Solving Ireland’s Housing Crisis

Every country builds homes. Even supposedly developing countries have huge building programs. Countries have recovered from wars and other disasters by building their way up and out. How is it that a stable high income country such as Ireland cannot access the funding for a major building program.

Vulture funds buying up housing developments are not a solution to the affordability crisis. The cost-rental model is well established on Continental Europe and has received widespread coverage in Ireland but to date the numbers of homes coming on stream under this model is a drop in a bucket compared to the scale of demand. The question is therefore how to fund the cost-rental model using institutional funds — that are most definitely not vulture funds.

In France, for example, the cost rental sector (the HLMs) are majoritarily financed by the Caisse de Depots which is a State financial institution whose mission is in support of public policies in the long term interest of the State. That there is not a similar institution of this scale in Ireland is partly due to the way pensions are financed. In France (and most of Continental Europe) there is a State earnings related pension system and this obliges the State to invest the annual pension contributions in order that they will be able to pay the pension benefits when they fall due.

In Ireland, by contrast, the basic State pension is quite modest and there is as yet no State earnings related pension. Savings for pensions is encouraged by generous tax breaks for individual and corporate pension schemes. However, in spite of awarding a range of tax privileges the State makes very little demands on how these funds are invested — and some, no doubt, finance the vulture funds buying up housing developments in Ireland.

In our view there is a third way where the Irish Pension Fund sector, and financial institutions in general, can finance the cost rental sector in a way similar to the Caisse de Depots in France. We propose the creation of a new type of authorised fund — the Residential Cost Rental Fund (RCRF). These funds would be similar to investment trust funds where their securities are quoted and tradable. The RCRFs would then own cost rental apartment blocks and housing estates. Their income would be the rental income from their properties plus a management fee and the interest paid to their securities holders would be that same rental income.

Thus if the market demanded, say, a 3% return on this type of security that would translate to €6,000 a year, or €500 a month, rent on a €200,000 property. The tenant would, in fact, pay more than €500 a month — perhaps nearer to €600 a month — due to various charges associated with the rental. However, this would still be well below half of the rent for a similar property on the open market.

In order to make this work the State would have to make it a requirement that tax exempt pension funds allocated a share of their portfolios to these RCRF funds (say 10%). Also, were these securities to be considered similar to asset back loans for regulatory purposes then financial institutions could hold these securities without reserve penalty. Thus, this would create a flow of institutional money into this sector similar to the HLMs in France.

The apartment blocks / housing estates owned by the funds would be leased to rental cooperatives. In Vienna, where this model is widespread, tenants are required to make a deposit of about 15% of the value of the property in order to protect the investment fund from default. There is a State backed scheme for loans to finance these deposits. Once a tenant is established in a dwelling he/she has security of tenure and rent stability — subject to inflation.

In France there is a scheme, the PSLA, under which tenants can purchase their home. (see https://www.proprietairemaintenant.fr/psla-pret-social-location-accession). Under such a scheme the RCRF funds would agree to sell homes to tenants at cost who then avail of a State backed mortgage. This would encourage the spread of home ownership. Note that the subsequent onward sale of these housing units by the new owners would be at cost.

A key issue in relation to the successful functioning of the cost rental model is to keep building costs as low as possible and to avoid paying market rates for sites. Thus the Government could make available its own sites for this type of housing and it could also allow sites to be acquired under Compulsory Purchase Order by RCRF funds. This might require a Constitutional amendment but as long as the acquired land was not used to benefit third parties but only for housing purposes then it might be permissible under existing laws.

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