Here's what the real cost of housing is...

Following the UK and scrapping the 13.5% VAT rate on new houses would stimulate building and lead to affordable housing argues Michael McCarthy.

Back on the ladder: Construction pace and housing supply is finally picking up once more, from a low level base since the slump years.

Housing is the hot topic of this decade. 

First there was the housing-led collapse, followed by stagnation and, now, we have a chronic shortfall caused by eight years of no building supply for the mass market.

The economics of the housing sector are complex and interwoven. They have changed fundamentally in the past 10 years, in every way.

This fundamental shift in housing economics comprises:

  • Lower wages, and higher personal taxation, such as new taxation measures such as Local Property Tax and USC.
  • Higher deposit requirements: Lower multiples of income for mortgage approval.
  • Less choice of mortgage providers and unavailability of tracker mortgages
  • Higher building regulation requirements and specifications.

It’s the perfect storm of unaffordability.

These are somewhat offset by the lower cost of construction resulting from lower wages and margins due to the decimation of the construction industry. 

Construction cost is just a part of this complex mix. 

It accounts for less than half the total overall development costs, but it’s the part that receives most attention.

The cost of construction is still down around where it was in late 2001 according the Society of Chartered Surveyors, Ireland (SCSI) tender price inflation index. Surveyors’ experience is that, in Munster at least, these figures are correct.

The challenge is to deliver enough new homes and apartments to buy and rent, at viable and affordable price levels to meet urgent levels of demand.

As construction activity increases, so too will costs as demand drives up prices of hard-to-replace trades such as masons, electricians and plumbers.

So, more pain is still to come in terms of the economics of housing.

In 2016 the SCSI published a report titled ‘The Real Cost of New House Delivery’. 

This detailed report, based on the cost of developing a typical three-bed semi-detached house in the Dublin area shows the total cost of developing a house at €330,493 including VAT.

The report shows this is €36,000 more than a couple earning a combined salary of €74,000 can afford, after having saved a deposit of €35,000.

If there is no policy change, because of all the constraints listed above, home ownership will no longer be a reality for substantial portion of the population. 

It is clear that they will have no option but to rely on local authority housing.

Hidden Inflation

A substantial area of cost increases has been in the area of increased specifications due to higher Part L requirements of building regulations.

Since 2006 there has been a considerable increase in the energy efficiency and performance of buildings. We have gone from a standard of a C1 rated building in 2005-2007 to an A3 rated building from 2012.

While this has increased energy efficiency, comfort and health of occupants as well as improved quality of the finished product, there is an upfront cost associated with it that has not been addressed.

Our calculations have found that building regulation increases in the last ten years account for a construction cost increase of 16% in today’s rates.

These increases have been largely masked by the precipitous fall in construction costs since early 2007.

Construction costs, on a comparable unit basis, are still at the same level they were in 2000 to 2001. This is 21% below their 2006 levels and 25% below their peak in 2007.

The SCSI index tracks the cost difference between set items in a building such as square meters of masonry, roof and other standard components to provide a consistent tender price comparison since its inception in 1998.

It does not account for changes in specifications or regulations.

A Taxing Matter

There has been much commentary about what the government can do to make housing more affordable in straitened times.

Clearly, the tax taken by the state represents a significant portion of the overall cost of a house.

Taxation on home purchase is particularly insidious and cruel.

The UK has a very similar housing market and climate to our own. Indeed, Irish legislation follows the UK very closely in many areas, including and especially housing except in one important area.

The key difference is that VAT in the UK on new housing is at 0%. Converting commercial office space to residential and subdividing existing residential units is at 5%. All other buildings are at the standard rate of 20%.

VAT is applied at 13.5% to all buildings in Ireland: no exceptions. What is most perverse about advance lump-sum taxes on homes is that young people, the people who will bring the next generation of children into the world, are borrowing to pay tax. 

They are burdened with this extra weight while trying to get their lives off the ground.

At an interest rate of 4% on 90% of the tax (€45,700) on the example house will amount to almost €72,400 to be repaid over 25 years, just to pay VAT and development levies. That equates to €26,700 in interest repayments, just for the purpose of paying VAT and levies.

For the equivalent house outside of Dublin the total repayment for VAT and levies would be €58,400, with €21,500 of this being interest.

That would be much better spent saving towards retirement, or helping with other expenses that having children inevitably bring with it.

There is a clear precedent for using the tax system to make the housing market more affordable and assisting young families. We are at a considerable cost disadvantage compared to our nearest neighbour in the provision of homes due to VAT on new housing.

On top of all this, the availability of housing is now causing major impediments to economic growth as companies cannot hire and expand as staff cannot find or afford suitable accommodation to live.

These cost obstacles originate at policy level. To make home ownership affordable, change must come in a variety of measures, chief among these should be in the form of a substantially reduced VAT rate on new housing. 

That is the single most effective measure that will substantially lower the cost of housing. 

Coincidentally, a 0% VAT rate would remove the difference between what an average couple could afford and the cost of a new house in Dublin, with change enough to buy some furniture.

That’s the clearest win-win scenario you are going to see this decade.

Michael McCarthy

  • Michael McCarthy is MD of MMC Quantity Surveyors, a Cork-based quantity surveying practice working in Ireland & the UK.



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