Tony Fahey on the causes of the housing crisis
“For 50 years we were trying to minimise the role of the private landlord in the Irish housing system and now we’re saying - ‘it’s all coming back, and we think it’s a good thing’”.
Dr. Tony Fahey is a social scientist, a former researcher and author with the ESRI, the Economic Social Research Institute and a emeritus professor at UCD in social policy. Helen Shaw sat down with him to explore why housing policy has failed in Ireland to meet the needs and demands of the country and what are the factors at play behind the housing crisis. For Tony Fahey finance is at the heart of the problem and he traces it to the fiscal crisis in the 1980s. www.esri.ie/people/tony-fahey
Transcript: Tony Fahey on the causes of the housing crisis - powered by Happy Scribe
I must say, I tend to this is the biggest change in direction in your social policy that's occurred really since the foundation of the state. There's been a lot of continuity and a lot of aspects of our social policy over the years. If you look at the system of income maintenance, for example, or financing of education or even of health care, the foundations that were laid down, even going back. In some cases in the 1930s, 40s and 50s, they still shape the system in fundamental sorts of ways. But in the field of housing, the basic principles that were there until the late 1980s were jettisoned. They are now being thrown completely out the window and we're gone in completely the opposite direction.
That's Dr Tony Fahey, a social scientist and author. And you're listening to me. Helen Shaw and this is where we live, a podcast series of housing and cities and how we shape and create great places to live. Tony is a former policy researcher with the ESRI, the Economic and Social Research Institute, and he's emeritus professor of social policy at UCD. Tony, he's been at the heart of social research and study here in Ireland for some 30 years. And now he's bringing that experience and insight to the question of housing and asking why it's presenting such a challenge in Ireland today. So with that in mind, I sat down with Tony for the series to get his sense of what he thinks is at the heart of the. Tony, this podcast and what we're doing with this series in terms of this is where we live, we're exploring not just housing as a crisis, but housing as an ongoing story about how we create and shape great places to live, cities at the core of the story of housing and also how they shape the nature of our everyday lives.
Well, I did not grow up anywhere near a city, so I was small farm background, grew up and come to meet. Went to college in Maynooth, which also kept me out of the city.
So my knowledge of cities was only began to develop when I got into adult life. I live now on the edge of Dublin, near Chapel is just outside of Phoenix Park. And of course, that is a great place to live because just simply having the Phoenix Park on your doorstep, not mind the River Liffey and views across the rubble mountains. There is a lot of attractive places in Dublin. So when we talk about great city living, we shouldn't assume that somehow. I think there is a tendency in Ireland so that we we never do things very well. So things are better everywhere else.
And that is true in some instances, but an awful lot of instances it isn't true or in a lot of aspects of life. So the question you ask there, the question you're interested in, which is how to create cities as great places to live. That's a continuous story.
I feel in some ways that the story of public housing in Ireland roughly from the 1930s up to the 1980s is one of the successes of Irish social provision and it created parts of Dublin that we know. In fact, one of the features of people forgotten that it had its origins in social housing. Crumlin is another one I often think of as well as large parts of cabra.
Now, there was there were some distinctive features in the model that was used in Ireland. One of them was that the idea of tenant purchase of social housing dates back in Ireland of the 1930s. So it's it's an old established idea. No, it isn't entirely unique.
And maybe just to explore that a bit further in terms of Ireland and Dublin in that if there's a narrative that's emerging, which we could unpack, it's often that in the recession, clearly there was a pullback from investment in housing development, switched off from the private sector and the workforce left, etc. But actually we stopped building public housing from a real output point of view from the early 90s that actually the boom was the switch point. And that what often people will frame this as is that neo-Liberal argument that the market will provide started to dominate, and that the philosophy from the state became whether in selling off entities that which had already happened and was continuing, but that in housing it began to be seen much more fundamentally as a market transactional force within policy. And I'm curious about that, because in a sense, in what you're unpacking, you're looking at a longer trend in housing and social policy and where you would see the changes in direction which happened particularly from, say, the early 90s.
