Ship of Fools

by Fintan O'Toole

  Kenny’s recommendation was relatively straightforward: local authorities should be able to purchase compulsorily land in designated areas. The owners would be paid the current (agricultural) market value, plus a premium of 25 per cent. Kenny, a distinguished jurist, gave a detailed analysis of why and how his proposal could be fully compatible with Irish law and in particular with the rights of private property guaranteed by the Irish constitution.

  There is a lovely Italian phrase: dolce far niente, the sweetness of doing nothing. The Italians presumably adapted it from Irish politics. In the case of the Kenny report, with its admirably concrete and sensible solution, the political establishment managed a far, far more niente response than the most sun-stunned sybarite, luxuriating in a Sardinian hammock, could ever muster. Faced with Kenny’s unpalatable conclusions, those in power made a coma look like manic activity.

  The way of dealing with the Kenny report was not to attack it or to defend the rights of landowners to make unearned fortunes and of property speculators to build up huge private land banks. It was simply to ignore it and, whenever anyone raised the subject, to say that it was under consideration. All parties in government at any given time agreed in principle with Kenny. All managed to believe that this conviction was like agreeing with Pythagoras’ theorem - it was clearly right but you didn’t have to do anything about it.

  Here is a typical Dáil exchange on the subject, in May 1980, plucked from a profusion of available examples: Mr F. O’Brien asked the Minister for the Environment his proposals for the implementation of the Kenny Report on land.

  MR [GER] CONNOLLY [Minister for the Environment]: Possible methods of dealing with outstanding problems on building land costs are under consideration in my Department in conjunction with other interested Departments. I will not be in a position to formulate my proposals until consideration of the complex problem involved is finalised.

  MR F. O’BRIEN: We have had this reply before. Could the Minister give some indication of when we may have some measures on land before the House for discussion?

  MR CONNOLLY: When I came to the Department the first thing I had a look at was the matter raised by the Deputy. It is a complex issue and I am awaiting a number of views on it. I do not want any undue delay.

  MR F. O’BRIEN: Is it lack of will on the part of the government or constitutional impediment that is causing these inordinately long delays? This has been dragging on since 1973.

  MR CONNOLLY: I admit it has but I am unable to go further than saying I am having the whole position examined. I assure the Deputy I am as concerned as anybody else about the cost of building land and everything connected with it as regards housing.

  MR F. O’BRIEN: Is the problem a constitutional one or is it a lack of will on the part of the government?

  MR CONNOLLY: It is a complex issue.

  MR F. O’BRIEN: Is it a constitutional issue?

  MR CONNOLLY: That is a matter for legal interpretation . . .

  During the boom years, when it was obvious that vast fortunes were being made by landowners because of public zoning decisions and on the backs of hard-pressed house-buyers, everyone in the political system agreed that it was long past time that the Kenny report was implemented.

  In 2000, Bertie Ahern, pretending to respond to public concern over rapidly rising house prices, asked the All-Party Oireachtas Committee on the Constitution, chaired by the future Minister for Finance Brian Lenihan, to go back over the ground covered by Kenny and his committee. Unsurprisingly, they came to exactly the same conclusions as had been reached in 1973: that Kenny was right to suggest the compulsory purchase of development land at a price modestly above the agricultural value, and that there was no constitutional problem about doing this. The committee had heard pleas to implement Kenny’s proposals from powerful official bodies like the National Roads Authority and the Railway Procurement Agency (both fed up with paying extortionate prices for land needed for transport infrastructure) and Forfas, the official advisory body for enterprise and science.

  The chances that something so obviously and urgently in the public interest would actually be implemented, however, were as remote as the dark side of Pluto. Kenny threatened just one small group of people - the speculators and developers who controlled the land banks. Unfortunately, Fianna Fáil would sooner have personally insulted the Pope, Nelson Mandela and Mother Teresa before it would offend that very group. Which was not o say, of course, that it was not committed to implementing the Kenny report. As late as 2006, Bertie Ahern was still declaring his intention to bring in legislation to control the price of development land. It was cruel happenstance and downright misfortune that he never got round to it.

  Nor did he even get round to the more modest measures suggested by his own consultants to rein in the flagrant self-enrichment of this tiny minority of landowners and property speculators. Peter Bacon and Associates, commissioned by the government to study the inflation of house prices in the late 1990s, recommended an ‘anti-speculation property tax’ to stop people buying houses purely for investment purposes. The proposal was modest enough - an annual tax of 2 to 3 per cent of the value of the property. It was resolutely ignored.

  Even the simplest of measures to bring some transparency to the operation of the market in land and property were not implemented. Almost every civilised country has a registry of land and property transactions, so that the public can see who is buying what and how much they’re paying. In Ireland, this information was deliberately kept secret. The Kenny report pointed out that ‘Any member of the public should be able to find out what prices have been paid for land and the nature of the dealings in it. Under the law as it is now, this is not possible.’ It suggested simple changes to the law to make this ‘essential’ information available. The Oireachtas All-Party Committee repeated this call: ‘In order to encourage transparency in property markets and research, transaction details should be gathered and published by the state. All lands and titles should be registered by a specified date. Auctioneers and estate agents, who generate, supply and promote market information, should be regulated by either an independent body or the state.’

