State Subsidies Fail to Make Apartments Affordable for Average Earners

A recent report from the Society of Chartered Surveyors Ireland (SCSI) highlights a pressing issue in housing policy: despite significant state subsidies aimed at increasing apartment availability, affordability remains a major challenge for average earners. The findings reveal that even with extensive public support, only the top 20 to 30 percent of earners can afford to buy or rent apartments.

The Irish government has committed substantial resources to various housing initiatives, including the Croí Cónaithe scheme and the Star scheme. These programs aim to stimulate apartment construction and enhance cost-rental options, where rent is set at least 25 percent below market rates. The Land Development Agency plays a crucial role in these efforts, while developers who initiated projects by the end of 2022 benefit from waivers on local authority levies and water connection fees.

In a noteworthy move, the government reduced VAT on new apartment sales from 13.5 percent to 9 percent. First-time buyers can also access financial support through the Help-to-Buy scheme for homes priced up to €500,000 and the First Home Scheme, where the state takes an equity stake.

While the total state spending on housing is projected to reach approximately €11 billion by 2026, with about €9 billion in capital supports, it is unclear how much of this funding will specifically target apartments. Estimations suggest that if apartments receive comparable support to other housing types, total capital investment could range between €2.5 billion and €3 billion.

The SCSI report underscores that government assistance has made many projects viable. However, rising construction costs—up by as much as 50 percent since 2020—have transformed the market landscape. Increased interest rates from mid-2022 to late 2023 have further deterred private investors, who now seek higher returns on investment.

The report analyzed various development types in urban and suburban areas, demonstrating how supports have shifted the viability of projects. For instance, buy-to-sell schemes transformed an average loss of €24,000 per unit into a gain of €62,000 with the introduction of government incentives. Cost-rental projects have reached a break-even point due to these supports, although many private rental sector developers continue to face losses, even with reduced VAT.

According to Dermot O’Leary, chief economist at Goodbody and a member of the Housing Commission, the report’s assumptions regarding investment yields indicate that some recent deals may be falling below the projected rate of just over 5 percent. He suggests that establishing policy certainty, particularly regarding rent controls, could enhance investment prospects.

Proposed changes in apartment building guidelines, currently under judicial review, may also encourage more private investment. Paul Mitchell, a quantity surveyor and report co-author, highlights positive shifts in apartment design and delivery since 2021. These include the rise of standardized apartment types in larger developments and a growing number of cost-rental projects, which represent half of the 10,700 units analyzed in the study.

Despite encouraging developments, affordability remains an acute problem. The delivery costs per unit for typical apartment projects range between €520,000 and €540,000. The high construction costs, exacerbated by regulations that often require underground parking, directly contribute to the affordability crisis. Current prices for two-bedroom apartments vary from €480,000 in suburban areas to €650,000 in urban centers. This necessitates household incomes of between €108,000 and €146,000 for potential buyers.

For apartments priced below €500,000, the Help-to-Buy and First Home schemes can lower income requirements for first-time buyers. Yet, most apartments exceed this threshold, leaving the SCSI to conclude that only the top 20 percent of earners can afford to rent in the open market, and only those in the top 40 percent can purchase.

Cost-rental schemes are intended for households earning less than €66,000 in Dublin and €59,000 elsewhere after taxes. Thus, these schemes generally apply to households with gross incomes below approximately €85,000. Currently, demand for cost-rental apartments significantly outstrips supply, and even discounted rents may be too high for many.

The government finds itself deeply involved in the apartment market, facing a decision on whether to increase its engagement. Despite evident risks associated with the Land Development Agency and other state bodies, political pressure is pushing for continued investment. The waiver on local authority and water charges may be extended to expedite development.

The SCSI advocates for further incentives to attract international developers into the private rental sector and to foster development on city-center brownfield sites. Apartment construction is deemed essential for increasing urban density, raising the question of which strategies the state should employ to boost supply while considering the ongoing affordability challenges.

In summary, despite substantial government backing, the issue of affordability persists as a significant hurdle for many individuals and families seeking housing in Ireland. The current trajectory suggests that without additional measures, the coalition government may struggle to meet its housing targets while ensuring that average earners have access to suitable accommodation.