Thursday, March 12, 2020

The Irish land racket and Dublin housing crisis

Dún Laoghaire Rathdown County Council and the Land Development Agency lodged planning application for 597 new homes at Shanganagh, Co Dublin, in Jan 2020.

The price of land is a key driver of housing prices and there has been a debate in Ireland and Great Britain for more than a century on the injustice of landowners near urban centres making huge gains at the cost of other country residents, without lifting a finger. Dermot Desmond, the prominent Irish businessman, raised this issue in an interesting opinion article in the Irish Times this month.

Government failure and land value capture

Winston Churchill a member of the Liberal Cabinet when David Lloyd George as chancellor of the exchequer, introduced his famous People's Budget, which introduced a tax on land ownership, said in a speech in 1909 on the land monopolist, "He renders no service to the community, he contributes nothing to the general welfare; he contributes nothing even to the process from which his own enrichment is derived."

A House of Commons Committee noted in 2018 that "According to Government statistics published in February 2015, the average figure for England (excluding London) is that agricultural land, which is granted planning permission for residential use, would, on average, increase in value from £21,000 per hectare to £1.95m per hectare... Julian Ware, from TFL [Transport for London], told us that methodology prepared by KPMG and Savills estimated that eight prospective transport projects in London, including Crossrail 2 and the Bakerloo line extension, could generate a land value uplift of £87bn, although 65% of this would be realised in the existing residential market."

The Committee said that after levies and other charges, "landowners currently retain around 50% of the increase in land value arising from the granting of planning permission."

In January 1971 the ‘Committee on the Price of Building Land’ was appointed by Robert Molloy, the Irish minister of local government. Mr Justice John Kenny of the High Court was appointed chairman and its main purpose was "To consider, in the interests of the common good, possible measures for—  (a) controlling the price of land required for housing and other forms of development."

A report was delivered to the minister in early 1973. There was a change of government in March 1973 and the report was published in January 1974.

The report stated that the price of County Dublin serviced development land on average rocketed by 530% in 1963-1971 compared with a rise in consumer prices of 64% in the period.

The key recommendation was that land for building should be valued at the agricultural value + 25%.

There was no Capital Gains Tax in Ireland until 1975. 

Twelve years later in 1985 an Oireachtas (Irish Parliament of 2 chambers) Committee under the chairmanship of Robert Molloy produced another report which reviewed the Kenny report and other land price issues. It noted: 

"the need to ensure public acceptance that the distribution of realised gains is fair and reasonable. This should take account of the fact that the overall operation of the planning system influences which landowners will benefit from development, and should recognise that windfall gain is concentrated in some cases.

"The Committee believes, in consequence, that a substantial part of the increase in land values should be acquired by the community subject to minimising any consequential effects on supply, availability and price."

Sixteen years later in 2001, the Irish Government abjectly surrendered to protests by the Irish Farmers Association (IFA), the powerful lobby group, demanding a deal on compensation for land acquisition for the national roadbuilding project.

The IFA succeeded in getting 23% of the €18bn budget, for land acquisition, compared with a ratio of 1% in Norway and 10% in Denmark, according to the National Roads Authority.

The IFA members had been on EU welfare, known as the Common Agricultural Policy (CAP), for almost 20 years and in a bizarre twist Tom Parlon, the IFA president, who had negotiated the bonanza for the farmers, won a seat in Dáil Éireann in the 2002 General Election as a member of the 'free enterprise' Progressive Democrats' party (PD).

In 2003 Parlon spoke at an event in memory of Charles Stewart Parnell (1846-1891), the Irish political leader who in 1879 was elected president of the newly founded National Land League which agitated for land reform and rights for tenant farmers.

Parlon said in Avondale House, County Wicklow, where Parnell had been born:

"It took centuries for Irish politicians to establish property rights and any move to change that would be a slight on the memory of people like Charles Stewart Parnell....limiting the private property rights of Irish citizens in an effort to put more development land on the market" is "an approach...gift-wrapped in an ideology somewhere left of Stalin."

Parlon's argument was an echo of the property claims that were made by Anglo-Irish landlords who were mainly descended from planters that were given English confiscated Irish land from the 1580s to about 1700.

