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Ethics not ‘immutable economics’ should drive housing policy.

By Padraic Kenna.

Housing in Ireland raises ethical issues, though for historical reasons we tend to see them almost  exclusively as practical (or ‘economic’) ones.

There is no other broad area of Irish society where public trust in institutions has been more corroded. Housing has been central to the collapse in Ireland’s State and personal finances and in respect for the public interest (such as it ever existed).

Its supply, distribution financing and profits are at the heart of fairness in this country. Of course, most people in Ireland have no clear views on ethics or the absence of ethics in our housing system.

Indeed our housing policies have generally been more about extending property ownership, boosting the construction industry, increasing public spending (in counter and pro-cyclical styles), facilitating lending and rewarding or providing for particular groups in society.

In 1965, an American academic, based at the Institute of Public Administration, studied the Irish housing system and concluded that it was the most heavily subsidised in the world. If he returned today and made similar investigations in relation to the housing tax reliefs over the past 20 years, absence of tax on betterment and development, rent and mortgage supports, and the colossal State bailout of loans on development land, he would probably be shocked.

Calculating how much of the Irish State €64 billion bailout bill is related to residential development land would give us some idea of the extent of these market subsidies. Clearly, nobody is doing that kind of economic research these days.

a policy that didn't work
a policy that didn’t work

However, these market subsidies to lenders, developers and landowners are politically acceptable, although rarely discussed.

When house prices reach a level at which significant numbers of new households are unable to afford homeownership or even home rental, governments are faced with a dilemma, described by Pfretzschner in 1965: “Either [a government] can take the steps to raise the level of wages, pensions and benefits sufficiently so that each family can afford to pay an economic rent, or it can take steps to provide the shelter, or to assure its provision, and absorb the loss itself, meaning that the burden of the loss is passed along in the form of higher taxation and/or rates to the rest of society”.

Of course, today, states have developed many effective instruments to direct the housing system, through planning, taxes, regulation etc, although in Ireland many of them are only marginally acceptable even in the wake of the Irish housing market fiasco.

As long ago as 1879, Henry George pointed out that as the productive output of countries increased, such as in Ireland during the past 20 years, much of the increased wages and salaries can get swallowed up in housing costs. The huge increase in productive power does not result in increased real standards of living, but rather in an increase in the value of land.

Indeed, the increase in land and housing costs prevents increasingly productive citizens from enjoying ethical increases in living standards and developing their full potential. In Ireland, the long commute (so as to afford a decent-sized home)and the absence of quality family time, as a result of expensive urban housing, is well established as a legend of our Celtic Tiger housing bubble.

What is remarkable is that building costs have not increased that much at all, yet access to a decent home costs more and more in terms of multiples of annual earnings. Here, the hidden price of land and the profits of the developer are concealed.

Henry George in ‘Progress and Poverty’ (1879) states that “all the advantages gained by the march of progress go to the owners of land”. A house and the land on which it stands are treated as property by the law, – “yet in nature they differ widely”. The “one is produced by human labour” and the other is part of nature.

Lawyers look on the private ownership of land as the foundation of society. Yet, most people believe that it is unethical that owners of land should benefit from publicly funded and organised improvements in its location, connection to services, planning and zoning. People’s homes and front gardens cannot be regarded as the same as development land.

Indeed, the Kenny Report in the 1970s suggested that local authorities be given the power to designate land required for development and the right to acquire this land at a price 25 per cent above its value in its existing use. The All-Party Oireachtas Committee on the Constitution Ninth Report on Private Property (2004) called for a “new mindset” in how we look at development land in Ireland.

It suggested that the community should benefit from the “betterment” of land created by zoning, planning, infrastructure connections etc. A planning-gain levy was mooted in the 1990s. This has now been enacted, with surprisingly little public awareness, in the NAMA Act 2009, which introduced a “windfall tax” on disposals of development land, to the extent to which they are attributable to rezoning.

Capital Gains Tax is exacted at a special rate of 80%. The danger in Ireland is that this will be insidiously removed sometime soon on grounds that it might raise prices. This particular issue should be an ethical not a practical one. A recurrent property tax on all land zoned for development where the land was not being developed was proposed by the Commission on Taxation in 2009.

The idea of a site value tax (SVT) on land (including where homes have already been built) is to capture the underlying value of developed land. In general, the value of a site derives from its location and accessibility to publicly funded or subsidised services, facilities and utilities”.

No SVT has been introduced in Ireland, though it was promised in the programme for government. Whereas a value-based property tax like the one the coalition in the end pursued has the ethical purpose of spreading wealth, a site value tax serves the practical end of promoting economic land use. Indeed the economic imperative is so fine that it becomes an ethical purpose in its own right. The motivations of ‘property’ and ‘site value’ taxes are separate and Irish politicians should note that one should not preclude the other.

