Bank rules driving high rent and house prices
Noonan warned against a new help-to-buy Budget scheme
Published 02/10/2016 | 02:30
The Government is playing with fire by introducing a help-to-buy scheme for first- time buyers in the upcoming budget, according to market experts.
Despite rents and property prices continuing to rise in the capital due to catastrophic supply issues, Finance Minister Michael Noonan has been told any scheme to help first-time buyers would inflate prices further.
He has been told cuttting the cost of building homes and doing more to bring further supply to the market would be more beneficial.
Central Bank lending rules have been blamed for escalating demand for rental properties as buyers wait until later in life to purchase homes.
This is also expected to have a devastating effect on house hunters later in life as they will be unable to save to live rent free into their retirement.
Savills Director of Research John McCartney said the introduction of a help-to-buy scheme would not help.
"It would lead to buyers bidding more against each other to a higher price for a single property.
"Doing anything to fuel the demand side of the market is playing with fire. Politically, I can see why that sort of populist notion is appealing but it would lead to people paying up to a higher price point."
Mr McCartney added that the rules are driving up demand for rental properties which in turn is driving up house prices.
He added most potential buyers will need to save and rent for longer before they can afford to buy a home.
This means they will have less time to pay off a mortgage before their retirement.
It will also impact their pensions and ability to retire and live rent free as they get older.
"Driving people into the private rental sector is not helpful because that drives up demand, which drives up the yield and also pushes house prices higher. Prices go up through the back door and the only lasting effect is a shift in tenure from owner occupied to the private rental sector.
"The model that we have had for a long time in Ireland is that you buy a house in your 20s, get the mortgage paid off before you retire and then live rent free for the rest of your life. Because of that you don't need a very extravagant pension to get by.
"That prospect is not possible now and I don't think pension arrangements in many cases are going to be sufficient to do that."
The current lending rules introduced in 2015 mean first- time buyers who want to buy a €400,000 property require a deposit of €58,000 - 10pc of the first €220,000 and 20pc of the remaining €180,000.
They were brought in to reduce house price inflation from more than 21pc and despite inflation standing at 3.8pc today, the rules are having a negative affect on those renting and looking to buy property.
"One option is to move into the commuter belt," said Mr McCartney, "but this is driving house price growth in Wicklow, Meath, Kildare and further afield since the mortgage rules were introduced.
"Then people may decide to stay in Dublin and rent. In the context of a shortage of supply, this drives up rents, and the yield on rent and this attracts investors to the sector."
He said lowering the cost of building houses would do far more to make buying a home more affordable and ease pressure in the market.
The Construction Industry Federation (CIF) director general Tom Parlon said increasing infrastructure investment and cutting the VAT rate for builders would help stimulate the sector.
"The lack of mortgage approval makes it unviable for builders to build, and ironically, for banks to provide finance," he added.
"Those who can afford to service a mortgage can't access one. The CIF believes that the Central Bank could allow banks more exemptions to their rules to provide mortgages only to those first-time buyers with appropriate income levels and a track record of paying rent."
However, Mr Parlon thinks a help to buy scheme could be positive.
"This approach would be more effective than the simple grant scheme being suggested in some quarters. It would also support first-time buyer couples at a lower cost to the State than building an additional social housing unit."