The Northern Ireland housing market is slowly recovering from the dramatic price inflation in the years 2006-09 followed by the price fall as the market place readjusted from 2010 to 2013.
As a consequence, too few new houses are now being built. Conservative estimates of possible need point to a deficiency of over 3,000 housing units each year.
Social Development Minister Nelson McCausland is consulting on proposals which would require contributions from private sector developers to increase the number of new ‘affordable homes’ by earmarking up to 20% of homes in new planning applications to meet these needs and supplement the number of social houses provided by housing associations.
Two features are dominating the current housing market.
First, many households feel less able to consider buying houses, possibly to trade-up to new units, because they are now in negative equity. When an existing property has to be sold at a price less than the outstanding mortgage, negative equity becomes a constraint.
Second, house builders now find it is more difficult to earn an acceptable profit, particularly when compared with the profit margins of seven to eight years ago.
Labour and material costs have increased relative to selling prices. There is much smaller incentive to initiate a private sector house building programme.
In today’s conditions, private developers are, understandably, cautious to undertake major projects.
The adverse impact of negative equity for over 40,000 home owners and the squeezed profit margins when selling new houses, both combine to restrain commitments to new development. Private sector house-building will gradually adjust to the new realities but this ‘over-hang’ may have an impact for another three to five years.
The minister’s proposals would require housing developers to include plans for 20% of new houses that they build to be earmarked as ‘affordable homes’.
Any scheme, involving more than five houses, would only gain planning permission if the affordable homes conditions were met.
In a development, the affordable homes would be built to the same standards and appearance of normal private sector developments. However, the affordable homes would be transferred, or sold at significant discounted prices, to new intermediary landlords (such as the Co-ownership Association or one of the housing associations) and then made available to tenants at rents set below the levels in the private sector.
Effectively, building affordable homes would reduce the profit that a developer would earn because of the compulsory earmarking of affordable homes.
The obvious knock-on effect could be that a developer would try to sell other houses in the private sector at slightly higher prices. The minister, in the consultative papers, refers to imposing the cost of affordable homes on the builder where the builders profit was greater than 15% of turnover.
At lower projected levels of profit, the scale of affordable housing might be negotiated on a reduced basis.
The best estimates of the housing need in Northern Ireland point to a continuing shortage of houses available at affordable rents (even when the impact of housing benefit is acknowledged).
To reduce the shortage the minister has also concluded that, whilst housing associations may take on more contracts, the extra affordable homes strategy can be implemented with little cost to the taxpayer. Private sector house buyers will, indirectly, subsidise the emergence of more affordable homes.
The proposals become more complex when the consultation points to the possible variations for their delivery.
Developers may integrate the quota of affordable homes into a large development or alternatively may offer to build them at a separate site. In a further variant, the developer might commute the cost and pay that sum to another provider.
The proposals to incentivise additional affordable homes are ground breaking for Northern Ireland. They do not fit easily into the current housing market.
The minister may need to rush slowly with detailed plans and timing until the marketplace is stronger.