Let’s talk about urban dereliction. Walk around Dublin, Cork or Limerick and dereliction is everywhere. Close to The Irish Times offices large swathes of Dublin’s south inner city are run down, in need of repair, unoccupied and derelict. And while many buildings may look occupied on the ground floor, once you lift your gaze more often than not the third and fourth floors are falling down.

The same is the case for Cork from where I’m writing today. Walking the length of this lovely city west to east you see something similar all the way from the Mardyke to Custom House Quay, upper floors appear grossly under-utilised and, in the main, vacant. They are certainly not homes or apartments.

In our cities that are crying out for accommodation how come so many buildings – potential homes for thousands – are derelict?

How come there are only 100,000 people living between the canals in Dublin when at the same time in Copenhagen there are close to 600,000 living in more or less the same footprint?

Copenhagen a not high-rise city, rather it is an intensively-used six-storey city. The main difference is usage. In Copenhagen buildings are used in their entirety; in Dublin and other Irish cities they have been allowed to go to ruin, and there is no penalty associated with dereliction.

In terms of our urban landscape, dereliction is legalised vandalism for the property-owning classes. It is as deleterious to the streetscape as vandalism.

Deploying the American “broken window” theory of urban development, once the city authorities tolerate dereliction and vacancy, dereliction and vacancy will spread. People see vacant properties, boarded up windows, idle sites and derelict buildings and they tolerate them. Thus we descend into a downward urban cycle, where people move away from the area.

Urban vacancy

In terms of the housing crisis, this dereliction and urban vacancy is quite inexcusable. So what to do about it?

First, we must define reality. Reality is that land is an economic resource that can either be used or hoarded. If you want land to be used intensively in urban areas you have to change the incentive structure away from tolerating dereliction and towards encouraging renovation. It is clear that the free market is not working. If it was we would not have dereliction in our city centres.

When property prices are rising there is always the incentive to hoard rather than develop. The reason is obvious. Why develop or renovate today when you can do it tomorrow, or, even more enticing, why not do nothing and sell on next year or the year after at higher prices?

So when prices are rising, supply of existing buildings doesn’t expand as economic theory suggests. In contrast, supply stalls as owners who might develop wait for prices to go up a bit more.

As a result the market can’t solve this on its own, and, indeed, leaving it to the market simply leads to more foot-dragging.

The way to solve this is to penalise dereliction and vacancy but at the same time to encourage renovation. So we must split the value of any urban building in two. The first value is the site value and the second is the bricks and mortar value or cost.

Take, for example, a building in Dublin’s north inner city worth €1,000,000. The site value of this building is, let’s say, €500,000, and the brick and mortar value is €500,000. It would not be difficult to estimate for the whole city a site value equating to the square metre site value or location value for certain parts of the city. This would vary according to the location.

Amenities

The site value per square metre in Dublin 4 would be more than the site value per square metre in Dublin 7. Dublin 4 is made more expensive by the amenities provided in Dublin 4, good rail links, good schools, good public hospitals, clean open spaces as well as shops, restaurants and footfall.

The value of sites in Dublin 4 is not generated by the individual owners of the sites in Dublin 4, but by other people, other enterprises and by generations of public investment in this area. A site value will go up enormously if a Luas stop is built there, yet the Luas stop is provided by the taxpayer – not by the site owner who will benefit from this windfall.

Therefore taxing the sites rather than taxing the individual owners who renovate their property captures some of that public site value back for the public because it is generated by the public not the individual owner.

The decision to renovate is a separate matter; it is a cost incurred by the owner to increase the value of the property at his expense. Such initiative should not be taxed.

By the way, a site-value tax should extend to public land owned by the State in strategic residential parts of the city but left lying fallow. State inertia as well as developer/owner greed is a massive contributor to land hoarding.

A site-value tax or a location fee would go a long way to stopping land hoarding in urban areas. In fact a site-value rather than property tax is the way forward because property tax actually penalises the people who renovate their home, adding value through their own efforts. A site-value tax only taxes the site, and in so doing reduces the incentive to hang on waiting for prices to rise further before selling for development.

Keeping this idea in mind, consider going one step further with dereliction. There should be a very draconian dereliction tax that makes it prohibitively expensive to sit on a derelict or vacant building.

Prohibitive

The owner could avoid this tax by selling on to a developer who wants to build or develop the building. Or the owner can avoid the tax if he starts developing or renovating himself. This tax would have to be high enough to make dereliction prohibitive. So it should be at least 50 per cent of the site value per annum. This would make the market move.

However, just in case you think this is a “penalise owners” idea, it is not. We could also introduce a tax incentive for renovations. So the owner who complains, with justification, that renovation of old buildings is extremely expensive can offset those expenses against tax. This would encourage development immediately, and give the developer an incentive to arrest dereliction and vacancy.

By penalising bad behaviour and rewarding good behaviour we breathe new life into cities and begin to chip away at the housing crisis – by using rather than hoarding existing buildings and land.