It was really driven most of all by the fiscal crisis of 1987 88, when the huge overspend in government had taken place, national debt was racking up. Ray McSharry came in with the Fianna Fáil government and said, we have to we have to rebalance the public finances. And so this is the period of the cuts of the late 1980s. One of the areas they cut was the public capital programme and that actually axed a lot of the social housing program. Now, in a way, this there's been ups and downs in the social housing program since then, but really it has never recovered to the level that it had in the 1970s and 1980s. And so it is true that social housing has since then has played a smaller role in the total system than it did in the 50 years leading up to that. So it's not the big fund.
The two things that seem to be driving this internationally is that housing is turning out to be a very good investment. And actually it's very interesting to look at the economics of that. The argument now that's emerging from the international studies that's been done on this is that the critical in-breeding ingredient here is urban land.
And one of the big studies that I've seen in in carried out now by the National Bureau of Economic Research in in Chicago, which looked at 16 countries around the world, that the the argument there is that housing affordability is becoming a problem throughout the Western world. And the argument here is that something like 80 percent of the upward push in housing costs is due to the rising cost of building land. And what lies behind that is, again, you need to look back over the cycle of history that in the industrial revolution of the 19th century, people were crowded into cities, the urban industrial. Working classes crowded into cities so as to be near their place of work. There was no public transport. There had to be able to walk to work. Homeownership started to decline. The peak year for homeownership in Ireland was 1991 and it declined a little. In the course of the 1990s, and the decline started to intensify in the early 2000s, even before the crash, what was happening was that that potential home owner was in competition with the investor.
So sometimes we described this as housing became a commodity. In a sense, it was always a commodity, but it became a financial and commercial commodity. And in a way, what Leilani Farha, the UN rapporteur and housing, was saying it became a way to dump money as well. That what you saw globally was also that in a sense where people might have moved money into stocks and shares, they moved it in two apartment blocks into blocks of houses. And suddenly, in a sense that the and that grew over all over that period, but that housing as an investment, it might be, was sold to us en masse.
Well, it was it was sold to those with money to invest. Obviously, the sort of the risk that happened in the period leading up to the crash is that it wasn't just sold to people who had money to invest.
It was sold to people who had no money. And banks were coming on saying . We give you money and you invested in housing. And so there was massive lending to investors to buy into housing that ended up being very destabilizing. But even since then, that other pattern that you've talking about, which is capital sloshing around the world, trying to find a home to go to somewhere, that'll give some kind of a return, that it it is turning out that real estate in general, including residential real estate, is one of the safer and more productive investments on a global level.
I saw an estimate recently in a study in the United States which looked at different kinds of investments in the United States from the period of 2002 to 2018.
And it compared four types of investment government bonds, stocks and shares. REITs. You know, this real estate investment trusts, which is investments not just in housing, but in any kind of real estate and then home ownership. Now the return on rates and homeownership where well in excess of either stocks and shares are government bonds. The return to home owners turned out after tax to be more favorable than the return to rates because rates investors have to pay tax on what they gain. Whereas homeowners and typically you don't pay tax on imputed rent and you don't pay tax on capital gain on your primary residence and most of the English speaking world at least. So they have a tax advantage.
But the critical comparison is not between the attractiveness of housing to the investor versus the homeowner. It's rather the attractiveness of housing as an investment compared to stocks and bonds from the people who have money. They'd even do better if there were home owners.
And most of them, of course, are homeowners and they're doing better out of the homes they own than out of the investment they have in REITs . But you can only own one home to live in.
If you have a couple of million, you can now in the idea of investing it in real estate. And particularly since these is what's called this rete residential real estate investment trusts. They were set up to facilitate to make it easier for people with modest amounts of wealth and a very modest I mean, maybe a half a million or a million. And rather than you going out and buying buildings yourself and having all that, you know, you're inexperienced, you don't really know how to handle it. And so on and so on.
