TheJournal.ie uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Click here to find out more »
Dublin: 1 °C Monday 18 December, 2017
Advertisement

FactCheck: Is it cheaper for the State to build houses directly than to use the private sector?

FactCheck examines a big claim on one of the major issues of the day.

banner

HOUSING WAS THE big story in Irish politics this week, with the government unveiling its four-year plan, called Rebuilding Ireland.

On TV3′s Tonight With Vincent Browne on Tuesday, there was a dispute between AAA-PBP TD Ruth Coppinger and financial analyst Karl Deeter, over the cost of building and providing houses.

The Dublin West TD claimed, “The cheapest way for the State to build an abundance of housing is through local authorities directly employing its own builders…”.

Deeter firmly rejected this, saying “You can repeat something that’s not true – it doesn’t make it true”.

But is it?

(Remember, if you see fact-fight on your TV and you’re not sure who to cheer for, email factcheck@thejournal.ie or tweet @TJ_FactCheck).

Claim: It’s cheaper for the State to build houses directly, than to contract it out to the private sector
Verdict: HALF TRUE

What was said:

Source: TheJournal.ie/YouTube

The key statements for this FactCheck are Coppinger’s claim that:

The cheapest way for the State to build an abundance of housing is through local authorities directly employing its own builders, actually, and cutting out the private developer profit, which can be up to 15%.
…The off-balance sheet model forces the councils to do this, to give away their land, but also those houses will cost the State a lot more money than if the State was building them themselves.

Karl Deeter strongly rejected this:

The cost of delivering housing is not cheaper when built by the State. And that is just a fact, the same as gravity is a fact. You can repeat something that’s not true – it doesn’t make it true.

You can watch Tuesday’s Tonight With Vincent Browne in full, here.

The Facts

In response to FactCheck, Ruth Coppinger provided evidence for her claim in the form of Chapter 3 of her minority report to the Oireachtas Housing Committee.

That section is extensively based on a recent report published by the Society of Chartered Surveyors Ireland (SCSI).

The SCSI research, published in May, was based on a study of live house building projects of at least 30 units in the Greater Dublin Area, and found that:

  • The construction cost of a three-bedroom semi-detached house is €150,251
  • But when VAT, developer’s profit, land costs and other fees are added, the cost of the house is €330,493
  • Construction only constitutes 45% of the total price of a house

Screen Shot 2016-07-21 at 1.38.47 PM Source: SCSI

So how much of these costs would be avoided in the scenario depicted by Coppinger and others? And are there other costs involved in the State directly building houses which are not present when that work is undertaken privately?

What’s the difference?

Mel Reynolds, an architect and commentator with particular expertise in housing procurement, gave FactCheck the following break-down.

Under what’s known as the “direct procurement” model, where local authorities build housing directly on land they own:

Screen Shot 2016-07-21 at 1.38.47 PM Source: SCSI (modified by TheJournal.ie)

  • There’s no developer profit margin. The local authority effectively acts as the developer. In the example above – that’s €37,980
  • There are no land fees, because the local authority already owns the land. That’s €57,500
  • There is effectively no VAT. While local authorities would pay VAT, that’s money going from the State, back to the State. That’s €39,310
  • There are effectively no planning levies. Again, this is tantamount to the local authority “charging itself”. That’s €11,750
  • The cost of financing would be cut by around 50%, because of the lower borrowing rates afforded to the State. That’s €10,001
  • There are no sales and marketing costs, because the local authority retains ownership of the units. The absence of a need for sales and marketing is particularly pronounced in the context of a high demand for social housing. That’s €8,200.
  • This amounts to €164,741 saved in the SCSI example – leaving a house price of €165,752 as opposed to €330,493 – 50% cheaper.

Reynolds also provided us research which showed potential savings similar to that in the SCSI example, involving four examples of houses and apartments.

We asked for an assessment of Coppinger’s claim (without disclosing the fact that she had made it), from Dr Lorcan Sirr, a lecturer in housing studies and urban economics at DIT.

He supported the claim made by Coppinger, and told FactCheck:

There’s plenty of evidence out there to show that direct delivery of housing by the State can be done much cheaper than relying on speculative building.
The levies, fees, savings in site costs and lack of a high level of developer’s profit – as often required by the banks finding the development – means State delivery of housing is the most efficient way to provide housing quickly and affordably.

coppingerdeeter Ruth Coppinger and Karl Deeter on Tonight With Vincent Browne, earlier this week. Source: TV3.ie

For his part, Karl Deeter told FactCheck:

  • Local authorities would have to pay permanent employees (as opposed to contractors) to do the work
  • They would have to pay them premium rates
  • They would have to accrue a “large trailing liability” in the form of pensions
  • State procurement takes longer and is more expensive than private procurement
  • The private sector tends to deliver infrastructural projects more quickly than the State, which would save money
  • There would be higher “input prices” (the cost of building materials, basically) because suppliers tend to charge more in bidding for State tenders

He also said that the best, fairest way to compare State vs private costs is to focus exclusively on construction costs, and much of his argument focused on this.

Ronan Lyons, an economist and assistant professor at Trinity College Dublin and an expert in housing markets, gave FactCheck his assessment of the SCSI cost breakdown, as modified by Mel Reynolds:

While the [breakdown] is right, [it] is right only in the sense that these costs are not faced by social housing (as opposed to market housing).
In other words, an Approved Housing Body (such as Cluid or Respond!) could also make these savings, or indeed a private for-profit developer, where they committed to using the homes for social housing.

Conclusion

22/9/2015. Homeless Famlies Take Over Nama Propert Source: Eamonn Farrell/RollingNews.ie

This is major, complex question. There are countless details and intricacies involved, which we’ve left out for the purpose of keeping this FactCheck as simple as possible.

It seems clear that there are savings that the State would make under direct local authority construction of housing, and many of these have been quantified, although the numbers will vary from model to model, depending on unit size, location, and so on.

However, there are also additional costs that would most likely arise under the State model – higher wages, pensions, and (based on general historical patterns) delays and inefficiencies that tend to cost the State money.

These are far more difficult to precisely quantify, not least because they often involve long-term pension liabilities that can go on for decades.

And this makes it difficult to definitively say whether these additional costs would match or exceed the savings achieved by removing the developer’s profit, land acquisition costs, and so on, from the equation.

As much as we enjoy clear-cut, definitive FactCheck verdicts, there appears to be no settled consensus on this issue among experts, notwithstanding how adamantly some might insist on one view or another.

For that reason, we rate Ruth Coppinger’s claim – that it’s cheaper for the State to directly build houses through local authorities, than to contract it out to the private sector – HALF TRUE.

Send your FactCheck requests to factcheck@thejournal.ie

  • Share on Facebook
  • Email this article
  •  

Read next:

COMMENTS (98)

This is YOUR comments community. Stay civil, stay constructive, stay on topic. Please familiarise yourself with our comments policy here before taking part.
write a comment

Leave a commentcancel

Trending Tags