Home Truths: Weighting works for new homes
There is an argument to be made that a variety of incentives which have in the past been employed to weight the property market in favour of new home buyers, were substantially unfair to existing home owners.
If you owned a house and a new scheme of similar sized homes was constructed on your doorstep, the fact that the new houses were relatively cheaper (thanks to stamp duty exemptions and first time buyer's grants and so on), would damage the saleability and value of your property. Existing home owners always lost out financially when new homes arrived on their doorstep.
Irish governments have maintained substantial grants and stamp-duty free regimes in the past which have caused imbalances. In the bubble years these incentives were misguided and even dangerous in terms of heating the market. Section 23 incentives, in particular, caused immense damage. Initially they worked extremely well for the purpose they were designed for - they helped redevelop Dublin's derelict city centre through introducing an artificially favourable regime for investors buying new apartments.
But their scandalous retention through most of the boom years poured petrol on the fire of an overheating market. It meant that as we neared the bubble bursting, we were chucking up apartments by the thousands to rent out to the same teams of East European workmen who were coming here to build them in the first place.
When the market eventually crashed, we were left with empty blocks and ghost estates. As it happened, years later, the better located of these homes would be badly needed.
Incentives or legislation which make new homes more attractive to buy financially are only ever justified in a market where there is a scarcity of affordable homes. Right now is one of those times - new homes in numbers are desperately needed.
In order to tackle the shortage that has caused the housing crisis, we need to do everything possible to weight the market in favour of new homes construction and towards the purchasing power of new home buyers. The target should be to construct as many affordable new homes as possible in areas where the shortage is most acute.
This is why the Central Bank's announcement this week that it is amending its own lending restrictions to incentivise new home purchases is entirely justified and timely.
This week saw the Central Bank lift the loan to value (LTV) ratio for all first time buyers (FTBs) to 90pc for all of that home's value. Previously the LTV threshold for ftbs was 90pc up to €220,000 and 80pc for the amount above. Combined with the Budget's recent 5pc tax relief on new homes purchases, up to €20,000, it means a seismic shift in the relative affordability and attainability of a new home from the first time buyer's point of view.
A FTB acquiring a fairly average Dublin new home priced at €350,000 two months ago, would have had to come up with a €48,000 deposit. Today that amount has been slashed to €17,500. This is a substantial difference. For aspiring FTBs paying out huge rents while trying to save, it could mean the difference between purchasing next year rather than in 2019.
But it also does something else. It makes new home building a more financially viable and therefore, a more likely prospect from the perspective of an entrepreneur in the construction sector. The changed regime should improve the borrowing success rate of builders and developers seeking finance to get on site and launch new schemes.
So the combination of the Central Bank changes this week and the Budget tax relief a month ago, should in reality ensure that many more new schemes go live, and in the process, genuinely help address the housing crisis.
Now it's time to go further.
Government should go the full hog and abolish VAT on new home sales. There has been talk of pulling it back to the 9pc preferential rate which was successfully employed in the restaurant and hospitality sector but with rents soaring to rates which are even higher then in the boom years and rental room shares now common for three people sharing, a complete wiping of vat is justified.
Meantime Britain, which has experienced its own shortages, has successfully implemented a series of new home design competitions in order to encourage the sector to produce new and innovative quality designs which can be built affordably at speed. This is another route Government should embark on. We need affordable quality design templates which can be built quickly.
But there will be losers. As new home schemes thrive, existing home owners will once again experience value plummets. For the common good, it's justified. Just as vital however, is that we kill these new incentives again once our problem is solved.