Ms Orla Hegarty:

I thank the Chairman and the committee members for the opportunity to attend this session, the purpose of which is to look at construction costs and inflation in the context of housing delivery and affordability. We might ask if costs are increasing, and they are, but the important questions are whether costs are making housing unaffordable and what can be done about it.

Tender prices reflect what the market will do the work for and they are a factor of the market conditions, economic cycles, risk and sentiment. The latest Project Management Institute, PMI, report states that construction firms continue to face severe delivery delays due to material shortages, shipping issues, the war in Ukraine and Brexit. The Society of Chartered Surveyors Ireland, SCSI, reported tender inflation of 13% in 2021. The Office of Government Procurement, OGP, has introduced measures to manage contract inflation.

Materials are just one part of a tender price so although the SCSI index shows tender prices 80% above 2010, it is noticeable that it is only 30% or 40% above 2007 levels for non-residential work. The EUROSTAT construction cost index shows labour and material costs are not significantly higher than 2007. However, it is a lagging indicator. The Central Statistics Office, CSO, wholesale index shows that the prices of materials are very volatile, with significant inflation in some materials.

More broadly, the problem is uncertainty. Risk is being priced into tender prices and this can include risks such as the pandemic, Brexit, availability and transport of materials, energy costs, labour, skills shortages, capacity constraints, procurement practices, regulatory policy, delays in utility and infrastructure, and risk allocation in contracts.

Are costs making housing unaffordable? According to the Department of Housing, Local Government and Heritage, hard costs are approximately €183,000 for a three-bedroom house and €210,000 for a two-bedroom apartment. A material cost increase, therefore, of 10% across all materials would add approximately €10,000 to a typical new home. From 2010 to 2022, the median new house price rose 9% nationally from €247,000 to €270,000. However, in Dublin it increased almost 50%, from €305,000 to €450,000. Outside the city, private developers are currently selling new three-bedroom homes from €235,000 and the Department of Housing, Local Government and Heritage and local authority records confirm this order of cost. Although inflation is an issue, building materials and regulatory standards are not what is making housing unaffordable. The development costs, the soft costs, can add up to €200,000 in speculative development, compared to costs from €30,000 in contract build that would be more typical in the public and non-profit sector. Speculative development is very high risk and means high costs. The National Economic and Social Council, NESC, calls this a dysfunction and states that affordability should be an explicit objective, that the supply of housing is not in itself a reliable and sustainable means of making housing affordable and that Ireland must engineer affordability into the supply of housing.

What can be done? In 2010, the EU Commission stated that land price inflation alone cannot explain high house price inflation since land prices represent between 17% and 30% of house prices. Construction cost inflation cannot explain it either because it was relatively low in the years leading up to 2020. Taxes, levies, fees, finance and marketing costs have not surged. Therefore, high inflation values may be partly explained by an increase in margins which may indicate insufficient competition. To address this, focus must shift to stabilising the housing system. The solution is not to be found in supporting inefficiencies with high subsidies. Capacity building and competition can raise quality, lower prices and temper the boom-bust cycle that is so damaging to employment, skills and the wider economy. It also has an impact on future capacity.

Capacity constraints in the provision of infrastructure, water and utilities are also a problem and causing delays. Overly complex procurement, financing and approval systems, particularly in the public sector, are adding cost and risk. Recent regulatory change in both planning and building control have been inflationary. In late 2015, the Department of Housing, Local Government and Heritage had a policy objective to reduce standards, aiming at two-bedroom apartment sales prices of approximately €200,000 to €260,000. By early 2018, the Department had increased that to an affordability range of between €240,000 and €320,000, and by 2021, the benchmark for apartments in the new affordable housing scheme in Dublin was raised to €500,000. As the Dublin market shifted from assets valued on 25 to 30 years of mortgage payments to the rental sector, where asset prices are assessed on 50 to 60 years of high rent, the price doubled.

In 2018, Department of Housing, Local Government and Heritage stated that construction costs for a two-bedroom apartment in Dublin could be reduced from €205,000 to €158,000. Yet, within three years an industry report claimed that the all-in cost of an urban two-bedroom apartment in Ireland is €450,000 to €615,000. These industry estimates are not substantiated or independently audited, and are not supported by independent data. Some property sector reports have made unevidenced claims of a very high cost base without acknowledging that it is the high-risk, high-cost speculative business model that may be unviable rather than the construction cost of homes and apartments. Dublin City Council published costs for recent schemes without highlighting that the majority of its examples were for non-standard procurement with particular technical requirements and on complex sites.

In urban areas, planning changes for high-density, high-rise and reduced apartment standards have in general added to construction and finance costs. Previous standards recognised that six storeys is a sustainable density and is cost-optimal for residential development. This scale of building is both easier to finance and phase, and safer and more liveable for residents. Under Housing For All, no housing is planned in Dublin city for households earning over €36,000 and under €80,000 per annum. In fact, two thirds of all new homes in Dublin city are to be fully publicly funded or heavily subsidised, with the other one third only affordable to very high earners. In this context, the difference between the Exchequer paying production costs and market prices in Dublin alone may be in excess of €4 billion, and higher again if public housing is leased. This has wider implications for the economy, competitiveness and sustainable growth.

Housing policy is undermining some climate and energy policies. When city housing is unaffordable, as it is planned to be, and unsuited to families, it results in a push to the commuter belt. In 2021, for every new house built in Dublin, almost two were built in commuter counties because the demand is for affordability and space. City housing for families is not currently a policy objective, even though half of all households have children. In the pursuit of low costs, apartment standards for space, amenity and safety, including fire safety standards, have been cut. The drive for speed and lightweight construction in the short term has not been adequately assessed against the long-term investment and the need for new housing to be climate resilient, safe and sustainable for the next 100 years.

Issues with supply chains and energy costs are outside of immediate control but a broader economic analysis and active risk assessment of housing policy is now critically important. Policy responses of nudging viability with piecemeal interventions have been very damaging. Housing standards needs to be evidence-based, holistic and with a long-term view. Many lobby-driven interventions are not evidence-based and have had unintended and negative consequences.

Procurement policies and practices are adding to risk, cost, delay and the administrative burden. Bundling, outsourcing and unquantifiable risk allocation are disincentives to tendering and competitive pricing, particularly in the public sector. These practices also militate against capacity building, skills and more sustainable employment practices.

The residential construction sector has not been supported to recover from the crash and has limited capacity and skills, both in design and construction. Pressures of skills and capacity risk substandard and non-compliant work. Now more than ever, quality controls need to be more independent and more robust. Time is of the essence: cost control should be devolved to those with expertise who are best placed to actively manage risk. That is to cut out delays and the further impact of inflation.

New housing has to be the right supply, in the right places and at the right price. It must be affordable to both the residents and to the Exchequer. It is not sustainable or scalable to subsidise high market prices, to load new homeowners with a second mortgage or to be over-reliant on international speculative investment that is delivering to niche markets.

As the Irish Government Economic and Evaluation Service, IGEES, has stated, the current housing delivery system is a land trap where sites tend to be acquired by the most optimistic with the highest expected sale prices and so property tends to be developed close to the margin of viability. As sales prices rise, so land values increase. Land values do not drive sales prices; high sales prices drive up land values and these higher values are baked into to land valuations immediately. This is the land value trap. When costs increase, as now, the margin is lost, and it may be too risky to develop and development may stall. In 2016, that margin of viability was around a sales price of €250,000 and now, in Dublin, it has doubled. That is not due to inflation in building materials.