  None of this was done. The government allowed dealings in land and property to remain veiled in secrecy, so that land prices could be more easily manipulated and house prices inflated by estate-agent puffery.

  This determination to do nothing was not the result of mere laziness. It was ideologically driven. It stemmed from two related shifts in attitude. One was a move away from the old idea that public policy should be guided by the basic aim of allowing as many people as possible access to affordable housing. So long as this basic belief held sway, it followed that relatively cheap housing was a good thing and that sharp rises in house prices were bad. Especially after Bertie Ahern, Charlie McCreevy and Mary Harney came to power in 1997, the government stopped believing this.

  Part of the problem was, of course, that Fianna Fáil was very close to the people who gained most from high property prices - the builders and developers. Another part, however, was the self-generating nature of a demand for expensive houses. Ireland gradually became a nation of speculators, betting on endless rises in house prices. People who already had houses at the start of the boom had an interest in seeing their values rise. People who bought houses at inflated prices acquired the same interest. The more people who were suckered into borrowing beyond their means to acquire houses for up to twice their real worth, the larger the critical mass of voters for whom the idea of the government acting to make housing cheaper was anathema. Quite simply, cheap housing was good if you didn’t have a house and bad if you did. And in a nation of house owners, the second category was bigger and grew faster than the first. Between 1995 and 2008, around 1.1 million mortgages for house purchases were approved - a very large chunk of the electorate who had bought property in the boom years.

  Working alongside this growth in the property-owning or at least property-mortgaging class was another ideological shi
ft - towards the market as the solution to all problems. One of the things that had traditionally helped to control house prices in Ireland was the fact that a large proportion of dwellings were built by local authorities. Housing was understood to be a social need first and a commodity second. Thus, in the mid-1940s, 70 per cent of all new housing in the state was built by local councils and city corporations. With the spread of property mania, however, housing became first and foremost a commodity or an investment. Drunk on the orthodoxy that the market was best placed to deliver this commodity, the Fianna Fáil/Progressive Democrat governments began to cut off the supply of public housing. From 27 per cent in 1985, the share of local authority housing in the overall production of new homes sank to just 6 per cent. Lip service continued to be paid to social housing, in the form of targets for 35,000 local authority houses in the first National Development Plan, but only 21,000 were actually built.

  The grotesque irony was that, during a period when the main activity of the country seemed to be the building of houses, there were more and more people who didn’t have, and could not afford to buy or rent, a decent home. The number of people officially recognised as being in unfit or overcrowded accommodation, homeless or unable to afford a house, increased by 105 per cent between 1996 and 2008. In the midst of a vast housing boom, there were over 100,000 households or about 236,000 people struggling to keep an adequate roof over their heads.

  By an even grimmer irony, this figure was quite similar to the number of surplus houses produced by a hysterical private housing market in overdrive. Michael Punch showed that between 1996 and 2006, there were 347,000 new households formed in Ireland. Over the same period, 597,000 new houses were built. This suggests that 250,000 houses were not built to meet housing needs but were either second homes or investment vehicles. Second or investment homes went up in some areas like mushrooms: 30 per cent of the homes in Leitrim were vacant on the night of the 2006 census. But even in Dublin one house in every eight was vacant.

  The main government response to this absurdity was to add another delicious twist of farce. It instituted an ‘affordable homes’ scheme, under which builders and local authorities would work together to provide houses for those who could not get large mortgages from banks. This involved a double irony. In the first place, the designation of a small numbers of houses (between 2 and 4 per cent of the total) as affordable logically implied that all the other houses were unaffordable. No one paid much attention to this obvious truth. In the second place, and in a gesture beyond satire, tens of thousands of people who applied for affordable homes were turned down on the basis that they were too poor to afford them.

  The property boom also produced another paradoxical novelty in Irish life - people who’d never had so much money and who were never in so much debt. As the boom went on and the property frenzy outstripped the seventeenth-century Tulip Mania, the mismatch between the earnings of ordinary workers and the cost of housing could be dealt with only by borrowing money for very long periods. People were buying what they thought of as their ‘first home’, often in a place they didn’t want to live in for very long, but locking themselves into thirty-year mortgages to pay for it. Between 2004 and 2007, at the height of the madness, the proportion of first-time buyers taking out a mortgage of over thirty years rose from 29 per cent to 75 per cent. Mortgages of 100 per cent, and even 110 per cent of the cost price, became commonplace. Even in 2008, when the credit crunch had come and the collapse of the Irish property market was looming, over a quarter of first-time buyers were given 100 per cent mortgages by their banks or building societies.

