merrion street

Introduction

Good afternoon, ladies and gentlemen. I am delighted to have been asked to wrap-up your conference today and I trust that you have enjoyed lively and productive discussions aided by the impressive line-up of contributors.

Developments in the sector

What I would like to do is to start by saying a little bit about where the construction sector has come from before looking at its future potential. I will also present some thoughts on where I see the future economic role of the sector lying and comment briefly on some of the actions that the Government has taken to support the sector in its current very difficult circumstances.

I don’t need to tell this audience that the construction sector has gone through a wrenching adjustment over the last 5 or 6 years following the spectacular collapse of a bubble. Let me just draw your attention to a few key facts and figures:

By 2007, the construction sector had grown to the point where its output was close to €39 billion or an extraordinary – and unsustainable – 25 per cent of GNP. This year, it is estimated that output will fall to €7.5 billion or just 6 per cent of GNP.

In 2006, over 93,000 new houses were completed. This year, the expectation is the number will be closer to 8,000.

Five years ago, the construction sector employed some 270,000 people accounting for almost 13 per cent of total employment in the economy. The latest figures show that the total number at work in the sector has fallen to below 100,000 or under 6 per cent of the economy-wide total.

I think it is important to bear in mind that our experience is not unique – internationally the construction sector has been hard hit by the economic and financial crisis of recent years. People here will be familiar with the case of Spain whose experience has some similarities with our own and where, for example, house completions have fallen from a peak of over 650,000 in 2006 to 180,000 last year, a fall of some 73 per cent. More broadly, construction output has fallen across the EU economy as a whole so we – by which I mean both industry participants and Government – need to keep abreast of what is happening elsewhere and tap into the wider international debate about the future economic role of the construction sector.

Future prospects and potential

I think it is important that we are clear that there will be no going back to the bubble conditions of 5 to 6 years ago. In terms of what we might realistically aspire to, I am aware that the recent report on “The Irish Construction Industry in 2012” prepared for the Society of Chartered Surveyors in Ireland envisages that a construction sector with a share of about 12% of GNP (or 10% of GDP) is what we could expect an economy of our size to sustain. At this level, the sector would be able to meet underlying demand for the economic, social and environmental infrastructure that it produces.

While Government will have a role – and I will talk later about what we are doing to support the sector – it won’t be in the business of trying to artificially stimulate demand for building sector output. The Construction sector like all sectors of the economy must operate at a sustainable level. It is important that the industry itself – and in particular organisations such as your own Federation – contribute actively to a process of thinking about how the industry can meet the challenges it faces and re-position itself to meet future demand.

In this context, the European Commission recently published a strategy for the sustainable competitiveness of the construction sector. Obviously, a Commission document like this takes an EU-wide perspective. But the document merits some consideration and reflection in terms of thinking about the future role of the construction sector here in Ireland.

The Commission acknowledges the important role the sector plays in the European economy while also highlighting the point I made earlier that the sector has been one of the hardest hit by the financial and economic crisis. It also identifies a series of challenges that the sector faces. In many ways, these challenges can be understood as the need to achieve a long-term restructuring of the sector. I think this is the challenge we in Ireland face too.

There are also some interesting ideas from the Commission on areas of potential demand for the industry over the medium term. In particular, they highlight the important role the sector will have to play in meeting EU targets for energy efficiency especially around the energy performance of buildings and moving towards the objective of a low carbon economy. There will also be an important role for the sector to play in helping economies to adapt to climate change. So I think that the industry here in Ireland needs to gear up to meet these potential sources of new demand both in Ireland and indeed in external markets.

The role of Government

My Department is playing its part in returning the property market to normal. The Department has already held meetings with the CEOs of the lending banks and relevant stakeholders to discuss ways forward. I see the Department as playing an active role in supporting growth in key sectors of the economy, including the construction sector. Last year’s budget measures were an example of that role in action. It aimed to restore confidence, re-build our economy and provide stability and certainty to investors to invest in Ireland. At the time, I said that as well as introducing policies to assist economic growth, we must also address the constraints on growth. It was with this imperative in mind that the property related measures were introduced.

