Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank the Chairman. I thank the committee members for inviting me to discuss the important challenges this country must address as regards housing and homelessness.

I also want to wish the committee well in its work. I hope that its work will stimulate debate on further actions that may be warranted to address the constraints impeding the housing sector. Indeed, these issues were an important priority for the outgoing Government. However, success in overcoming these problems has been slower than all of us would have liked. The findings of this committee will, I am sure, provide a new impetus.

I will introduce my officials: Mr. John McCarthy, chief economist in the Department; Mr. John Hogan, assistant secretary, banking division; Mr. Gary Tobin, assistant secretary, tax policy; Mr. Declan Reid, specialist in the Department’s shareholding management unit; Mr. David Hegarty, principal officer in the economics and budget division; Mr. Gerry Kenny, principal officer in the tax division; and Mr. Seamus Milne, principal officer in the tax division.

To begin, I would like to outline my analysis of the current problems facing the housing market. Ireland is in the midst of a significant housing shortage which is forecast to persist for the next number of years. The shortage is particularly pronounced in Dublin and in the other main urban areas. From an economic and societal point of view, the continuation of this housing shortage is of concern. Unless addressed, it could pose a serious threat to the competitiveness of the economy. The housing shortage is also giving rise to major social issues including rising homelessness, driven by pressures in the rental market.

It is clear that the problems we are faced with is primarily on the supply side. Thus, policy needs to focus on supply-side factors such as building regulations, the planning process, development levies, infrastructural constraints and construction costs. As regards the demand-side, various factors, including the macroprudential rules, have better aligned purchasers’ borrowing capacity with income levels and it would appear to have had a dampening effect on house prices.

In tackling these problems, primary responsibility for housing policy lies with the Minister for the Environment, Community and Local Government. However, home building is a complex process that involves the land, construction, property and finance markets, as well as the tax, social welfare and legal systems. Therefore, there is a need for a holistic, cross-government approach.

For my part, as Minister for Finance, the Department of Finance and I have proactively addressed those issues that fall under our remit.

We continue to engage with other relevant Departments and we worked closely with the Minister for the Environment, Community and Local Government and his Department on the stabilising rents and boosting supply package unveiled in November last.

I will now outline activity under way in my Department to address some of the key issues. The requirement to develop a sustainable financing model for the property sector is one that has received much attention. There is a growing acceptance in the sector that sustainable financing for development requires a mix of equity and debt financing appropriate to the risk of the project. This is a departure from the 100% debt financing model that contributed to the crisis. The transition to a new equity-based financing model is under way but will take time given the changes in behaviour required. This new financing model will help ensure a productive and efficient construction and development sector and reduce the risks of a re-emergence of a credit bubble.

My Department has worked to help smooth this transition. For example, last year we organised a conference on development finance options that brought together developers with various bank and equity finance providers. In addition, the officials in the Department of Finance have worked with the Ireland Strategic Investment Fund, ISIF, and the commercial banks - with the banks partnering with providers of mezzanine debt - to ensure that financing is available for development projects. For example, the Ireland Strategic Investment Fund launched a new €500 million joint venture, Activate Capital, to make funding available to the house building sector and support the construction of more than 11,000 new homes. This fund will address a gap in the financing market as it will provide up to 90% of the financing requirement of these projects.

Turning to mortgage holders, I have taken steps to ensure that the banks provide options for standard variable rate, SVR, mortgage holders to reduce their monthly repayments. In 2015, I requested a report from the Central Bank on the topic which was subsequently published on my Department's website. I also met the six main mortgage lenders at this time and outlined my view that the standard variable rate being charged to Irish customers was too high. The banks agreed to review their rates and products and to have simple options in place to allow reductions in monthly mortgage payments for SVR customers.

More recently, the increasing competitive dynamics evident in the market are benefitting borrowers. In this regard, the Central Bank noted in its recent Statistical Release that all mortgage rates declined in the fourth quarter of 2015, with variable mortgage rates for primary dwelling houses falling by 44 basis points to 3.76% over the year.

