by Conor McCabe
The building industry, for its part, maintained that the loan limits under the Small Dwellings Act – a maximum of £4,500 – and the lack of loans from the building societies were the reasons behind the large lay-offs and the subsequent rise in unemployment. ‘Nothing short of an injection of about £20 million in loans would be needed to prevent a running down of the industry in the immediate future’, said a spokesman for Abbey Homesteads, one of the largest builders of houses in the Dublin area.57 The construction industry employed around 80,000 people nationwide and had an annual turnover of £400 million, with housing accounting for some 40 per cent of that business.58 A slowdown in construction, of any kind, would be a disaster for the economy. ‘House-building should be given priority over most other areas of economic endeavour’, said The Irish Times, quoting an anonymous group of builders, ‘and within the housing sector, the most beneficial sub-sector is that concerned with private dwellings.’59 In May 1975, Daniel McInerney, deputy chairman of McInerney Properties Ltd, said that ‘beside being a great social need, housing in Ireland was a leading industry and was like the motor industry in America. When building boomed, the nation boomed.’60 These new houses had to be built, regardless of whether there were people willing or able to buy them.
Certainly there was no shortage of new private houses being built. In 1974, there were 19,510 dwellings completed, almost double the amount which were completed in 1971. This was independent of local authority completions, which was 6,746 in 1974 and 4,789 in 1971. Nor was there any let-up in prices. In 1970, the average new house cost £5,261; by 1975 it had almost doubled to £10,438. Prices continued to increase throughout the 1970s, despite two years of recession. In order to meet the ‘affordability’ crux, the government requested the major banks operating in Ireland enter the residential mortgage market. The Minister for Finance, Mr Richie Ryan, announced in the June 1975 budget that Bank of Ireland (BOI) and Allied Irish Bank (AIB) had both agreed to make £40 million available to house purchasers over the next two years. They were followed by the Ulster Bank and the Northern Bank in August 1975, when it was announced that they intended to extend finance for house purchase.
In the first six months of their entry into the residential mortgage market, BOI and AIB approved 1,415 home loans totalling £12.5 million. Previously, the major banks had limited their involvement with home-buyers to short-term or ‘bridging’ loans. Their entry into the mortgage market was tentative and slow – the banks tended to focus on higher earners, of which in Ireland there were comparatively few. This changed in the 1980s, as tax incentives and government grants developed in scope and ambition, and by 1987, Irish banks had secured around 43 per cent of the mortgage market. At the same time, the building societies accounted for around 34 per cent of all mortgages. They were soon helped in no small measure by the decision to cancel the involvement of local authorities in mortgage lending. In October 1987 the Minister for Environment, Pádraig Flynn, announced details of a new government incentive in which building societies would undertake ‘up to £70 million worth of mortgage lending next year which would more usually have been done by the local authorities’.61
This was the final part of the overall assault on local authority housing initiatives, the last major obstacle to the privatisation of the housing and mortgage market. Up to then, local authorities were still able to grant mortgages under the Small Dwellings Act, which had refocused itself mainly towards low-income households. The 1987 Act gave the building societies full access to this final outpost of State involvement in what had become the option of first and last resort in securing a home: a mortgage. The very idea of public housing itself was severely undermined in 1984 after the introduction of the £5,000 Surrender Grant Scheme, which directly led to the further ghetto-isation of local authority estates. And as with the 1987 Act with followed it, the Surrender Grant Scheme was primarily geared towards the needs of lenders and speculators during those recessionary times.
‘… THE REPORTS OF THE EXTENT OF THE PERCEIVED PROBLEM HAVE BEEN GROSSLY EXAGGERATED’62
The Surrender Grant Scheme was introduced in October 1984 as part of the coalition government’s programme ‘Building on Reality, 1985-1987’. It provided a grant of £5,000 to local authority tenants to entice them ‘to buy private homes and surrender their existing homes to the county council or corporation’.63 When the grant was added to other available government grants and incentives, eligible tenants ‘could have up to £10,000 at their disposal to acquire a dwelling in the private market’.64
The scheme had two objectives. Firstly, it made available local authority housing without the need to build additional stock. The quality of housing would be maintained as families would be moving out of the estate rather than buying within the estate. People would, in effect, ‘trade-up’ with the government’s help. They would swap their well-built local authority house for a presumably better-built, and much more desirable, private-sector house. Secondly, the scheme would give a boost to the private house-building sector, as it would generate ‘a new source of demand from local authority tenants transferring into private ownership’.65 It was seen as a win-win situation. The local authorities would get freed-up houses for £5,000, while the private sector would get customers for their empty units, of which there were thousands on the edges of Irish towns and cities across the country. The mid-1980s saw the first sustained drop in property prices since the foundation of the State, and the government duly rose to the occasion and guaranteed those speculators a steady stream of sales. And as with so many win-win scenarios, the reality turned out to be somewhat different.