The agitation for tenant rights culminated in the British Land Purchase Act of 1903 which resulted in tenants being given loans to purchase the land they farmed. This dramatic development was a huge advance for Ireland.

Parlon had begun his adult life as a farmer by purchasing a 30-acre farm in County Offaly from relatives and that land had likely been owned by an absentee landlord a century before.

In 2004, the All-Party Committee on the Constitution said in a report it wasn’t “persuaded that the existing constitutional provisions place any unjustified impediment to infrastructural development. It does not, therefore, consider that constitutional change is necessary before any reform of the existing system of compulsory purchase and acquisition is attempted.”

Article 43 of the Irish Constitution expressly states that the right to private property is "to be regulated by the principles of social justice" and to be reconciled "with the exigencies of the common good."

The NAMA Act of 2009 introduced a windfall rate of 80% on rezoned land. However, this charge was abolished and profits from rezoned land from January 2015 are taxed at a capital gains rate of 33%.

Developments in Ireland and the UK

In modern times the price of land has outranked house prices and it has become an investment class.

Ireland and the UK have dysfunctional planning systems. 

Since 1991 County Dublin has accounted for about 29% of the population of the Republic of Ireland compared with a 15% ratio relative to the same national land area in 1911. The current population is 1.4m and there is a large commuter belt because of the price of houses in Dublin.

In the 1970s average prices of new houses in the Dublin area were in line with national prices. 

There is no shortage of land for development in County Dublin which has an area of 921 km² compared with the island of Singapore with an area of 721 km² and a population of 5.7m.

The Central Statistics Office (CSO) has estimated that farmland in 2010 accounted for 380 km² in County Dublin or 41% of the total area.

In 2006 the European Environment Agency called Dublin's urban sprawl a "worst-case scenario" of urban planning and it was using it as an example for Eastern European countries to avoid.

In September 2019 at the Dublin Economics Workshop conference in Wexford, Robert Watt, secretary-general of the Department of Public Expenditure and Reform, said, "Delivering on the ambitions in the National Planning Framework and Project Ireland 2040 are essential to the development of proper functioning communities that can sustain growth. NIMBYISM (not in my backyard syndrome) and poor land use management are the greatest risks to this."    

Only about 8% of housing units in Ireland are apartments, and in County Dublin which has 29% of the population, most people want houses with a garden front and rear, no high rise and a right to object to every new proposed development.

John Moran, the former secretary-general at the Department of Finance and now the head of the Land Development Agency said in his address to the Dublin Economics Workshop conference, according to The Irish Times, that current planning guidelines were completely out of kilter with “densified” urban development and sustainable transport of the kind we see in European capitals such as Copenhagen. The prospect of having an additional 2m people in the country by 2050 requires a complete rethink of how people live, he said.

It was an Irishman, an Earl of Meath, who advocated Green Belts on the periphery of England's main cities, that would become artificial restrictions on the expansion of urban areas.

The Brabazons had been in Ireland since the time of Henry VIII, and in 1876 the family had 14,000 acres of County Wicklow and 28 acres of the Liberties area of Dublin City. Reginald Brabazon (1841-1929), the 12th earl, had been a British diplomat on the Continent when young and later sat in the House of Lords and as an alderman of the London City Council.

In 1901 the Earl promoted a ‘Green belt or girdle’ comprising of parks and recreation facilities to prevent London from expanding into rural areas. His solution for the growing urban population was state-sponsored emigration to the British Colonies.

Green Belts were provided for in the main British cities under the Labour government's Town and Country Planning Act of 1947 but it took until 1955 for Duncan Sandys, a Tory housing minister, to implement the London Green Belt. Sandys wrote, “even if…neither green nor particularly attractive scenically, the major function of the Green Belt was…to stop further urban development.”

The capital's Green Belt includes intensive farming (over half is agricultural), many golf courses and few amenities for Londoners.

Paul Cheshire, an emeritus professor of geography at London School of Economics, has noted, "Denmark has not just got cheaper housing: according to the Dallas Fed’s data, the real house price has increased by a factor of 1.6 in Denmark compared to 3.4 in the UK since 1975 but new houses in Denmark are a lot bigger: 80% bigger in fact."

The average size of an Irish house is the smallest in Western Europe despite having one of the lowest population densities on habitable land, in the European Union.

