Socio-economic and Political Drivers

The preceding discussion has identified the weak design and implementation of the land use planning system and perverse incentives generated by other policy measures as key proximate causes of the spatial mismatch between housing output and population growth during Ireland’s economic boom. However, the ultimate causes of these imbalances are structural rather than policy related—at both local and central levels of government, there were strong reasons for sustaining high housing output, even despite mounting signals that the new supply was failing to address demand where it was most needed.

A key structural driver relates to the funding model for local government. Although Irish local government relies heavily on central government subsidies for funding, there is also evidence that the potential for generating additional revenue also encouraged Irish city and county councils to facilitate construction, and this incentive was particularly strong outside cities. Between 2000 and 2005 Irish local government charges to builders and developers for the costs of providing the infrastructure required for construction (called development levies) rose from €0.11bn to €0.55bn. Although councils were legally obliged to spend this revenue on land servicing during the housing boom (and indeed needed to in order to meet development requirements), these charges became an increasingly important part of the sector’s revenue. By 2005, development levies represented 13.6 % of Irish local government’s financial resources (Kitchen et al. 2010). However, there were strong regional differences in the extent of dependence on development levies.

Development levies accounted for only a small proportion of total income/expenditure by the five city councils which managed large urban areas in 2007 (between 7.7 and 12.2 %) By contrast, they accounted for over 20 % of the income of a number of county councils responsible for largely rural areas (e.g. Laois, Kilkenny and Wexford), in this case those closer to Greater Dublin. Local taxes (called rates) are another important source of revenue for Irish councils; however, since the 1970s these taxes only applied to commercial uses. Rates are one of the few income sources which councils can spend as they wish, without central government restrictions; therefore, this source of income is particularly attractive from the perspective of local government politicians and managers. City councils would traditionally have enjoyed large amounts of revenue from business rates. Similarly, their rural counterparts had an incentive to grant planning permissions for commercial developments in order to access this revenue. Thus, the prospect of increasing the rate base by approving commercial projects also incentivised councils to grant permission for projects of dubious viability and in inappropriate locations, although not specifically for housing (An Taisce 2012).

At the national scale, housing investment became a dominant feature of the Irish economy during the boom years, accounting for a growing proportion of GDP and household wealth and debt (Table 7.2). Employment in construction related activities nearly doubled between 1996 and 2006, reaching nearly 13 % of all employment in 2006, with new housing construction as a proportion of the existing dwelling stock, rising from 3 % to an extraordinary 5 %, before dropping to a negligible 0.4 % by 2012.

All of these factors combined to exert extreme political pressure on the Irish planning system to facilitate and sustain high levels of new housing supply.

Williams, et al. (2002) argue that, in urban areas, political lobbying usually restricts housing supply (as the wishes of existing residents are the key political consideration), while in peripheral areas (where landowners are more influential) it often facilitates the zoning of land for development. Where planning systems are dominated by local political systems of decision-making, these factors come to be a defining characteristic of development patterns. Indeed, a large number of commentators have emphasised the influence of Ireland’s very strongly localist political culture. In this, vein Kitchin et al. (2012) suggest that the Irish planning system prior to and following the reforms through the 2000 Planning and Development Act, endowed local politicians with significant power over local planning decisions, while establishing weak arrangements for

1996

1998

2000

2002

2004

2006

2008

2010

2012

Construction employment % of all employment

7.6

8.6

9.6

10

10.9

12.7

11.3

6.5

5.6

GDP (€m)

57,649

77,670

102,845

130,717

150,025

177,574

180,250

158,097

163,939

GDP derived from

construction

(%)

