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Ireland's political and cultural magazine
5 0 April 2017
“R
ENT OR Buy?” is a frequently asked question.
Buying a property is a form of long-term
saving; mortgage repayments pay loan inter-
est as well as a portion of the principal loan amount. The
end of a mortgage term coincides with full ownership of
a substantial asset. When renting, no such saving occurs
and the asset is retained by the landlord. The argument
for buying is compelling - rental costs are higher than
mortgage repayments in many locations.
In fact, for Government policy-makers the question
should be “Rent or Build?”. The governmnt’s ‘Rebuilding
Ireland’ Housing Action Plan proposes 47,000 new social
dwellings in the next five years, 70% of which will be
rented or leased. The remaining 15,000 units are to be
a mix of builds by Local Authorities, Approved Housing
Bodies, so-called 'rapid' units, and regeneration pro-
jects. It is an ambitious plan with a large budget
allocation. Last year, according to Sinn Féin Housing
spokesperson, Eoin Ó Broin, 76% of the Department of
Housing social housing so-called ‘solutions’ were pri
-
vate homes leased by the State.
From these figures it can be seen that the State con
-
tinues to be reliant on private housing rented for social
housing. Given the ambition and scale of the current
housing strategy, it is appropriate to examine this rental
model from an economic perspective. What are the cost
implications of renting a typical house versus a local
authority building social housing itself (direct
procurement)?
A cost-benefit analysis will test the underlying
assumption that it is cheaper to rent than to build.
State housing: Rent or Build?
In this indicative worked example the following assump-
tions apply: a three-bedroom dwelling (apartment or
house) is located in the Greater Dublin Area, a rent con-
tribution (say Housing Assistance Payment) in this
location is €1,050, and the average building cost of a
directly-procured Local Authority three-bed Home on
state owned land is €180,000. This cost was confirmed
by Minister Simon Coveney in the Dáil last November.
Locations outside Dublin will have lower building
costs and lower rent-assistance payments, but the dif-
ferences will be proportionate. Energy costs for
low-energy (nZEB) building standards will be examined.
It will be assumed that a home is properly maintained
over the thirty-year period in each scenario and that
costs are similar, and so are not tabled. nZEB will be the
new-build national performance standard in 4 years.
It should build Passive Houses,
not rent housing from the private sector,
as social housing
State could save
€9bn over 30 years
on social housing
OPINION
‘Rebuilding Ireland’
proposes 32,000 private
homes rented or leased
by the State over the next five
years - this may cost €290m per
year more than Local Authority
built low-energy homes
by Mel Reynolds
Bruck Passive Houses, Changxing, China
Design: Peter Ruge Architekten
Avoid 9bn euros of this
April 2017 5 1
COST-BENEFIT ANALYSIS
There are three sections in this cost-benefit exercise- (1)
rent and mortgage comparison (2) energy consumption
of a typical versus a low-energy new-build home and (3)
residual value.
. RENTAL MORTGAGE COMPARISON
With a 3% real interest rate over a thirty-year term,
monthly mortgage repayments on a €180,000 directly-
procured Local Authority home will be €800 per month.
A typical private-sector rent assistance payment is
€1000 per month, so renting is €2400 more expensive
per year than a mortgage.
The thirty-year Net Present Value (NPV) saving for a
Local Authority build is €47,655.
. ENERGY CONSUMPTION
Passive or near zero energy (nZeb) homes have signifi
-
cantly lower running costs than existing dwellings. The
estimated annual energy savings for a three-bed Passive
House over a typical dwelling are €2,284 per annum.
The thirty-year NPV energy saving for a nZeb Local
Authority home is €45,352.
. RESIDUAL VALUE
The net present residual value is perhaps the most sig-
nificant element to be examined. There is no transfer of
title at the end of a tenancy period - the residual value
for renting is zero. The state will own a directly-procured
Local Authority home after thirty years and can decide
whether the asset can continue to be used as social
housing or be sold on to fund further housing develop-
ment. For simplicity, it is conservatively assumed that
the net present value of the residual value of the house
is the same as the cost to build:
The net present residual value of a Local Authority
Home after a thirty-year term is €180,000.
. TOTAL SAVINGS
The total savings (of all three items above) suggests that
over thirty years a Local Authority nZeb house costs
€273,00 less than a typical rental unit.
CONCLUSION
This cost-benefit exercise - although somewhat crude -
strongly suggests that the Government should be
procuring new social housing directly, with the State
acting as developer building Local Authority homes to
nZEB or the Passive House Standard.
‘Rebuilding Ireland’ proposes 32,000 private homes
rented or leased by the State over the next five years -
this may cost €290m per year more than Local Authority
built low-energy homes. Over a thirty-year period this
private-rental housing strategy could cost the state
almost €9bn more than building.
In 2016 out of 18,000 social ‘solutions’ almost 13,900
were in private homes leased by the State, mainly for two
years. A public housing system heavily reliant on the pri-
vate-rental sector could cost the State a significant
amount over and above the cost of directly procured
Local Authority housing over the next thirty years.
The Department of Housing, Planning, Community and
Local Government should call upon external economic
expertise already at the disposal of the Government - the
Department of Public Expenditure and Reform and THINK
National Economic and Social Council amongst others,
to thoroughly examine the assumptions that underpin
current housing policy.
Maoilíosa Reynolds is a Registered Architect and
Certified Passive House Designer.
Passive housing