The Budget reduced the Stamp Duty rate for commercial property transfers from the rate of 6 per cent to a flat rate of 2 per cent on all amounts in respect of all non-residential property, including farmland as well as commercial and industrial buildings.

While the number of property transactions subject to Stamp Duty from 1 January to 31 August 2012 is over 10% up on the same period last year, from 30,293 in 2011 to 33,895 this year, a range of factors may be relevant and it is still too early to assess the impact of the Budget changes.

The Budget also provided that first time buyers in 2012 will get mortgage interest relief at a rate of 25 per cent and non-first time buyers will benefit from relief at 15 per cent. This measure gives certainty to those considering purchasing a home. I want to again strongly emphasise that this mortgage interest relief measure will come to an end at the end of this year. There will be no extension to this measure given the current budgetary position. Furthermore, purchasers should make sure to factor in the time required between purchase and mortgage drawdown in order to qualify for mortgage interest relief so we are getting close to the time when the curtain comes down on this.

I also introduced a Capital Gains Tax incentive for property purchased between 7th December 2011 and the end of 2013. If a property is bought during this period and held for at least seven years, the gain attributable to that seven year holding period will be relieved from Capital Gains Tax. This applies to commercial property, including industrial and commercial buildings and farmland, and to residential property.

Public Capital Programme

Despite the challenges we are facing as a country, the Government agreed to provide €17 billion for our capital programme for 2012 to 2016. This level of expenditure is based primarily on what we can afford. In that context, we have prioritised the investments that are most needed.

The Capital Investment Plan has been designed to facilitate economic growth and build our social infrastructure. Capital spend will now see an increasing share of our scarce resources allocated to jobs, schools and healthcare facilities, all areas where the construction industry can expect to benefit from the increased demand stimulated.

We will be spending €2.2 billion for 40 New Schools and 180 other major School Projects.

We will be spending €2.9 billion on our national and regional road programme, including a new PPP road, the Ballaghadreen By-pass, motorway maintenance and provision for local and regional roads. We will also be providing €1.4 billion for the LUAS interconnection, Rail Safety and regional cities traffic management and removal of bottlenecks.

We will spend €1.5 billion for Water Services and €1.4 billion is being provided for Social Housing Provision and some Regeneration schemes.

Infrastructure Stimulus

In July 2012, my colleague Minister Howlin announced the Government’s plans for an additional €2.25 billion investment in job-rich public infrastructure projects in Ireland. The bulk of the funding will come from a combination of the:

National Pension Reserve Fund

European Investment Bank/Council of Europe Bank

Domestic Banks

and other potential private investment sources

This package is the culmination of intensive efforts to identify projects that are realistic, credible and deliverable. It is estimated that Phase 1 of our PPP programme will generate up to 13,000 jobs. The focus for Phase 1 is on projects valued at up to €1.4 billion in the Education, Health, Transport and Justice Sectors.

Residential Property

The Government regards the residential property area as a key aspect of the wider construction sector. Our strategy to deal with mortgage arrears is receiving the highest priority and we have already taken a number of actions in this area.

But, there are no quick fixes or a one-size-fits-all solution to the mortgage problem.

Each family in mortgage arrears faces unique difficulties and we must have a range of solutions which can be adapted to resolve their difficulties.

In light of the audience here today, I do not propose dealing in detail with the actions already undertaken by Government but they include:

· A range of resources to better inform and advise at risk mortgage holders

· The Mortgage to rent scheme

· The new personal insolvency regime

· The development of the new residential property price register and

· The banks actively implementing mortgage arrears resolution measures under the oversight of the Central Bank.

The banks have also started to introduce new products to get the residential property sector active and liquid again including announcing specific funds and different types of mortgage products.

In this regard, this week’s CSO Residential Property Index figures are somewhat encouraging, as at an overall level, they show a stabilisation in house prices over the past 6 months.

The Property Price Register is being compiled by the Property Services Regulatory Authority and its launch is imminent. The register will contain the price of each residential property sold in Ireland so anyone will be able to find out how much homes on a particular street are actually selling for. Removing price uncertainty will allow both buyers and sellers to make informed decisions on what moves they want to make.