5.3

5.7

6.4

6.3

7.6

9.4

6.1

1.6

1.6

Outstanding residential loans to GDP ratio

24.1

26.9

31.6

36.1

51.7

69.8

82.6

65.2

59.5

Owner occupation rate (%)

n/a

n/a

n/a

n/a

81.8

78

77.3

73.3

69.6

Real gross fixed

investment in housing (% change year on year)

n/a

n/a

n/a

3.7

10.8

3.8

-16

-32.9

-19.5

Source: European Mortgage Federation (various years) and Eurostat (various years) Note: * data refer to 18+ population only the national coordination of local plans (see also Counsell et al. 2014). Consistent with this view, an exhaustive national tribunal of enquiry into the Irish planning system (An Taisce 2012) found that ostensibly irrational decisions appeared to be inspired by clientelism and corruption (Counsell et al. 2014). There is also evidence that the particularly strong economic reliance on construction employment in rural areas facilitated the emergence of ‘growth coalitions’ which lobbied for excessive housing development (Gkartzios and Norris 2011). The tendency for local l andowners, business groups and political representatives to lobby for and welcome growth in economically marginal or depressed regions is hardly unique to Ireland, and has also been identified as a factor in the Spanish housing boom and bust (Romero, Jimennez et al. 2012, Fernandez-Tabales and Cruz 2013). In Ireland, as in particular parts of Spain, rather than following and enabling economic growth, housing development itself became a huge sector of the national economy during the boom years. In rural locations, the pressure to sustain this ‘industry’, was understandably intense (Norris and Byrne 2015).

When contrasting this picture of the local operation of planning in Ireland with experience in the UK, it is perhaps less surprising that Part V mechanisms for affordable housing had relatively limited impact in the 2000s. When local politicians seem hell-bent on permitting any privately promoted housing scheme, it would seem unlikely that they would worry much about niceties like affordable housing components within them.

At the higher spatial level, there is also evidence that political factors undermined efforts at regional planning. Garvin (2004) describes how the implementation of Ireland’s only previous attempt at national spatial planning in 1968 (by Colin Buchanan and Partners), was scuppered by the overwhelming localism of Irish politics, which renders positive discrimination in favour of one locality over another practically impossible. Scott (2005) argues that similar political considerations were behind the selection of the large number of gateways and hubs which were prioritised for development in the National Spatial Strategy. While Meredith and van Egeraat (2013, p. 4) argue that localism also undermined the implementation of this strategy:

“Key policy and political stakeholders rejected the concept of gateways and hubs as urban-centric and detrimental to the development of rural areas. In this instance the concept of rural development was largely limited to enabling residential housing construction in rural areas rather than a broader conceptualisation encompassing social or economic dimensions. It is fair to state that the critical reception the strategy received conditioned the (un)willingness of policymakers to support or implement it.” (Meredith and van Egeraat 2013, p. 4)

Irish households began to suffer the effects of the housing binge even before the economic shock which precipitated its collapse. As shown in Table 6.3, rates of owner occupation began to fall from 2004 on, and then as a consequence of the market collapse—tumbling 11 % between 2004-2012 (from 81.8 % to 69.6 %).

While one of the positive factors to have emerged in this period was improved affordability for those in employment, overall, the situation at the bottom of the market worsened significantly (DKM 2012). In the three years following the collapse, social housing waiting lists grew by 75 %, while the deterioration in public finance has made it even more difficult to deliver social housing supply in response to this growing need (DKM 2012). Housing vacancy rates rose dramatically, compounded by the phenomenon of unfinished housing estates, which numbered around 3000 projects situated across the country. By the end of 2015, the number of unfinished housing developments had fallen to 668, of which 2542 dwellings were complete and vacant, 8105 units were in various stages of completion and 18,376 units had not been started (Housing Agency 2015, p. 9).

New policy interventions were introduced to manage the ways in which land rezonings occur in future, reducing the potential for speculative gain while enabling a significant mechanism for value capture via a land rezoning tax introduced in 2009. The tax provided for the capture of 80 % of the value of land inflation following a new rezoning, payable on the first transaction (DKM 2012), and in a large part was designed to prevent another speculative property bubble. In the context of extensive supplies of zoned land, and limited development activity or demand, it was anticipated that the impact of the measure would be limited in its initial operation. However, the tax was rescinded in its entirety in the 2015 budget, in the context of anxiety over its impact as a deterrent to land development. This illustrates the wider theme which can certainly be observed in

Illustration 7.1 Abandoned house, Ireland. Many housing projects were abandoned in Ireland's rural areas in the wake of the GFC.

