First-time buyers' grant will only push up prices
The Government's latest plan to tackle housing problems is careless and will do more damage than good
Published 16/10/2016 | 02:30
The Government's plan to re-introduce the first-time buyers' grant has received a cool response from housing experts. They think it will encourage demand rather than supply and will facilitate a bidding-up of prices by purchasers.
The Central Bank, according to Michael Noonan on Budget day, has accepted that the grant money will be allowed when calculating the deposit required of purchasers under its mortgage lending rules. It could hardly do otherwise: the source of the deposit money is not the Central Bank's business and it would not disallow deposit money that came from a relative. But it can hardly be happy to see the Government borrowing more money to play the rich uncle in the Dublin market, already at risk of a bubble repeat.
Anything which stimulates demand will push up prices, particularly in Dublin and a few other urban areas. The housing affordability problem is not national: houses are perfectly affordable in most parts of the country. There are three times the number of residential units for sale at under €150,000 in Co Mayo alone than in Dublin city and county combined, according to daft.ie. Why introduce a nationwide scheme to address what is mostly a Dublin-area problem? Why stimulate demand in Dublin when supply constraints have already pushed prices (and rents) way ahead of common-sense levels?
The short answer is that fiddling around with tax rebates is easier for politicians than facing the music across the full range of dysfunctions in the urban housing market, through zoning more land, servicing land already zoned, and ensuring prompt availability of planning permission. Dublin-area politicians, including Government ministers, continue to oppose residential development in their own constituencies while keening in public about housing affordability. Making housing affordable means targeting a reduction in house prices through releasing the supply side of the market from the constraints of a policy which has failed. Nobody in Irish politics is willing to explain to Dublin voters that their houses, in a rational world, would be worth less than today's silly prices.
Any buyers' grant in the current unbalanced condition of the Irish housing market should be greeted with suspicion but the details of the Government's scheme contain some especially troubling features. The first is the nationwide application of the proposed subsidy. In counties (the majority) where decent homes can be purchased at €150,000 and under, what precisely is the problem the Government's scheme is seeking to address? Without the scheme, the deposit required is only €15,000. The Central Bank rules require only a 10pc deposit up to a price of €220,000, enough to buy a swanky house in most counties. The banks are now offering 2pc cash-back deals (on the amount of the permissible 90pc mortgage) which lop another €2,700 off this figure, so only €12,300 is required to buy at the €150,000 level. This cash-back goes towards the deposit if the borrower can do some juggling for a few weeks (max out the credit card or borrow from mum) and the loan required is just 8.2pc of the purchase price. Now throw in the Government's proposed deposit subsidy (5pc of the purchase price) and the actual requirement is only €7,300.
The borrower, all the way up to €220,000, needs real money equal to just 3.2pc of the purchase price. The 100pc mortgage is making a stealthy comeback.
Even at a house price of €500,000, the Government's scheme plus the cash-back gimmick from the banks mean that the borrower needs to find just €49,560, and can borrow a shade over 90pc of the price. Outside Dublin, there are hardly any homes being constructed (yet) in the €500,000 bracket. Borrowing 90pc of the purchase price in an artificial Dublin market entails a real risk of negative equity down the line if housing ever becomes affordable.
The subsidy will be available only for new homes, and is intended to stimulate new construction. But empty houses are for sale, and are not shifting, in large parts of the country at less than the cost of construction and at prices readily affordable for any half-solvent buyer under the (nationally uniform) Central Bank rules. Does the Government sincerely wish to encourage new construction in Mayo, to compete with the 950 homes currently on offer, according to daft.ie, at €150,000 and below?
It gets worse. In many rural towns and villages, there is plentiful choice for first-time, or any other, buyers. There is no new construction by builders, since older houses, often on the main street, are unoccupied and openly or discreetly for sale at knockdown prices. There is a ghost estate on the edge of town with unoccupied houses (sometimes vandalised) also available for a song, well under €100,000 in some cases. The older homes need work (central heating, a new roof, re-wiring) and the main street means traffic noise. They are maybe a bit close to the pub and the chipper. The ghost estate is dreary and there is a fear of anti-social behaviour by renting neighbours. It might be OK if fully completed and inhabited but who wants to be the pioneer owner-occupier? The clear preference of many people is to self-build a one-off outside the town, especially if a site can be acquired cheaply from a relative. Construction costs are well below Dublin figures, local tradesmen will do good work for the right price and people can build what they want, a detached modern home that they can afford. The Government deposit subsidy is being made available to the self-builders and will make this popular solution even more attractive.
The subsidy will also be available for the never-occupied units on the ghost estates but it is hard to see them shifting at any price. But the subsidy is not available for the older unoccupied units on the main street, perfectly sound houses in need of energetic owners. The Law of Unintended Consequences haunts Irish policy in so many areas. This latest instalment is bad news for the declining core streets of Ireland's rural towns.
The subsidy is 5pc of the purchase price, up to a limit of €400,000, enough to buy an elaborate mansion in most parts of Ireland. The cap is therefore €20,000. But bizarrely the €20,000 continues to be available up to a purchase price, for a newly-constructed home, of €600,000! To qualify for a mortgage on a €600,000 home, the borrower would need, under the Central Bank rules, an income of €171,000 per annum. Even for a joint income, this is at the upper limit of the Irish income distribution. For a single income, this is a grant to the very highest earners in the country.
Fianna Fail TD Barry Cowen has objected to this measure on the grounds that it is a 'mansion grant'. Sinn Fein's Peadar Toibin has claimed that it is designed for the extravagant prices of new homes in south County Dublin. My concern is more straightforward: the mere mention, by the Government, of grant-aid to buyers at up to €600,000 a pop feeds the inflationary psychology.
The Central Bank will announce revised mortgage lending rules in November and must now consider how to undo the damage wrought by the Government's careless proposal.