  Especially in the last four years of the boom, Ireland became the owe-zone of Europe. The housing boom fuelled a vertiginous growth in private sector credit. This was already very high by the end of the 1990s - around 110 per cent of GNP in 1999, which was higher than the proportion in Scandinavian countries when their banking systems had collapsed earlier in the decade. Especially after 2001, when the European Central Bank made sharp cuts in interest rates, things got far worse. In 2004, private credit stood at €190 billion - 145 per cent of GNP. In 2006, it was €305 billion - more than double the size of GNP. By 2008, it had hit the €400 billion mark - two and a half times GNP. Property-related lending amounted to about two-thirds of this vast swamp of credit.

  The annual rate of growth of private sector credit in Ireland in 2006 (€65 billion in one year alone) is probably the highest in any country anywhere, ever. A big part of this was created by people taking out mortgages. The level of personal mortgage debt in Ireland increased by €2 billion a month during 2006, a year in which the average price of a new house in Dublin rose by €55,000 in 12 months. Both personal debt and mortgage debt doubled in the five years between 2004 and 2008.

  Much of this debt was essentially a transfer of wealth from the putative future incomes of ordinary workers to the bank accounts of those who had gained control of the property development industry. But it was also creating an obvious instability in the Irish economy as a whole. As early as 22 December 1999, Standard and Poor’s Credit Week mentioned Ireland as one of seven countries with a financial system vulnerable to a credit bust.

  In an article in the February 2000 edition of Finance magazine, the former Central Bank regulator William Slattery pointed to the unsustainable nature of the growth in private sector credit. Sooner or later, he argued, borrowing would have to come back to a rational level, and when it did so, this would ‘result in the removal of the source of a large volume of expenditure in the economy. When this happens I believe it is likely that the supply of property will substantially exceed demand . . . In that event, a substantial decline in property prices is inevitable.’ How much would prices fall? Given the inflated prices being charged for houses and land, Slattery’s educated guess was that ‘A return to more normal levels for each of these elements would mean a substantial drop in house prices, perhaps as much as 30 to 50 per cent.’ Unless the government made it a priority to ensure that house prices did not continue to rise, Slattery warned, it would simply ‘exacerbate what I believe is likely to be ultimately a quite traumatic situation for many current house buyers’. This is pretty much what happened: the government did not try to stop house prices rising, prices ultimately dropped by 30 to 50 per cent and it was indeed pretty traumatic for people who had bought homes during the boom years.

  To be fair, it is something of a misrepresentation to say that the government did not try to control the property boom. Bertie Ahern remarked in 2006 that ‘the boom is getting more boomier’, and making booms boomier was what Fianna Fáil did. Faced with a rapidly inflating balloon it took the advice that Lauren Bacall gave to Humphrey Bogart in To Have and Have Not: ‘Just pucker up your lips and blow.’

  The Bacallian (or should that be Bacchanalian?) school of economics, as perfected by Ahern, McCreevy and Harney, dictated that the way to make sure that a property crash did not destroy the economy was to force-feed property developers and investors with tax incentives. The government created a bewildering array of property-based tax breaks to encourage more building, higher land prices, and a diversion of potentially productive investment into yet more bricks and mortar. There were incentives for the developers of hotels and holiday camps, of private hospitals and nursing homes, of holiday cottage schemes, of third-level educational buildings and student accommodation blocks, of childcare and park-and-ride facilities, of multi-storey car parks and refurbished flats. Most of this was stark stupidity: the number of hotel rooms, for example, increased by 150 per cent in the Celtic Tiger years, while the number of tourists increased by 70 per cent. Developers were building hotels, not to meet a market demand, but simply to get the tax subsidies from the government. Fianna Fáil ended up spending €330 million of public money to subsidise the building of hotels. The only effect was to make the hotel trade unviable. With so many of them sprouting up all over the place, there were simply not enough paying guests to go round. By the summer of 2009, Irish hotels, with
an occupancy rate of 53 per cent, were officially half-empty - a towering achievement for Bacallian economics.

  One of the most popular tax incentives was the so-called Section 23 relief, under which most of the cost of building rental accommodation (generally apartment blocks) in designated areas could be set against tax. The original intention was that the relief would encourage development in specific, neglected urban areas. It was rapidly seized on as a broad tax-avoidance measure. Ruairi Quinn, then the outgoing Finance minister in the Rainbow Coalition government defeated by Bertie Ahern in 1997, told a story of that year’s election. He was canvassing in Carrick-on-Shannon in County Leitrim for the local Labour Party candidate. Leitrim is one of the least urbanised areas in Western Europe. Quinn was approached by members of the Carrick-on-Shannon Chamber of Commerce. ‘They said, “We want section 23” and I asked what part of Carrick-on-Shannon they wanted it for, to which they replied, “Oh no, we don’t want to make a selection.” I asked what other places they wanted and was told: “We don’t want to be competitive between one town or one village and another.” I asked them what exactly they would like and they said, “We want you to give section 23 to the whole of County Leitrim.”’

  This helps to explain why Leitrim ended up with almost one in three of its houses empty and with hundreds of houses built in villages like Dromod or Leitrim village that recorded only a very small increase in their actual population. It is a strange housing boom that leaves such places literally emptier than they were before.