(Image credit: Nicole Gurran 2012)

relation to the historical evolution of betterment taxing approaches in the UK and similar debates about value capture arrangements in the USA and Australia. Namely, that although there are strong arguments in principle for land betterment taxing, even at a quite high level, in reality betterment taxing has been vulnerable to political and economic swings, failing to gain longer-term acceptance necessary to embed the practice. As discussed in Chap. 4, the long-standing section 106 mechanism for affordable housing contributions used in England has arguably been much more resilient because it has not been viewed as a high-profile national level tax.

The provisions of Part V of the Planning and Development Act were retained following the 2012 review, although in 2014 it was announced that the 20 % contribution requirement would be halved to 10 % but

Illustration 7.2 Unfinished housing estate, Ireland 2012. (Image credit: Nicole Gurran 2012)

these dwellings would be employed to provide social housing only and the provision of affordable housing for sale would be ended. These reforms were intended to boost overall development activity. At the same time, the government announced the introduction of a ‘use it or lose it’ levy of 3 % to apply to vacant sites in priority development areas. The reforms also introduced a new power for planning authorities to reduce the duration of planning permission applying to a project, if commencement progress is out of step with the proposed development schedule (Department of Environment, Community and Local Government 2014).

In reaching any assessment of the contribution of planning weaknesses to the Irish ‘boom-bust’ experience over the last two decades, it is important also to acknowledge other factors which conspired to drive the boom to such an exceptional extent in Ireland. These factors include both the so-called market fundamentals and aspects of speculative excess (McQuinn 2015). Amongst the former factors were the genuine and exceptional extent of real economic growth under the Celtic Tiger phenomenon from the early/mid- 1990s, particularly as reflected in high levels of in-migration/population growth, substantial rises in real incomes and sustained falls in unemployment rates. The fact that this growth was and continues to be concentrated on Dublin and a very few other cities also contributed to the house price escalation, because supply within the core conurbation area was relatively more restricted, so creating a leading region as a house price hotspot, analogous to London’s role in the UK. Other significant fundamentals included the effect of joining the European Union, which led to interest rates falling to historically low levels in Ireland, so encouraging a massive increase in the demand for credit at much higher than traditional norms in terms of loan- to-income ratio. At the same time, it is clear from the work of McQuinn (2015) and others that Irish house prices lost touch with fundamentals and went significantly higher in a true speculative ‘bubble’ phase in the mid- 2000s, and that they are now scarcely emerging from a prolonged period of ‘hangover’ when prices have been below fundamental levels, hampering the operation of the market because of negative equity, excess vacancies and damaged expectations. This speculative bubble was clearly driven by two other factors: extremely lax lending by banks, who had access to large international flows of funds, and were subject to wholly inadequate prudential regulation by the Central Bank of Ireland; and by media hyping of housing property as a surefire investment (Mercille 2013). Indeed, a report commissioned by the Central Bank of Ireland to understand the factors leading up to the Irish banking crisis, concluded that:

“[..]There is prima facie evidence of a comprehensive failure of bank management and direction to maintain safe and sound banking practices, instead incurring huge external liabilities in order to support a credit- fuelled property market and construction frenzy [...] macroeconomic and budgetary policies contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector and other transient sources for Government revenue (and encouraging the property boom via various incentives geared at the construction sector). This helped create a climate of public opinion which was led to believe that the party could last forever.” (Honohan et al. 2010, pp. 15—16)

The report goes on to describe “corrective regulatory intervention for the system” as ‘delayed and timid’, in “an environment which placed undue emphasis on fears of upsetting the competitive position of domestic banks and on encouraging the Irish financial services industry even at the expense of prudential considerations” (ibid).

The exceptional and ultimately speculative boom in house prices fed the exceptional and also speculative boom in housebuilding output. The kind of lax and even reckless planning approach, especially in rural and peripheral regions, was certainly an enabling factor for this very big increase in supply, but it has to be recognised that what was happening on the demand side was complementary in delivering a ‘perfect storm’ of over-supply. For example, builders would have found it very easy to find credit for new housing schemes, however speculative, in this climate, where the belief in ongoing strongly rising house prices became so entrenched. Amateur housebuilders and landowners would have been strongly tempted to enter the market in this climate of price levels, trends and expectations.

 
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