Property measures must be targeted at urban areas
There is a quote: "Good decisions come from experience, and experience comes for bad decisions." In the context of the recent Budget, one would like to believe that decisions regarding budgetary measures are based on what has been learned from past experience and thus should result in sensible policies.
Specifically in regard to the property market, we are all aware of the bad decisions made during the late 1990s and the noughties and the adverse repercussions which followed. The recent Budget had a number of good measures to support the private rental market, which I have written about in today's Property section.
However, the income tax rebate to assist first-time buyers (FTBs) is, in my opinion, a bad decision, which will push up house prices. The measure is reportedly designed to boost the supply of new homes, but it is questionable whether it will have this impact, at least in the short run. Moreover, the provision of the rebate to all FTBs is akin to the 1990s Serviced Land Initiative, which opened up land for residential development all over the country.
The tax rebate is being introduced to assist FTBs of new homes to fund the deposit required under the Central Bank's macro-prudential rules. It will consist of a rebate of income tax paid over the previous four years, up to 5pc of the purchase price of up to €400,000, and will be available for properties priced up to €600,000. The first-time buyer must take out a mortgage of at least 80pc of the purchase price.
The CSO reports that the average FTB house price in July was €257,000, ranging from €60,000 in Cavan to €352,000 in Dublin. There were five counties where prices were below €150,000 and a further six where they were below €200,000. Individual FTB prices were not provided for nine counties, but average prices for all houses in a number of these were below €200,000.
The table alongside examines a number of case studies, using four of the house prices already mentioned plus two other examples of €500,000 and €600,000. The gross incomes required to purchase these properties, which would mostly involve working couples, are derived using the Central Bank's loan-to-income limit of 3.5. This will not change on account of the introduction of the tax rebate.
The tax rebate will mean that potential FTBs will now not need to raise the full deposit previously required. However, those who have already saved their deposit will be able to pay more for a property. Those who have not yet raised their deposit will now be able to enter the market more quickly. And those who are currently renting or living at home may now decide to get onto the property ladder. The level of pent-up demand in the property market is already at exceptional levels, estimated by DKM at around 40,000 nationally. Thus demand will be higher than it would have been before the rebate was introduced, and buyers will be able to pay higher prices. In terms of supply, there will be no increase in the short-run.
A more targeted measure aimed at urban areas where there is a supply problem, such as, for example, a reduction in development contributions, would have been preferable, and would have reduced the cost of the measure to the taxpayer.
More importantly, it would have tended to reduce house prices rather than increase them.
Annette Hughes is a Director of DKM Economic Consultants