Construction costs make up less than half the total of building a new home in the capital, a new report has found.
According to the report by the Society of Chartered Surveyors Ireland (SCSI), the average cost of building a three bedroom, semi-detached house in the greater Dublin area is €330,000.
The construction costs – or “hard costs” - came to €150,000, amounting to less than half (45pc) of the total cost of building the house.
The remaining €180,000 consists mainly of “soft costs” such as the land and acquisition costs of €57,000 (17pc of total), VAT of €39,000 (12pc) and a margin of €38,000 (11pc).
Michael Mahon of the SCSI described the fact that the soft costs dominate the total cost as an issue the government urgently needs to address.
Seems to me that the soft costs are entirely in the hands of the construction industry.
VAT is charged on new builds at 13.5% so VAT on the “Hard costs” is 20,250
Builders are obviously paying too much for land - many of them own that land - they paid more than the market can bear. So the final House price contains 57000 (+13.5% - 64695) in land costs and 38000 margin (+13.5% - 43130) that they could control. The appropriate Government control would be to impose (and collect) a truly punitive land tax on unused development land in areas of housing pressure. This would force land hoarders to take losses and drive down the price of land.
The margin is also quite extraordinary on a base price of 150000 - the margin is 25% (the margin shouldn’t be applied to the land costs in my view). Lets move closer to a margin of 10% and half land costs
So if we did this we have ((150000 *1.10)+28000) *1.135 giving a price of 219055 including VAT. This seems far closer to the affordability levels that we need.
If the developers kept their 25% margin the price would be 244592.
Land cost and margins are the big thing here - let the SCSI cop on and get on to the builders case - not the government.
Could we drop VAT on new builds for a few years?
History shows that property prices expand to suck in all the available cash. Home buyers will end up forking out the same, and developer margins will increase. Land prices would also then go up accordingly, and developers would go back to complaining about margin. The only way to do it would be to reduce CB lending limits at the same time. But that would also negatively affect the value of second hand houses, so existing home owners would revolt.
It’s what makes property booms so insidious – there’s no easy way to undo the damage. Even the punitive tax on undeveloped land that some see as the solution is not a panacea. If it sends developers into bankruptcy the same way the last bust did, it will not result in any increased supply. What we really need is a consistent long term strategy that is clearly signalled in advance, rolled out gradually over years, and doesn’t cave in to political expediency – in other words, exactly the sort of thing that governments are really crap at.
If it sends developers into bankruptcy the same way the last bust did, it will not result in any increased supply.
Not sure why you say that…unless you think that the repossessed land (from the bust developer) will sit in the hands of the banks for years looking for a solvent builder to develop it. I think that if it is sold/lost by a developer without the cash to build on it, the lower price will facilitate a developer who does have the cash (or backing) to build on it, especially now that they have got the land at a lower price.
Maybe you are suggesting that all developers will go bust simultaneously like 2009. I think this unlikely as the banks can pick the winners this time as it won’t be systemic risk but just over-stretched developers risk.
You’re right, my hypothesis depends on how parlous a state the developers are in, and I readily admit to not knowing that. But there is no doubt that the capacity to build has been rebounding only slowly since the bust, and part of the problem is that the banks require the developers to make high margins on projects so that they (the banks) are not left holding the baby again if things go pear shaped. That reduces the number of viable projects.
By all means, if developers can wear the cost of a land hoarding tax by increasing output, have at it. But one suspects there are other well-connected owners of property at the heart of the Irish establishment who would not want to see such measures.
The latest report by the Chartered Surveyors says costs have increased by €41,000 over the last four years, bringing the total delivery cost of a 3bed semi in the greater Dublin area to €371,000.
This puts an ordinary new house out of the reach of the average couple. The pandemic measures will add substantially to these costs. The Government has get to grips with this quickly or a generation will be left at the mercy of the private rental market.
Is local government capable of delivering social housing, as it used to do in decades past?