Is it time to shift media and academic commentary on housing from its simplistic standard where reports on the “iron laws” of supply and demand always accompany harrowing personal accounts of homelessness and housing hardship, with nothing more than superficial analysis of the system which perpetuates both.

The experience of a decade ago show that prices will rise to whatever purchasers can afford (or borrow) even if building costs barely increase. Is it good public policy to allow housing (or land) to soak up all the gains in productivity and output expressed in the wages and salaries of society? Why are development and infrastructure levies applied only to new homes?

In the UK, where increases are again pricing people out of a home, some are suggesting using graduated capital gains tax on primary residences as a way of cooling prices – in the public interest.

It is an ethical question to why we have a housing system where 89,872 households (or 5.4%) were last year waiting for State provision of housing.The Irish, largely private, housing system does not serve all. Of the 89,872 households some 13,451 were employed. The waiting lists included 46,584 households on Rent Supplement. At least 28,000 of households are on waiting lists for more than 4 years.

Some 4,600 people accessed homelessness service in 2013 in Dublin, with 130 families living in emergency housing in hotels at the end of 2013.

In the past few years horrendous abuses of housing consumers have taken place. From the tragic fire safety breaches at Priory Hall to the Pyrite scandal this is an ethical issue, particularly as housing purchase takes up almost all a person’s lifetime savings.

True, some new regulations have been introduced this year, but they leave the individual consumer in much the same position. They must wait until a defect appears in their home, then try and get a lawyer to take a case against a builder of other professional, ultimately fighting a lengthy and expensive legal battle with an insurance company possessing huge resources.

We need an ethical, accountable and effective housing consumer agency which has real enforcement powers rather than advising people to ‘shop around’.

We also need a courageous State to take a strong role inspecting all housing developments, and not just the 10-20% contemplated by the so-called protocol with the local authority Managers. Why not make the local authority liable in negligence where a defect arises which should have been obvious on inspection, as is the case in the UK?

Most people find it totally unethical that a builder (who may have built defective homes) can wind up a company and avoid any legal or personal liability for any damage or ruin caused to hapless house buyers. How about personal bonds secured properly to cover defects for up to 20 years, to  be held by a State body – and not by a bank or trade body?

What is an ethical profit for a housing developer? Is a norm of 5-6% as much as society can take or should we, for some reason, allow a laissez-faire approach?

At first sight, the provision of State housing through local authorities seems to be an activity of the highest ethical standard. And indeed, over the past century this has provided valuable and secure homes for many people. Today, however, many local authority housing estates have become residualised – largely confined to persons without employment and essentially poor.

This has followed successive policies of council house sales. Since 1992, there has been a policy of “counteracting undue segregation between people of different social backgrounds”. While this might sound admirable, it fails to mention different economic backgrounds.

The result is a glorified, aspirational but meaningless statement which appears over and over in housing and planning policies. A similar criticism applies to the term “sustainable communities”, which is now included in all State housing policy documents, but which again has no legally defined or enforceable status.

So while there are many high-minded platitudes about State housing, the reality is that in many cases it is of poor quality, badly managed and tends to create a third-class citizenship.

This third-class citizenship is reinforced for example by the lack of a complaints or dispute-resolution process (unlike the situation with private-rented housing); the absence of any enforcement (or even inspection) process for violations of housing standards; and the absence of any remedies for tenants who are treated unfairly.

There have been regulations on standards in rented housing since 2003.However, while these apply to local-authority housing, the local authority itself is the inspection and enforcement body. Needless to say there have been no enforcement actions in relation to such accommodation.

We know that estates in Dublin’s Dolphin’s Barn and in Limerick endure unacceptable conditions, yet tenants have no way of enforcing standards. Private-renting tenants can appeal to the Private Rented Tenancies’ Board about any dispute with a landlord, but local authority tenants have no such facility and must rely on the Ombudsman – who has no enforcement powers.

Further disenfranchisement flows from the fact that Ireland is unique in Europe in lacking a representative organisation of tenants in either private or social sectors. Some 130,000 household local authority tenant households and 305,000 private renting households have no representative organisation to enable them to have a say in the making of laws and policies which affect them.

These decisions and laws have an overwhelming impact  on the lifetime opportunities of themselves or their children. In Ireland, citizenship and property ownership are siblings, still close friends while non-owners are still outsiders (and there are no plans anywhere to change this).

Our housing and landowning system is out of step with our constitution. Article 40.1. states that “All citizens shall, as human persons, be held equal before the law”. While there may be formal equality in the courts, there is substantial and real inequality in society. Housing consumers are not equal to developers.

Tenants, especially those in local authority housing, do not even have the opportunity to raise such issues.
In housing debates today, we rarely hear of new paradigms of thought and action. Droning about the immutable “iron laws” of housing markets continues to constitute a starting point for most commentators.
The Great Recession provided an opportunity for a rethink centring on the truth that so long as housing is unethical, society will remain unfair. •