Keep the first time for someone special
'Y OU only live once," said Mae West, "but if you do it right, once is enough." There are many things we get to do just once -- such as be a first-time buyer.
That simple observation has taken on new relevance for people thinking about buying a first home and may have profound implications for what happens to the housing market over the next few years.
With developers still churning out 1,500 new homes a week, a lot is riding on first-time buyers. Figures released by the Department of the Environment last week show that nearly 19,000 new dwellings were completed in the second quarter of this year.
That means completions were running at roughly the same heady pace as at this time last year. But every dog in the street knows that there were nowhere near that many buyers last quarter. That can mean only one thing -- the overhang of unsold properties is growing.
What's worse, completions are expected to step down only moderately in coming months. Developers will be finishing homes that they started to build last year when the demand for new dwellings was still incredibly strong.
Buy-to-let investors won't touch these properties with a barge pole, given low rental yields and dismal prospects for capital gains.
Current homeowners looking to trade up to larger new houses need someone to buy their old home before they can move. In the past, this someone was often a first-time buyer. But potential buyers have gone AWOL, as vividly demonstrated by the placing in receivership of an up-market housing development on the outskirts of Kilkenny city earlier this month, after the developer was forced to abandon the project.
Any way you cut it, a bounce back in demand by first-time buyers appears to be the only thing that can save the day.
Some commentators take the view that potential buyers are holding their collective breaths. Anytime soon, they argue, first-time buyers will come flocking back to the market. Estate agents haven't missed a single opportunity recently to tell anyone who will listen that this is a great time to buy.
The head of one of the country's largest mortgage lenders last week even trotted out the old cliche, "paying rent is like throwing money down the drain" in an effort to convince potential buyers.
But under current circumstances is buying really better than renting? Let's take a closer look.
A few days ago, I spotted on the internet a two-bedroom apartment for sale in Dublin for €395,000. An identical apartment in the same building was advertised for rent at €1,300 a month. A couple buying such a property would face monthly payments, on a five-year fixed rate mortgage, of about €1,900 over 30 years. This figure includes the benefit of mortgage interest relief. As a first-time buyer, the couple will not have to pay stamp duty.
How do the figures for renting and buying stack up? The key is that if the couple plan to live in the apartment for, say, five years before trading up to a larger home, the bulk of their mortgage payments will go to pay interest.
On average, the couple will pay €1,600 a month in interest over the five-year period. That, plus home insurance and the legal costs of buying spread over five years, is the appropriate figure to compare with the €1,300 rent.
You see, you either rent the apartment or you rent the money to buy the apartment. Either way, you've got to rent something.
The Government loves first-time buyers. Stamp duty for these folks was eliminated in June, their ceiling for mortgage interest relief was doubled in the last budget, and more relief is promised in December.
But here's the kicker. These measures make the status of being a first-time buyer increasingly valuable. But you only get to use the privilege once. Like virginity and a no-claims bonus, when lost there's no getting it back.
When house prices were soaring, the name of the game was to get on the property ladder as quickly as possible. Starter homes were in great demand. But with prices no longer rising, why should young people blow their precious first-time buyer status on a starter home?
Doesn't it make sense to keep your powder dry by renting, buying a bigger, more expensive home in five years' time when the dog and kids arrive?
None of this is to imply that renting is necessarily better than buying for everyone. But it does mean that incentives to first-time buyers are a double-edged sword and, at the moment, one at the throat of developers and estate agents.
Alan Ahearne is a former senior economist at the Federal Reserve Board in Washington DC. He lectures in economics at the Cairnes School of Business and Public Policy at NUI Galway