As regards taxation, there are growing demands for the use of the taxation system to support the development of the property market. The committee need not be reminded of Ireland's poor experience with property-related tax incentives in the past. Care needs to be taken with any fiscal incentive designed to stimulate the housing market, no matter how laudable the objective.

Indeed, to complement the Department's own analysis, the ESRI was commissioned to analyse the possible role of tax breaks in stimulating housing supply last year. Given prevailing supply constraints, the report found that tax incentives aimed at developers would be unlikely to have much effect on supply. It also noted that tax incentives targeted at home buyers, such as mortgage interest relief, would increase house prices with a limited increase in supply.

That said, I have been open to selective interventions in the property market where targeted action can be justified. For example, Deputies will be aware of the increased deduction for mortgage interest relief that I introduced in the recent Finance Act for landlords who commit to the provision of rental accommodation for a minimum three-year period for tenants receiving social housing supports.

Another example concerns the private rental market where there is a clear need to professionalise the sector in order to better serve tenants. For this reason, I introduced the real estate investment trusts, REITs, tax regime in the Finance Act 2013. This intervention has been successful in encouraging large scale investment into the commercial and residential property markets. There are currently three REITs operating in Ireland - Green REIT plc, I-RES REIT plc and Hibernia REIT plc. With subsequent rounds of capital raising since flotation, it is estimated that the market capitalisation of the three REITs is now approximately €2.3 billion.

I-RESREIT plc, which is purely focused on the residential market, has a property portfolio consisting of 2,087 apartments. The properties are based in 17 apartment complexes in Dublin county and city. The company has the ability to develop 600 to 650 apartments at existing complexes subject to planning permission and other approvals.

Other measures I introduced include the Living City initiative, in respect of which I admit the initial take-up has been slower than anticipated. However, the home renovation incentive, HRI, has been very successful. This incentive generates employment in the tax-compliant construction sector, increases sales and provides support for homeowners and landlords for building works. As of 1 April 2016, works on over 37,500 properties have been notified to Revenue’s HRI online system. This represents more than €845 million worth of works involving some 7,500 contractors. The potential total cost to the Exchequer in respect of these properties is approximately €59 million.

NAMA is frequently suggested as a one-stop solution to housing issues. Let me be clear: NAMA has a commercial mandate to achieve maximum return to the State. That said, NAMA has utilised this commercial remit to contribute to housing supply in a number of ways. For example, NAMA will fund development or completion of housing units on sites securing its loans where this is proven to increase the ultimate return. NAMA has also innovated so as to combine its commercial priorities with due consideration of ancillary social contribution, and has played a very important role in facilitating, on a commercial basis, the supply of social housing. Following a review last year, NAMA concluded that the value-maximising strategy for some sites under its control was to fund, on a purely commercial basis, the delivery of up to 20,000 residential units by the end of 2020. This activity will mainly focus on starter homes, reflecting consumer demand and viability. Separately, NAMA, again on a commercial basis, offered just over 6,600 residential units to local authorities for social housing, of which demand was confirmed for about 2,500, and over 2,000 have been delivered. Therefore, it is clear that NAMA has played and, I am sure, will continue to play an important role in addressing our housing needs while fulfilling its commercial mandate.

There is a need for continued improvement in the supply of housing as it is vital for the economy’s performance and to address social problems, including homelessness. As I have outlined, the outgoing Government has played its part through the policy actions I have highlighted above and others. For example, the recent package, Stabilising Rents, Boosting Supply, includes targeted development contribution rebates for starter homes in Dublin and Cork, while new flexible apartment planning guidelines will reduce apartment construction costs by €20,000 per unit. It is important to bear in mind that these measures were introduced quite recently and that it will take time for the full effects to be realised. Moreover, there is no quick fix to the housing shortage.

In designing appropriate policy responses, I stress that there is a need to be careful of the unintended consequences of any intervention, however well-intentioned. For example, I would have concerns about the plethora of proposed demand-side interventions. International evidence indicates that such policies are not appropriate and unlikely to be effective in alleviating the current supply shortage. I urge the committee to bear this in mind. I thank the members and look forward to their discussion. I hope to be in a position to answer their questions with the help of my officials. With the permission of the Chairman, I will call on my officials to address the members directly on certain questions.