According to Prof Cheshire, there is enough Green Belt land in Greater London to build 1.6m houses at average densities — about 30 times the number of new houses London needs a year.

Since 1970, 10.5m new houses have been built in the UK (Office for National Statistics) and 1.5m have been built in Ireland in 1970-2019 (CSO).

The population has risen by 19% in the UK and by 65% in Ireland.

In the 20 years from 1970, Britain built 5.3m houses while the population grew by 1.6%.

In the 20 years from 2000, Britain built 3.5m houses while the population grew by 7.5%

Paul Cheshire has commented on what happens when high demand has to deal with restrictions in an area:

"Over the nearly 40 years from 1980 to 2018, 56,340 houses were built in Barnsley and Doncaster combined while population increased by only 22,796. In Oxford and Cambridge only 29,430 houses were built but population grew by 95,079." 

There were over 1.5m Irish housing completions in the five decades from 1970: in thousands 229.2; 230.5; 302.0; 636.5 and 103.1.

The Irish population grew by 2m people.

The average Irish household size fell from 3.9 in 1971 to 2.7 compared with an EU average of 2.3.

Demography and artificial restrictions

Some wise person once said, "Buy land, they're not making it anymore" (there is no evidence that Americans Mark Twain or Will Rogers coined it). There are exceptions to expanding land and the famous Raffles Hotel on Beach Road, Singapore, once looked onto a beach and the South China Sea.

The price of a new house in 1625 on the Herengracht canal in Amsterdam had doubled in price in real (inflation-adjusted) terms by 2008, rising with the Dutch Republic — Europe's richest country in the 17th century and falling in the inevitable wars with bigger powers, England and France. The Dutch Republic was the world's first modern economy. In the 10 years to 2018, the median price of a house in Amsterdam had risen by 82%.

The price of land and artificial restrictions have been the main drivers of house prices in advanced countries since 1950. 

The escalating cost of land in urban areas is a common problem in many countries and in Britain house prices have gone up 5-fold since 1955. But the inflation-adjusted price of development land has increased 15-fold over the same period according to London School of Economics research.

In the 45 years from 1970, the Bank for International Settlements (BIS) reported in 2016 that Irish real house prices rose 175%. My calculation on agricultural land prices from 1970 at €370 per hectare as per data from the Irish state agency, An Foras Taluntais (now Teagasc), show a real rise of 434% in 1970-2015, based on the consumer price index (CPI).

Irish land prices increased almost five-fold in real terms in 1970-1979 because of a boom triggered by Ireland's membership of the European Economic Community from 1973. However, following a recession from the early 1980s, the real price per hectare in 1983 was just 25% above the 1970 level.

British house prices rose 405% in real terms over 49 years according to the BIS.

According to research on house price trends since 1870 in 14 developed economies including, the US, UK, Germany, and France, inflation-adjusted house prices have tripled since the start of the last century but most of the rise has occurred since 1950. The economists say that about 80% of the increase in house prices in 1950-2012 was due to land prices. The transport revolution has been a factor as have artificial restrictions on the supply of development land.

In November 2015, Jason Furman, President Obama's chief economic adviser, in a speech cited zoning restrictions that add as much as 50% to the cost of a house. Paul Krugman, the New York Times columnist, has said that “this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.”

Also in 2015 the Economist wrote that an analysis by academics at the London School of Economics (LSE) estimated that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%.

The Economist noted in 2014:

"Over the past decade farmland prices have grown at twice the rate of prime London property prices, with good agricultural land increasing 270% in value compared with a 135% rise for London houses during that time, according to Savills, a land agent. This makes it three times the price of farmland in America and 15 times the cost of such land in Australia."

The rise in single-adult households and no children are also putting pressure on housing demand.

In 2018 Sweden had a ratio of almost 57% with a rise of over 1m in a decade (see chart above). Germany and Denmark have ratios over 40% and Ireland's level in 2018 was 26% — a rise of 120,000 in a decade (ageing is also a factor in the rise).

Conclusion

Ireland's recent General Election sent a message to politicians that the status quo on housing and lack of affordability is not acceptable.

The land racket has been a huge stealth tax on the majority of citizens.

