The state agency tasked with delivering affordable homes has said it will not be able to solve the housing crisis unless it gets more money from the Government as inflation drives up construction costs.
he Land Development Agency (LDA) was given a five-year budget of €3.5bn in September under the Government’s Housing for All plan, but already its chief executive believes high inflation means the money will not last that long.
“Nobody is suggesting we would be lowering our targets, but it’s going to cost more to deliver,” LDA chief executive John Coleman said. “We may have to go back to the Government sooner seeking more capital.”
Such a move would put the Government in a difficult position, effectively having to spend more money or accept the housing crisis is not going to be fixed in the promised time frame.
The LDA is planning to deliver 8,000 affordable homes by 2026 and will break ground on two developments in Dublin and Cork this year.
But the LDA has already had to adjust contractual terms with builders to take account of more expensive materials, introducing a variable component that is likely to increase the costs of projects that are just now getting under way.
“It’s very hard for contractors to commit to a fixed price for two or three years under the circumstances, which we are asking them to do,” Mr Coleman said. “The Government is looking at ways to introduce more flexibility to accommodate them in a fair and appropriate way to deal with the risks and the costs.”
The Society of Chartered Surveyors in Ireland (SCSI) said the annual rate of construction price inflation hit 13pc in 2021 and would likely get worse over the rest of this year due to the global impact of the war in Ukraine.
Their latest Tender Price Index showed high price volatility across a range of building materials as well as labour shortages due to extremely high demand for projects
following the Covid-19
“Management of risk has now become a primary focus for companies to ensure that construction competitions awarded are adequately structured to protect against inflation pressures within the market,” said Kevin James, vice-president of the SCSI.
“From a public sector perspective, additional measures need to be introduced by government to ensure that existing projects are afforded an equitable level of price variation. This will enable contractors to respond to the frequent increase of material prices facing the market at present and ensure more balanced risk pricing.”
In response to these issues, the LDA is now exploring legal ways to negotiate “hot rates” with builders for areas of massive inflation, such as steel rebar and concrete, that would tie some of the cost of projects to market prices to make them viable.
“Like everyone else, we are subject to inflationary pressures, so it is a concern,” Mr Coleman said. “The cost of delivery is going to increase, but we still have to deliver affordability.”
He said the agency would simply have to absorb more costs to meet its housing
The LDA is about a month away from announcing its first “forward purchase agreements” with cash-strapped developers who lack the financing to complete their building projects.
The initiative to unlock unused development sites, called Project Tosaigh, has the potential to deliver an extra 5,000 affordable homes, the agency said.
The LDA is negotiating terms with several potential partners to be a backstop buyer for the houses, which would allow the developers to secure the private sector funding needed to build the homes.
The agency is first focusing on guaranteeing developments that can break ground this year as the “simplest and lowest risk” approach but will ultimately seek multi-annual agreements on large sites, according to Mr Coleman.
The LDA has submitted planning permission applications for housing projects totalling nearly 2,400 homes in Dundrum, Balbriggan and Skerries – all in Dublin – and in Naas, Co Kildare.
Mr Coleman would not commit to a timeline for delivery, saying the planning and procurement processes could take years.
However, the agency is starting construction on developments in Shanganagh, Co Dublin, and St Kevin’s in Cork that will deliver nearly 900 new homes starting in 2024 in the largest affordable housing schemes undertaken by the State in decades.
Mr Coleman said he was encouraged by a survey last year showing two-thirds of renters would be interested in cost-rental accommodation.
He said the LDA is well-placed to lead in developing affordable rental units and was open to partnering with approved housing bodies or private operators.
On the issue of rising construction costs, a Department of Housing spokesman said: “Housing for All commits that the Government and relevant State agencies will advance methods to reduce residential construction costs, particularly the cost of apartment construction, by increasing the focus of existing and planned construction related initiatives on the residential construction sector, and by ensuring a co-ordinated, whole-of-government, approach to residential construction.”
The spokesman said the department was also in the process of preparing a study to carry out an analysis for each component of cost of construction with a view to reducing cost and increasing standardisation