Turning to the sustainable energy area, the Better Energy Homes scheme provides grant assistance to homeowners who wish to upgrade the energy performance of their homes. In addition to the direct benefits of cost savings and increased comfort levels to homeowners, the scheme reduces imports of fossil fuels as well as reducing harmful greenhouse gas emissions. There are also significant economic benefits including direct employment in a labour intensive sector with nearly 2,000 contractors registered for the scheme. The continued growth of this sector will be vital if Ireland is to meet its energy efficiency objectives across our building stock.

Construction Contracts Bill

The Programme for Government contains a commitment to introduce new legislation to protect small building subcontractors that have been denied payments from bigger companies and I know that this is an area of particular interest to you here today. My colleague Minister of State Brian Hayes is working with Senator Feargal Quinn to develop the Senator’s private member’s Construction Contracts Bill into a robust piece of legislation. The Bill has passed Second Stage in the Dáil.

Government will be making some amendments at Committee Stage which is expected to take place in this Dáil session. This is an important piece of legislation aimed at creating a more level playing field between contractor and subcontractor in the construction sector.

NAMA

I have engaged with NAMA since coming into office and I am pleased that the agency is making a positive contribution to a renewal of sustainable activity in the property market in Ireland. You heard earlier about the measures that NAMA is adopting so I will not list out these again but I would just mention the ones that I see as key interventions:

NAMA’s investment of €2 billion of capital and working capital on assets located in Ireland, which will generate up to 25,000 direct and indirect construction jobs and potentially an additional 10,000 jobs in the wider economy.

The making available of a further €2 billion in the form of vendor finance to facilitate the sale of properties.

NAMA’s work with other State Agencies, most notably with the IDA in respect of the provision of first class office space for interested FDI companies to facilitate the creation of employment.

The introduction of the 80:20 Deferred Payment Initiative.

NAMA will be key to the normalisation of the property market and I will continue to work closely with NAMA.

Government Finances

Although everyone is aware of it, it is no harm to remind ourselves of the fiscal situation in which Ireland finds itself and the tightness of funds means that every measure which requires expenditure must be financed by a corresponding increase in Revenue or a corresponding reduction in expenditure. Many of you may be into the Department in the build up to the Budget and I would strongly advise you to have prepared an answer to the question “what are you willing to forego to pay for your proposals?”

Officials in my Department have been meeting with stakeholders in the residential property market over the past number of weeks and listening to their suggestions on what needs to be done on the Government’s side to get the property market functioning effectively again.

The types of suggestions which are being put forward so far can be categorised into actions or changes in policy in the banks, the usual tax incentives, education strategies for house buyers and the fostering and development of competition in the mortgage market. We will carefully examine the suggestions already put forward as well as continuing to meet with other stakeholders to further expand our understanding of the issues facing the sector and the range of possible responses.

This Government does not have a monopoly on solutions and will be glad to listen to any suggestions to help the property and construction to get back to a functioning and effective market situation.

General economic situation and outlook

I would like to briefly comment on the current macroeconomic situation. As you will be aware, last year saw an expansion in gross domestic product of some 1.4 per cent. This followed three years of successive decline in GDP and marked a welcome turning point in the economic cycle.

The recovery is being led by the external sector with exports of goods and services now well in excess of pre-crisis levels. This shows that the improvement in competitiveness, which has been evident in recent years, is yielding benefits. It also highlights the inherent flexibility of the Irish economy which has seen significant falls in prices and costs. The strong export performance also means that our balance of payments with the rest of the world moved into surplus in 2010 for the first time in over a decade.

More recently, a surplus of €3,235m was recorded on the current account of the balance of payments in the second quarter of this year. This is the largest nominal surplus recorded since records began in 1981. While the figures can be quite volatile, it is worth pointing out that over the last four quarters the current account balance has averaged 3.3 per cent of GDP. A surplus of this magnitude has not been seen since the early 1990s.

My Department will produce revised forecasts for 2012 and later years next month and these will take account of more recent information and the outlook for the international economy.

Wrap up/summary

To sum up, the construction sector has been hit hard in recent years but the Irish economy is not an outlier in this regard. We accept that the sector has an important role to play in the recovery of the economy and see good potential for the sector to rebuild to a sustainable level, not as high as it was but certainly higher than it currently is. The Government is actively playing its part within the tight fiscal situation in which we find ourselves.