it would also drain deposits from the Irish banking system.....which could, if done in enough scale, have knock-on effect for mortgage credit.

 

[Protocol]

face severe regulatory constraints under Basel III, forcing them to allocate prohibitively high capital against riskier mezzanine debt would drive up RWA's and lower the return on equity.....this is not a great business for a bank......its a great business for private credit vehicles.

I don't claim to understand all of this, but surely the whole point of the finicial system is to match savings with lending.

There is a large supply of savings.

There is a demand for loans from property developers.

Why can't the banks lend more to developers?

Or maybe then we need a separate vehicle? A corporate bond market where developers could issue bonds?

 

[letitroll]

Why can't the banks lend more to developers?

Basel III puts various Bank loans into risk buckets against which the bank has to take its own capital (not deposits) but the actually shareholder equity or what like to call the REAL money inside a bank against those loans.....the riskier the loan the more the banks REAL money needs to be put against the loan from a risk perspective.....an in-progress development is about the worst & riskiest collateral a bank could hold.....the bank capital CONSUMED in holding that loan is very high.....and given the amount of capital held against a loan determines (amongst many other things) its margin or return....you can see how development lending is a high risk, low rmargin return business line even though the top line rates charged to developers may look high.

Why can't the banks lend more to developers?

Or maybe then we need a separate vehicle? A corporate bond market where developers could issue bonds?

The Government could if it had the courage help out the banks by giving a guarantee (sound familiar?)......they could actually engage in SRT's.....synthetic risk transfers....where the Gov could agree to eat the first 20% of loan losses if a dvelopment went bad....this would drive down the risk weights on these types of loans for banks making them less riskly, hgiher margin and less capital intensive......this is the most efficient method to drive deposits funding into housing development in Ireland while getting the private sector experts (banks) to underwrite the quality of the loans while keeping skin the game...rates would be lower too to developers......I'm sure government has been presented with this idea and they chickened out as all the public would hear is the "Government guarantee" and Mary Lou's head would explode in the Dail on the Six One news.