What you do is buy shares in a REIT and they assemble all of this money and you have professional housing investors and housing managers and so on. And they go and do it for you. And so you get the return as if you were you. So you own a share in the in the in the REIT rather than your owning the individual properties and its spreads risk and so on. But it does mean now that housing has become a commodity in a way that it wasn't in the days of home ownership. One of the, I think, misconceptions was there in the course of the 20th century, when social policy analysts talk about social housing, our private market, commodified housing, what they were talking about in the private market, commodified housing was home ownership. And my take on this is that actually homeowners aren't it's it's not a commodification of housing in the usual way. Homeowners do not treat their property as a piece of capital.
They don't they don't sort of move it around and move in and out of the car. You know, they're watching the price indices and saying, would I be better off selling this one than buying another one? Whatever. You buy a house, you settle down. And actually, one of the criticisms that's often made by economists of homeownership is that it leads to inefficient use of the resource because the homeowners are actually not concerned with maximizing thei return out of it. They're simply wanted as a home. And when Minister Simon Coveney, who was the minister for Housing at the time, launched the Rebuilding Ireland strategy in 2016. On the day of the launch, there was a press conference where he said that the private rented sector has doubled over the last 20 years or so on. We have to assume that it's going to double again in the next 20 years. So he is more or less saying private landlordism is back. We almost fought a national independence struggle to get rid of it out of the rural areas. And then we had this programme of investment in the... You know, for 50 years we were trying to minimize the role of the private landlord tonight in the Irish housing system. And now we're saying it's all coming back and we think it's a good thing.
And that is quite a fundamental change of direction even in Ireland. The Rietz legislation was passed in 2000. The Rietz movement is a kind of reetz instrument, is an international development that originated in the United States back in the United 1960s. But it's part of this financialization of the housing system that has me really made it increasingly difficult for the potential homeowner on modest income to buy into the system because they're competing they're competing with people who have a bunch of money in their hand, were ready to walk in and buy a place outright off a builder. There was an interesting example there, I think was in summer 2018, where a block of apartments in Sandiford came for sale and according to a report in the Irish Times, something close to a thousand people had registered an interest in buying an apartment. Irish life investment managers came along and bought the entire thing in a single swoop. Now that was quite. That kind of thing wasn't really happening in Ireland before. And there's another one of those IRES where the Irish real estate, I forget what its full title is. They were set up after the 2013 legislation and by last summer they owned 2600 dwellings. So suddenly you've had a system where there was no major private landlord in Ireland or the private landlord on on a big scale is on the way back. Now, whether that is the future is another matter.
It's true that most of the landlords in Ireland are very small scale. It's almost as if the mantra that that arose in the 1990s was - own your own home and own another person's as well. So you own two homes, one to live in and one to rent out.
And that in itself was new. And it wasn't not just made possible, it was encouraged by the developments in the financial system at the time. But I was well aware that the thing that had me made more of a difference to my standard of living was that the Royal Bank of Scotland did come into the Irish market offering mortgages at a much lower rate than everybody else. So all of the others had to follow suit and reduce their mortgage interest rates and that benefit anyone who had a mortgage, therefore benefited from the entry of the Royal Bank of Scotland into the Irish market. It was symptomatic of the of international capital suddenly flooding into the Irish market, which is what Anglo Irish Bank did historically. Capital really came from Irish depositors. And so the building societies took deposits from Irish depositors that then could leverage it up and they could lend out more than they actually had on depositors. The narrow as the normal system in banking. But it did mean sometimes that there was a shortage of credit. If the deposits weren't there. But nevertheless, it meant that it was a very closed system. There were restrictions there on banks lending into the mortgage market.
And so this idea, because building societies were there to promote home ownership on your own home, not on your next door neighbor's home as well.
And this is why I think it was actually a semi social. We talk about social homeownership. In other words, it wasn't an open market system. It was it was supported by, I think, this concept of the household economy, not self provisioning, where, you know, you do your own housework. You might sometimes have a plot of ground at the back and you grow your own potatoes if you buy your own home. What in fact, you're doing is becoming your own landlord. You're providing yourself with your your accommodation on a day-To-Day basis.
Tony, just give me your sense of what's happening in Dublin.