The Housing Finance Agency, which administered the grant, reported an ‘enthusiastic response to the scheme’ in 1985, and predicted that ‘around 1,000 tenants may avail of it’ that year.66 In June 1986, the Minister for the Environment, John Boland, told the Dáil that ‘from its inception until 31 March 1986, 6,321 applications have been received by local authorities, 4,347 have been approved, and 2,790 have been paid’.67 As a consequence, 2,200 dwellings were made available within the local authority housing stock – ‘a significant contribution’ the Minister said, ‘to the housing of nearly 12,000 applicants by local authorities during the year’. He pointed out that, ‘as over 40 per cent of the grant recipients have purchased new houses, the scheme is of considerable benefit to the building industry also’. In conclusion, he was ‘pleased at the way in which the scheme has widened the opportunities for home ownership for so many people, and enabled them to house themselves in dwellings of their choice’.
During Dáil questions, the Fianna Fáil TD for Dublin North, Ray Burke, asked the Minister if he was ‘aware that the view of the sisters and priests serving in the west Tallaght area, in the parishes of Brookfield, Fettercairn and Jobstown, is that the scheme as it operates at present has a totally unintended consequence in that it is producing a ghetto … ?’ A fundamental flaw in the scheme was coming to light. It was not tenants in decent housing and settled communities who were availing of the scheme, but ‘relatively well-off tenants who were living in the poorest segments of the stock who took up the £5,000 grant most enthusiastically’.68 Those who had jobs were being replaced by those on the housing list who had none – a situation which accelerated the marginalisation of public house estates.
At the same time, the tenants who bought houses under the scheme were not fully informed of the true costs of home ownership. The housing advice agency Threshold found that many of the grant recipients were not informed of the level of costs involved ‘in transferring from a situation where the rents were subsidised and maintenance costs covered by the landlord to one where all costs fell on the shoulders of the householder’.69 Threshold also found local authority compliance with the private sector in the operation of the scheme, with grant cheques ‘frequently paid to third parties (usually builders) thus speeding up the transfer of tenants from their local authority houses to their new private houses’.70 The unrealistic expectations of costs and sub
sequent repayment difficulties saw a number of transfer tenants evicted from their new homes, or brought to court over arrears. By 1994, around 55 per cent of the grant recipients in Cork City had mortgage arrears of two years or more, while the communities left behind slipped further into decay.
The National Economic and Social Council (NESC) found that the uptake for the scheme was concentrated in the worst-off local authority estates. In Dublin, 75 per cent of recipients came from three areas: Darndale, Ballymun and Tallaght. Many of those who qualified for the scheme were working and were active in the local community. The scheme upset the balance in these areas between working and non-working tenants. Ray Burke told the Dáil in 1986 that on the Fettercairn estate in Tallaght, 177 families had left under the scheme, and were replaced by 95 households that were welfare dependent. In Brookfield, also in Tallaght, around 12 per cent of all households had left under the scheme. There were 100 single-parent families on the estate, and unemployment stood at 65 per cent. A similar trend took place in Jobstown, where 177 families had left and where the unemployment rate stood at 61 per cent. The scheme had intensified the polarisation of Irish housing between public and private, and had greatly added to the association of local authority estates with social problems. Tallaght was a long way from Marino, in more ways than one.
In March 1987, the Minister for Finance, Ray McSharry, announced the termination of the scheme. This was done because of financial concerns, and not the social damage it had inflicted. No alternative funding for public housing was given, which meant that ‘housing lists would grow at a time when no extra housing was being provided’.71 The true benefactors of the Surrender Scheme were builders and estate agents, who were quick to lament its demise. The minister’s cut in funding ‘could not be justified’, they said. ‘The scheme was more than self-financing in releasing valuable assets for use by local authorities and virtually eliminating housing waiting lists.’72 There was money for housing, but it was focused on making mortgages ‘affordable’ and building costs ‘realistic’. The Irish government was spending tens of millions a year in grants and tax breaks in order to make efficient the dynamics of the mortgage industry. By 1987, with public housing a by-word for social deprivation, the only real option open to new households was the private sector, either through the rental sector or house purchase. ‘The withdrawal of political commitments to the welfare state initiated by the New Right in the 1970s [had] all but permeated the entire political spectrum.’73 The long-cherished dream of both The Irish Times and Catholic bishops, of a nation of semi-detached owner-occupiers docile with mortgage debt, was all but complete.
1987-1997
The creation of the Irish Financial Services Centre in 1987 was an integral part of the new developments in the Irish economy. A revolution was underway. Banks were becoming ‘one-stop shops’ for financial services, and the Irish government played its part by changing the rules and allowing building societies and insurance companies to compete with high-street banks in the areas of personal and business loans. The competition within the Irish mortgage market was already well established, but in 1988 it became even more intense, as Irish Life joined forces with Irish Intercontinental Bank to form UK and Irish-based mortgage corporations, while ‘Ulster Bank, having concluded a deal with the Prudential to use its 330 sales force to sell Ulster Bank mortgages in the north is now looking for similar partners in the south.’74 The government had changed corporation tax rates in the 1987 budget, along with tax breaks for Irish banks working within the mortgage market, and both Irish Intercontinental and Ulster Bank saw these changes as an opportunity ‘to obtain [mortgage market] share essentially through product innovation and service’.75 These ‘innovations’, these new financial products, saw banks selling credit in an economy which was producing little else by way of merchandise and more by way of services. By 1998 around 80 per cent of all goods exports were being produced by about 8 per cent of the workforce, while in the rest of the economy these financial innovations were being used to fuel speculation in one of the least-productive economic activities: property.
