Michael Finneran (Roscommon-South Leitrim, Fianna Fail)

The time which the House has set aside for statements on affordable housing gives me an opportunity to outline current issues and developments in this area and how we are responding to the impact on the affordable housing area of far-reaching changes in the housing market and the wider economy.

As in most countries, the Irish housing market has experienced a sharp downward shift. This change began here in late 2006 as the fall-out from excessive lending, frenzied buying and resulting house price escalation and loss of affordability led to a slump in demand, compounded by the impact of a series of interest rate increases. Meanwhile housing output continued at a high rate long after demand had slumped, a common feature of housing market cycles. All around the world, very clear lessons have been learned about how inappropriate lending leaves the housing sector vulnerable to external shock. That shock emerged in the form of a global wave of financial turbulence, which manifested itself, in particular, in very significant restrictions on the availability of credit and a significant global economic downturn. The result is a significant correction in house prices and declines in housing output and realised demand for home ownership.

Provisional house price statistics held by the Department, based on data compiled from lenders, show that, nationally, new house prices in the fourth quarter of 2008 had dropped back to levels last seen in the third quarter of 2005, with Dublin prices now back at fourth quarter of 2004 levels. Prices for second-hand houses, both nationally and for Dublin, are now comparable to prices in the first quarter of 2005.

Significant contraction is also evident in the key indicators of housing output. Housing completions peaked at 93,000 units in 2006, significantly ahead of what was widely recognised as the level required to meet demand in the medium term. Output had dropped back to 51,000 units last year and projections from a number of sources suggest that completions in 2009 are likely to be in the 20,000 to 25,000 range, since commencements and registrations are significantly down, by 71% and 82%, respectively. There is a considerable quantity of newly completed and unsold homes, estimated by industry sources to be in the order of 40,000. In addition, estimates of the number of second-hand properties for sale at the moment range from 55,000 to 70,000.

How the housing market evolves in the period ahead will depend in particular on factors such as economic performance, expectations in terms of housing and the availability of mortgage finance. One positive effect of the reductions in house prices is the availability of much better value in the market. For households wishing to become home owners, the price reductions, coupled with other factors, especially the significant reductions in mortgage interest rates and mortgage interest relief changes, have resulted in significant improvements in the affordability position of first-time buyers.

The standardised affordability ratio used by the Department for many years, which shows the percentage of household net monthly income required to service a mortgage, shows that prior to last week's European Central Bank reduction, for the country as a whole, the proportion of net income required to service an average mortgage nationally is at 2003 to 2004 levels, with the Dublin ratio now back at 1996 to 1997 levels.

The Government has taken a number of steps to ease the problem of credit shortage for first-time buyers, through the home choice loan scheme and the terms of the bank recapitalisation scheme. The home choice loan scheme, which is designed to facilitate but not incentivise house purchase, provides a line of credit to certain first-time buyers. Under the recapitalisation scheme, the participating banks have undertaken to make available an additional 30% capacity for lending to first-time buyers in 2009. It will be some months before the effects of either of these measures can be gauged in terms of their impact on facilitating the realisation of underlying demand.

Trends in the overall housing market are closely reflected in the affordable housing area and issues related to affordable housing must be viewed in that broader context. As a result of significant house price increases in recent years and difficulties encountered by prospective first-time buyers in accessing home ownership, especially in areas of high demand, the provision of affordable housing has been a significant priority for Government. It is an area that has evolved considerably in a comparatively short period, primarily through the introduction of the Part V mechanism which has been in effect since 2002, and that evolution continues in line with recent major changes in the housing market and the wider economy.

In the context of rapidly increasing house prices in certain areas, the Towards 2016 social partnership agreement set out an ambitious target to deliver 17,000 affordable homes over the three-year period 2007 to 2009. Local authorities responded strongly to that challenge, delivering more than 3,500 units in 2007 and an estimated 4,500 in 2008. I wish to put on record my appreciation of the positive response of local authorities in what was a relatively new element of their housing functions.

However, just a few years on from the Towards 2016 agreement, we now find ourselves in a different world. As I indicated, there has been a sharp downturn in the housing market generally, price reductions and expectations of further reductions, increased insecurity concerning employment and income levels, and a more restricted credit environment. In the affordable housing area, erosion of the differential between the affordable price and the market price is an added issue. These developments, coupled with the strong surge in delivery in 2008, particularly under Part V, have resulted in an increase in the stock of affordable housing units on hand.

Local authorities would have a certain amount of completed affordable homes on hand at any given time, principally comprising units either being prepared for, or in the course of, sale. At the end of 2007, when sales were buoyant, that figure stood at approximately 2,200 homes on hand nationally. It is also important to note that there have been significant sales of affordable housing during 2008, approximately 2,750 nationally.