Well, investment finance is pouring into the housing market. Now, what's driving up house prices, even if, say, if you've two people trying to buy a single dwelling, one of them is your traditional young person, young couple or whatever, trying to raise a mortgage in order to make a purchase.
They have a big threshold. They have to find a 10, 15, 20 percent deposit. And so that's a big difficulty. Now, if you've an investor coming along with 100 percent of the purchase price in their hand, clearly the investor is going to win out.
And because you now have international, there are now, you know, there are people on the New York Stock Exchange who are paying attention to house prices in Finglas. Because that's where their money is. Through this, the REIT system, the whole internationalization of finance now means that you can have for this is this is utterly new thing in Ireland that you can have international investors paying attention to what's happening on the in the Irish housing market.
And you can occasionally get reports in Bloomberg about the Irish housing market and what what it's likely rates of return. And this is directed at investors in Tokyo, in New York, in Frankfurt. And the investors might be you know, they might be pension companies that might be pension funds. There might be people who've gotten an inheritance over half a million saying what am I going to do it? There might be someone in Dublin who has gotten an inheritance of a hundred thousand. And if you have an inheritance of a hundred thousand now you say, what? What might what could I do it? There would be some advisers.
I'm not an expert on this, but there might be some advisers who would say, why don't you buy shares in a REIT? And that means you're buying into the housing market out, having to go to all the bother of doing actually buying the house yourself.
So what has that meant for housing in the city? Because there is a focus on homelessness and on, say, a figure of 10000 in the city. And yes, in some ways, the consequences of that are not just homelessness and the people who we actually know are living in homelessness. conditions, whether in hostels B and Bs or in shelters, mean that's far, far wider in its reach. When you start to think about who's affected by that, because it affects the person who's currently living at home and who's 29 and has spent the last five years painstakingly trying to put together a deposit and actually saying I can neither rent nor buy.
Yeah, that's one of the one of the most obvious consequences is that now you have among people in their late 20s, early 30s and now increasingly into their early forties, the proportion who are renting rather than buying is up until about age 30 is now over 50 percent or renting.
So you've had a huge increase in renting among that generation of people in the family formation stages. And the 2016 census was very dramatic on this. Now, this has been building since 1991. It was already happening in the 1990s. But on a at a fairly low, slow rate and it picked up in the 2000s. And so since in in the last 10 or 15 years or so, it's become quite sharp. So you've had a new generation.. in fact I looked at this recently and came to the conclusion that the current generation of people in their 30s may well be the first generation in over a hundred years that will enter into their 40s or over 50 percent of them are private renting.
And this means that they are paying they have no security because the idea one of the big attractions of homeownership as indeed of tradition, local authority housing, is that your lifetime security of tenure, you moved when you decided to move. Not when someone decided that wanted to put you out in the Rebuilding Ireland strategy. They made a play in strengthening tenure conditions for private renters or the private rented sector, but simply to extend some element of security of tenure for four years to six years.
Now, even there, there's all sorts of exemptions that landlords can ask for the property back for a whole range of reasons. One is that they want to use themselves. The other is they want to sell it. So there's no security, or at least I won't say there's no security of tenure. But the kind of tenure conditions that are available for that age band, those tenure conditions are OK if you're a student and you only want the place for nine months anyway in the year until you go off in the summer, then you come back the following September and hope to get another place. Or if you're a young worker and you don't know, you're going to be in the present job for a year or two or where you're going to settle down and so on. So you do need a private rented sector for those transitional households. Are it helped people who have not yet settled down. But what becomes socially problematic is what is now emerging with great speed. And the Irish system, which is a generation of people in their 30s, are now moving into their 40s who do not have a secure long term home. And even the one they have is extremely expensive. And if they aren't put out by the landlord for one reason or other who might want to sell it, there might well be put out by rent increases anyway. And a lot of the homelessness now, of course, is due to people. It's what it's called economic homelessness simply couldn't afford the rent and lost their homes on that basis. Now, this is a really big change in the Irish system. There's now 750000 people roughly living in private rented accommodation, which is a huge increase over what it was 15 or 20 years ago. And they are in an age range now where they're at the early stages of what usually would be settling down family formation or whatever.
