Housing is a numbers game. The supply of new homes has doubled since 2017, but the underlying challenge is affordability. The median sales price of a new home is now more than €400,000 nationally and €500,000 in Dublin. This high-priced housing is beyond the reach of average earners. The need is great, but market demand is constrained by ability to pay.

The government's approach is to fill the 'affordability gap’ with subsidies, but this is very costly at scale. State supports now reach up to €150,000 per home. If required for just 10% of the housing programme, it could cost €4.5bn in subsidies alone – as much as two children's hospitals.

Estimates of costs

So, this ‘gap’ needs close scrutiny. The Society of Chartered Surveyors (SCSI) draws from submissions by developers across a range of projects to produce estimates of costs for building homes.

These are not audited projects – detailed costs are commercially sensitive – but rather a summary estimate. Currently, the SCSI calculates that a new three-bedroom house costs €397,000 nationally, and €461,000 in the Greater Dublin Area (the GDA is defined by SCSI as counties Dublin, Kildare, Meath and Wicklow). 

On the other hand, the Department of Housing, Local Government and Heritage compiles market data from competitive bids to build homes for local authorities. These are lower, with average ‘all in’ costs of €318,365 nationally and €392,975 in the GDA. 'All-in' cost reflects a composite figure/unit to include the addition of allowances for site purchase costs, design team fees, utilities, site investigations, surveys, public art etc as appropriate.

Manifestly, speculative developers and building contractors do not have the same cost base. Design and specification, procurement methods, site conditions and local markets all have an impact. However, these figures are a useful benchmark.

Firstly, the 'hard' construction costs from the SCSI are €224,730 (nationally) and €257,645 (GDA), compared to €251,379 (nationally) and €296,263 (GDA) for local authorities. However, these local authority costs include normal site works, whereas the SCSI adds an extra €55,000 per home for "site works and site development", largely closing the gap.

However, it is very notable that market prices paid by the local authority increased by 11% nationally and 13% in the GDA in the year to spring 2023, and by a staggering 50% since 2017 (in the time that housing supply has doubled). 

Land a component

So where does the rest of the money go? Land is a component. The SCSI assumes a site cost of €70,000 (ex VAT) per home in the GDA, although actual prices paid for land are difficult to determine, and it may have been bought much cheaper years earlier. 

NAMA sold sites with the potential for 86,000 homes, many for a fraction of this €70,000 cost, and the majority of these have not yet been developed. So some ‘land cost’ may in fact be profit, depending on what was paid originally.

At its inception, the Land Development Agency (LDA) promised access to 150,000 sites in public ownership, which could considerably reduce the cost of homes. However, this ambition has been scaled back to 10,000 homes in five years, and with estimated costs of up to €500,000 per new home. It seems even ‘unlocked state lands’ may come at full market prices.

The SCSI estimates a developer’s margin of €53,864 (ex VAT), although this will vary, particularly in a time of high inflation and uncertainty.

Speculative development (buying land in the hope of timing house sales for maximum profit) is a high-risk/high reward business, which is very cyclical and vulnerable to external factors, including interest rates, construction inflation, market conditions and government policy. A high margin may therefore be required by those financing development as their safety net. 

Next, the SCSI estimates development levies of €18,645 (ex VAT), although currently, developers benefit from a waiver, so this is not incurred in 2024. Although noted in the SCSI’s report, it has not been deduced from their €461,000 sales price.

The cost of borrowing money (finance) and marketing are assumed to cost €36,000 (a ‘deposit’ for many first-time buyers). The SCSI estimates interest rates at more than 7%, with an assumption of 55% borrowed to buy land, and 90% borrowed to build on it. Notably, these costs are expensive because of the business model, not the actual construction of homes.

Built and occupied in small phases

In other sectors, public and private organisations pay building contractors monthly, without the risk or cost of financing construction for long periods. Houses and apartments can also be designed to be built and occupied in small phases, so that finance can roll over, negating the need to finance entire developments in one go.

Inflation is a risk and a reality. It is not only a factor of labour and material, but also of markets and sentiment. As noted above, tenders to local authorities have increased significantly in recent years.

Prices rise when capacity is constrained, but prices may also rise in the short term when order-books are uncertain. According to the latest BNP Paribas survey, activity in residential construction has reduced in every month since autumn 2022. Output in residential construction is down, and the volume and value of production in residential construction are lower than at any time since 2018 (excluding the pandemic closures).

More broadly, capacity in the construction sector has still not recovered to Celtic Tiger levels. Typically every new home needs two new workers. Yet there are 30% fewer people employed across all sectors of construction now, only 167,400 compared to 242,000 in 2005.

The sector is very fractured through subcontracting and sub-subcontracting, which in itself is a barrier to capacity building, recruitment, skills development and quality control. Undercapacity and contractual complexity can also be inflationary.

In 2020, the European Commission questioned whether the lack of affordability in Irish housing "may be partly explained by an increase in margins, which may indicate insufficient competition". Market expansion is what drives competition, innovation and keener prices.

Yet, house building in Ireland has very significant barriers to new entrants, including lack of access to finance and land (exacerbated by land-banking by others), and policy that favours complex, large scale apartment developments. 

Whether it is wise to rely on a relatively small speculative sector to deliver the majority of new homes has to be questioned. The SCSI confirms that 51% of the sales prices does not go into bricks and mortar, rather it is a factor of the favoured procurement model.

Traditionally, contracting builders to build for the state has evened out the peaks and troughs of the private market, ensured competitive prices, prompt delivery, certainty of employment and retention of skills in a downturn. A leaner process would make rents and mortgages more affordable. Moreover, it could save the state billions of euro in subsidies.

(All costs include VAT (13.5%) unless indicated. Where appropriate, VAT has been added to some figures for comparison purposes.)

Author: Orla Hegarty is lecturer and assistant professor in the School of Architecture, Planning & Environmental Policy at UCD. She is a Registered Architect in Ireland and the UK (ARB) and a fellow of the Royal Institute of the Architects of Ireland and a member of the Royal Institute of British Architects. This article first appeared on RTE's Brainstorm.