It is now estimated that the number of affordable units on hand nationally has risen to somewhere in the region of 3,700 units. Those are not spread uniformly throughout the country. There are a number of high delivery areas where the stock levels have increased, while there are other local authority areas that do not have a significant stock on hand. Despite the current difficulties, many of the units on hand are already in process of sale or will be sold in the coming months.

Estimates compiled from local authority feedback suggest a majority of the affordable stock will be sold to eligible purchasers. However, it is estimated that approximately 1,800 of the units already on hand may be difficult to sell in the current market and it is estimated that more than 2,000 additional units will be completed this year. The location and price of many of those will be conducive to sale, even in the current climate, but others may be more difficult to sell.

The Department, in co-operation with the Affordable Homes Partnership, AHP, and local authorities, has been monitoring the situation closely in the context of changes in the economic climate and the housing market in recent months. The costs to local authorities of retaining unsold units are considerable, and it is undesirable that these houses should remain vacant. The Affordable Homes Partnership has already conducted a detailed examination of the position at the Department's request and has met the local authorities in the areas with the highest supply of affordable units to identify actions that might assist in the sale of those units. The position in all areas has been reviewed as part of a recent series of housing action plan meetings between the Department and local authorities. In February, the AHP held a seminar for all local authorities to provide specific updated advice on the marketing and sale of affordable homes in the current market.

The priority now is to ensure available affordable homes are brought into use as soon as possible in the most appropriate and effective way. The first priority of local authorities is to sell these units to persons eligible for affordable homes. That is being done successfully in many cases. However, the indications are that a significant number of affordable homes are proving very difficult to sell in the current climate of uncertainty. This is a problem especially where reductions in open market prices have significantly eroded the discount on affordable units.

The Department has issued a circular to all local authorities this week, which will be accompanied by a sales strategy prepared by the AHP, setting out the options local authorities should consider in addressing the matter. Local authorities are being asked to identify those units most likely to sell and to refocus their sales efforts on those developments. In tandem with the focus on sales, authorities are also being requested to consider alternative options for the use of affordable units which may not sell at this time. Alternative options that will be set out in the circular will include transfer of affordable properties to the rental accommodation scheme for a temporary period, sale to local authority tenants under the incremental purchase scheme, and use of affordable properties as a temporary social housing support, where appropriate.

We are also putting an additional instrument at the disposal of local authorities to help them in their efforts to deal with the affordable stock issue. I am pleased to be able to announce to this House a significant increase in the limits for local authority housing loans from a maximum of €185,000 to €220,000. That represents a nominal increase of 19% but in real terms the effect of the increase is more significant having regard to the significant reductions that have taken place in house prices. A credit policy is also being introduced to support a prudent and consistent approach to lending by all local authorities. That will deal with matters such as income limits. Further details will issue to local authorities shortly.

Where units provided under Part V are no longer required for affordable or social housing, there is provision for local authorities to dispose of them for other purposes, including sale on the open market at market value. However, the clear priority is to sell those homes to eligible purchasers and a key element of that, which is strongly emphasised in the circular, is that affordable housing must be marketed to potential eligible buyers in the widest possible way with efficient market-oriented methods of marketing and sale.

Some local authorities have shown great energy and imagination in marketing and sale of affordable homes. However, others appear to have retained restricted and less efficient approaches, such as allocating specific units to certain applicants and restricting offers to people already on lists. Such practices probably originated at times when demand outstripped supply of affordable housing. I wish to state in the strongest possible terms that the affordable housing market is now dramatically different and such outdated practices must be replaced without delay with a more open and efficient approach to marketing and sale.

In the coming months, the Department will continue to monitor and support local authorities' work in addressing the challenges in the affordable housing area and promoting approaches to take account of the evolving housing market and economic climate. One significant change of which Members of the House will also be aware is the introduction of a new affordable homes purchase scheme which will facilitate the purchase, through a single equity-based mechanism, of property under the various affordable housing schemes. This will be provided for by way of amendment to the Housing (Miscellaneous Provisions) Bill. In the longer term, as the overall market evolves, the extension of this approach to open market purchases as a replacement of the declining shared ownership scheme will be considered.

It is clear we are now in radically different circumstances than those we were in 18 or even 12 months ago. All areas of the housing market have been profoundly affected by those changes and the challenges presented are considerable. I and my Department are committed to working in collaboration with our partners to ensure we will be able to continue to respond effectively to new challenges. We are also mindful of the need to be able to adapt our approaches as fiscal and economic conditions evolve.

In the affordable housing area, we are working through the current issues in very close collaboration with the local authorities. We are putting a comprehensive range of options at the disposal of housing authorities and the Department and the Affordable Homes Partnership will provide every type of support and guidance possible to authorities to deal with the issues that confront them in the most effective and productive way possible. We are also mindful of the need to look to a future beyond the current difficult circumstances and to plan accordingly, learning from the experiences of recent developments.