And so the housing basis for that is really now constricting down to about that's only about half the people, half of those people and even less than half of them have the potential to secure a stable, affordable, long term home. Now, whether it's social housing cost, rental housing, homeownership or whatever, they are all different varieties of secure or affordable long term access to housing.
There is this generation, though, of that in that age range who and I'd say they're going to be the first generation. Who knows it. You have to go back to the 1920s and 1930s to find a similar prospect facing a generation in that age.
But just on where we are with that, because, you know, what I'm curious about is also how we get out of the current scenario and what some of the solutions are. And when you talk about the price land and urban land being such a trigger, and we are also still seeing in Dublin City where Urban land, which is owned by the state, by Dublin City Council, or by one of the other by Fingal or Dun Laoghaire, that that land has been in many ways facilitated and given to private developers to build on rather than used to build social and public housing. That in part of what often it seems like the panic to move forward is that there isn't a recognition that the land we have is limited and there's a really critical decision that needs to be made about state and public owned land.
Well, I .. that the land is one issue. I must say, I think the real issue is finance, that we need to move back towards the territory that held until the late 1980s where there was a kind of finance for housing was kind of ring fenced. It was segmented off from the general run of the international financial system. In other words, investors were not encouraged to get involved in the in the housing market. It was a reserved idea for the state building social housing or for homeowners who were buying one house for themselves to live in. And that's what the building societies were about. The building societies were there to enable depositors. You know, you got your job in the civil service as an 18 year old and a 19 year old. You open an account in the local building society started saving 10 years later. Then when you got married, you got down to the building society and they would give you a mortgage to buy your home. Now, they wouldn't give you a second one to buy another home that you could then rent out to somebody else that wasn't there. That wasn't their remit. They were there to support the owner occupier. And so it's the dismantling of those barriers in the 1990s around the developed world that enabled the private investor to start capitalizing on the scarcity value of urban land.
So what do we do now? Do we roll back those incentives that were put out to the private investor or do we start to regulate who can or can't invest in private housing, whether within the sphere of cities or country?And what are some of the ways in which you see solutions here?
I have not examined and do not have the even the knowledge or the skills to examine precisely what the controls might be. I do know that those controls were there in the past and they had effects. And I think the effects were generally benign in the sense that they helped contain the whole business of of of the cost of housing.
And they certainly avoided the the landlordism systems. If landlordism over time, the risk of landlordism is that it will lead gradually to concentration. You know, we in the 19th century in Ireland with something where nearly all the property, land and housing in Ireland was owned by 20 or 30 thousand families and the building industry has always been private. You know, we've never had a state build and we don't need state builders. It's rather the who the owners are who buys the thing off the builder or who commissions the builder to build it the first instance.
So the using, say, European investment funds, which are there for a social purpose, channelling the finance through some kind of a regulated mechanism into home construction. And in some ways, it doesn't. It isn't necessarily the critical thing as to whether it's social housing that's given unfair favorable rent terms or some kind of cost rental housing or sometimes rent purchase. You know, there's all kinds of varieties of agreement. But the main thing is that the the householder is looking for a home should not be competing with some big investors somewhere or someone who happens to have a million euro that they're trying to find an outlet for. You do not want them competing with the potential home owner.
So when we say that in one sentence, it can seem really straightforward and quite simple that as a policy led decision, we do not want house owners, potential house owners, emerging house owners, families, young couples, single people. Doesn't matter. We don't want people who want to own their own home or to be in a house. We don't want them to be competing with a big investment company, a small investment company, a vulture fund or some form of for profit entity.
So what's puzzling about this when we see that has been the shift since then, the early 90s and we see the consequences. And we know when we look at that, then that's actually a policy decision. Yes. So what we're looking at here, when we're told repeatedly that this is a very complex and a very nuanced and a very long term problem, kind of isn't.
It isn't. Now, I know that. But say the government in 2011, there was an officer of the time issued a housing policy statement more or less saying where out of the business of supporting homeownership. Now, this in itself was quite a dramatic announcement at the time, and it hasn't been entirely followed through since then. But it was a very big change in direction. And there's a there's phrases in that saying that the focus on home ownership was an obsession which caused all kinds of difficulties to us in the past. This, I think, is based on a complete misreading of the history of Irish housing policy. It's very common among academics. Is it there is this tendency among academics in the social policy field to denigrate homeownership as an obsession, when in fact there is a lot to be said for it as a very sound and very, almost social, socially protected type of development. It wasn't commodifying housing. It was actually creating this protected area. And it was really the financial barriers around it. It meant that you you did not find investors piling into the housing sector saying here's potential good returns, we'll buy it up and we'll rent it out to the householder rather than enabling the householder to buy it themselves. The policies which enabled the householder to buy the dwelling themselves was in the way it operated in Ireland. Actually, one of the more egalitarian dimensions of Irish social policy. By the end of the end of the 20th century, you know, around the year 2000, the distribution of housing wealth was far more egalitarian in Ireland and the distribution of income people who were in the bottom range of the income distribution actually owned. They owned more of the housing wealth than they had of the income distribution. They know that they were doing better in the housing system than they were in the income system. So it was a counterbalance to other kinds of inequalities. And that was driven by, I think, part of the problem here. And I think in some respects a lot of the academics haven't helped because of this tendency in the academic world to sort of denigrate this focus on homeownership in the Irish tradition.
My own take on it is that that focus going back to the end of the 19th century in the land reform and feeding through into the 20th century in housing was actually quite, quite egalitarian. It wasn't absolutely egalitarian because neither in land nor in housing did the ones down at the very bottom benefit that much. But when it was supplemented by a reasonably decent system of social housing, even though a lot of that social housing was privatized, it. Ended up on balance, being an awful lot better than what we have now, which is really losing out on the the distribution side,
So I guess a lot there to unpack, Tony. But, you know, always good to think about if you had the ear of the person in charge, not just the housing minister, but, say, the person in charge in Dublin City Council. What would you be saying?
Well, I would certainly say that the primary thing we must look at is the financial system. And to do and who is getting ..., who has the finance to buy the housing.
And at present, this system is being shaped by the proportion of buyers of housing who are there because they are looking for an investment. They are not looking for a home for themselves. They are looking for an investment and are looking for a turn on on an investment. That is what has been new in the last 20, 25 years in Ireland. And that is the principal driver of what's been of how the system is is changing. Why we now have a situation where, as I said before, that you have maybe people now in their 30s and 40s that maybe 50 percent of them will end up entering middle age and they'll be renting in the private rented sector. And that is not a good thing. It is not a good thing given the nature of the private rented sector. And it's partly due to the insecurity of tenure and lack of control over rents. The whole business of the sort of feeble attempts were made to control rents in the last couple of years with these rent control zones just haven't worked. Again, there's too many ways around it. And so rents have been rising steadily. That is not a solid foundation for the future. So the answer to the question is the entry of the private investor into that segment of the housing market. That has been the source of a lot of the difficulty. And so finding ways of reversing that is the primary goal. Now, this could turn out to be technical, but not undoable.
There are various ways of doing it. I think the difficulty is that people do not accept that it needs to be done, that there is an understanding there that is misguided. The real difficulty is not the complexity of the task.
It's a lack of awareness of the task needs to be tackled.
So that was Tony Fite, fascinating conversation. And you'll find some links to Tony's recent work with the podcast on our Web site. So we're gonna be releasing interviews and stories right across this year, 2019. Sometimes there'll be one to one interviews. I like that one with Tony. Sometimes location pieces like our previous ones with Joe Brady and Ruth McManus. And sometimes as we go on and build our resources, more documentary style features about key themes and places. So if you like the idea of what we're doing, supporters subscribe to the podcast where you find your podcast, review and ratings as it helps others find us. And if you want to do more, if you think what we're doing is worthwhile, go to our Web site. Thisiswherewelive.ie And become a supporter through patriot and pledge as little as a euro a month to become part of this project. Thanks for listening. Next up, I'm going to be talking to an award winning architect. ronia hasit about her vision for great places to live and about her experience in shaping them.