Planning in Dublin should become a central government function until the housing crisis is past. Such a measure in Tokyo ended chronic housing shortages.

If politicians fail to take radical action, they will be denounced as Oliver Cromwell did in the House of Commons in 1653: 

"It is high time for me to put an end to your sitting in this place...Ye are grown intolerably odious to the whole nation; you were deputed here by the people to get grievances redress’d, are yourselves gone! So! Take away that shining bauble there, and lock up the doors.

In the name of God, go!”

In 2018 about 7,800 acres of farmland was bought by business people from a total of 31,687 acres — amounting to 17% of individual land sales.

About half of Irish farmers have other jobs and in 2018 sales accounted for 0.3% of the utilised land area compared with a peak of 2.1% in 1978.

The very low land turnover produces an unwarranted high valuation for the other 99.7%.

Few Irish farmers grow vegetables in contrast with global innovation economies, the Netherlands and Denmark.

Irish farmers typically buy vegetables from the local Tesco. Potatoes are the biggest category of vegetable imports, and the Netherlands, Belgium and Denmark are among the leaders. https://bit.ly/397HrCp while Ireland is with the laggards.

Average farm household subsidies/ welfare were about 60% of average family houseold income in 2018.

Even land compensation in respect of land at agricultural price value would still be very generous.

National average Irish agri-land values in 2018 were up 12% in 12 months to €9,910 per acre or €24,500 per hectare (ha).

The Savills Global Farmland Index has Ireland in thousands at $26.4 per ha in 2018; UK  was at $24.1 and France at $7.1.

This week the Irish Institutional Property lobby group estimated that a 2-bed apartment in Dublin with a net size of 82 sqm could cost up to €460,000 to build — almost 10 times the average annual wage for a full-time employee. It was even higher in another estimate in 2017.

There is also the challenge that Construction employment at 147,000 people in December 2019 was at a similar level to December 2000.

Another challenge is that two-thirds of Irish construction businesses are micro firms (1 to 9 employees), compared to an OECD average of 40%. Micro firms struggle to win bank financing.  

Related

Irish Housing Facts: Portugal has highest dwellings per 1,000 inhabitants

These are a few extracts from the 1973/74 Kenny Report on building land:

In County Dublin the average price per acre of serviced land was £1,100 in 1960 and £7,000 in 1971 and the average price per acre of potential building land was £300 in 1960 and was £2,500 in 1971. The cases we have examined corroborate these conclusions. These disproportionate increases arc not confined to the County of Dublin: similar ones have occurred in the other counties which contain cities and large towns.
In 1938, a farm of land containing 128 acres with a substantial residence on it in Clondalkin, County Dublin was purchased for £3,600 when it had no value as building land. The land have not yet been provided with services but in 1971 the Corporation of Dublin decided to acquire them for their building programme. They negotiated an agreed purchase price of £192,075 with the owners. This was reasonable having regard to prices which were being paid for similar land near Dublin. There was no element of speculation whatever. This an increase in price of over 5,000% between 1938 and 1971.
In October, 1964, 60 acres of land in Castleknock, County Dublin were sold for £67,000. In March, 1965, the purchaser sold them to a finance company for £160,000 and so made a profit of about 140% in a few months. Planning permission to develop the lands was granted to the finance company on the 6th September, 1968.

The Urban District Council of Bray wished to acquire lands at Old Conna which were within the urban district. In 1968, the Town Clerk made a verbal agreement with the owner of 30 acres of land in Old Conna for the sale to the Council of these lands at a price of £1,550 per acre. The owner did not sign a written agreement and refused to complete the sale. The Council were advised that they had little chance of success in an action to enforce the agreement. .So they made a compulsory purchase order in respect of the lands and this was confirmed by the Minister for Local Government on the 21st May, 1971. As the parties could not reach agreement on the amount of the compensation, it had to be assessed by the Official Arbitrator, who on the 9th December, 1972, awarded £130.000 (£4.333 an acre). This figure did not include anything for compensation for severance or for what is quaintly called " injurious affection " and claims for these items are still pending. Thus the pricc of the lands increased between 1968 and 1972 front £1,500 an acre to £4,333 an acre, an increase of almost 180%. The award was reasonable having regard to other prices paid for land in the urban district.