In the first three months of 1988, the Irish mortgage market grew by 20 per cent, a large part of which was due to the transfer of local authority lending to the building societies. The 1987 initiative gave the building societies £75 million in business overnight, as well as complete access to the previously untapped, low-income mortgage market. It saw total loans issued by building societies increase by 104 per cent in 1988 to £532 million, up from £260 million the previous year. By way of contrast, bank mortgage lending during 1988 increased by a relatively modest 25 per cent. Overall, there was also an increase in house prices. In Dublin the average price for a new home rose by 20 per cent, with second-hand house prices up by 9 per cent. Outside the capital, the price increases were around 9 per cent for both new and second-hand homes. This was at a time when Ireland’s unemployment rate stood at over 16 per cent, emigration was at its highest for decades, and the number of new houses sold actually fell by over 6 per cent.76 It also took place in the wake of severe budget cuts which were initiated by the Minister for Finance, Ray McSharry. When interviewed on the rise on house prices, despite a drop in demand and the continuing recession, the director of the Construction Industry Federation, Michael Greene, cited a rise in building costs, adding that ‘quality had also increased over the period’.77 As with so much which relates to housing and construction in Ireland, the reasons behind the price hikes had more to do with tax breaks and financial investment than the modest dreams of first-time buyers or the fictional high standards of self-regulating builders.
‘IT’S A GODSEND FOR THE WEALTHY, A REAL HAVEN’78
In March 1988, Ray McSharry reintroduced Section 23 reliefs on rental properties. It was listed under Section 27 of the Finance Act but retained its name from 1981, when it was first introduced as a stimulus for investment in construction. The Irish Times reported that the government’s decision to bring back the section provided a ‘tax efficient outlet for investors and a valuable shelter for people with existing rental income’.79 The maximum relief available was essentially the purchase price of the property less the cost of the site.80 The scheme was announced as a short-term measure to help what was seen as a flagging construction industry, and was due to run from 27 January 1988 to 31 March 1991. It would allow investors to construct and/or purchase flats and town houses, with a floor area of no more than ninety square metres each, in designated areas in towns and cities – including large sections of central Dublin – and to offset construction costs and rental income against income tax. Its main purpose, however, was not to provide housing or rental accommodation. The reason for the scheme was to provide tax relief for investors. The fact that this was done via construction should not disguise the fact that this was a legal procedure for the avoidance of tax.
The scheme was not exclusive to the income from the rental property in question. The exemptions went to the company or individual who availed of the scheme, and the building costs were offset against all of the client’s existing rental income, subject to the maximum relief allowable. It allowed investors ‘to obtain tax-free rental income from the new units they buy and from any other new or old property they own (or subsequently may buy in the State) whether it is commercial, industrial or residential, until all the relief is used up’.81 The tax allowances meant that as a financial investment, property could provide ‘gross return [of] around 17 per cent, with the additional attraction of a potential capital gain over ten years’.82 Property, once again, was providing a tax shelter for investors, and not surprisingly, investors responded with energy and enthusiasm. For their part, builders almost immediately increased the price of properties, ‘with the tax relief in mind in much the same way that first-time buyer housing grants were previously absorbed’. A property and price boom had begun, fuelled not by wider economic activity within the State – that is, by wages, employment and demand from below – but by investors looking for tax relief a
nd seemingly safe investments.
By the end of 1988, The Irish Times was reporting a 24 per cent increase in building starts in Dublin, while in Galway the increase stood at over 50 per cent. During the months of September and October, around £20 million worth of new homes were sold, and according to one Dublin auctioneer, ‘a healthy chunk of that was sold to investors availing of the tax advantages contained in Section 23 (now Section 27)’.83 The fact that investment, not jobs and wages, was driving demand could be seen by the nature of the sales. The Irish Times found that prices at the lower end of the housing market remained ‘all but unchanged with the middle and upper areas deriving the greatest benefit from the boom’.84 It reported that around 60-70 per cent of all sales of new homes in the affluent areas of Dublin 4 and Dublin 6 were to investors under the Section 23 tax relief scheme.
The nature of the late 1980s property boom – its subsidy by government incentives via mortgage grants and the creation of tax havens – was of particular concern to the governor of the Central Bank of Ireland, Mr Maurice Doyle. In November 1988 he gave a speech at the annual dinner of the Master Builders’ Association, where he pointed out the dangers of Section 23 concessions, mortgage interest relief, subsidised local authority housing, and first-time buyer grants:
