Monday 16 December 2019

Richard Curran: New mortgage scheme is taxpayer subsidised intervention in housing market

REPORTS of a new government-backed mortgage insurance scheme for first-time buyers are a little troubling. The government wants to get 60,000 construction workers back in employment. One way of doing this is to boost house-building from 8,000 houses last year to around 25,000 within two years.

House prices are now finally rising, as is mortgage activity. The latest figures from the Irish Bankers Federation show that 3,425 mortgages were drawn down in the first three months of this year. Mortgage activity is up 65pc on last year, according to the IBF.

Yet, the government seems concerned that builders are not coming forward to build new houses at the optimum rate. Undoubtedly they have been whispering in Michael Noonan’s ear that they can’t build the houses, because the banks are being too mean in giving out mortgages to first time buyers.

In other words: “It’s the banks’ fault. If we build them, the banks might not give out enough mortgages to people to buy them. We need some kind of government intervention to make this work.”

Hence, reports in the Irish Independent, that the government is planning a mortgage-guarantee scheme for first time buyers. This would see first-time buyers secure up to 95pc mortgages, and part of the mortgage would be guaranteed by the state in the event the customer can’t meet repayments in the future.

The idea is that such a move would give comfort to the banks to go ahead and lend more to first-time buyers, while also giving certainty to the developers that there will be customers for these houses.

It provides no real comfort for the taxpayer who is subsidising an intervention in the housing market. The upside for the taxpayer is that the 60,000 construction workers will pay taxes and money will go round in a virtuous circle – sound familiar?

If these first-time buyers are a good bet – in other words if they deserve a mortgage based on their circumstances – then they should get it. They are either a viable and reasonable risk, or they are not.

The construction industry is clearly telling the government the banks have lost their risk appetite or desire to lend mortgages for first-time buyers. If this is true, then what are the reasons for it? If the banks are wrong, then surely that would leave a gap in the mortgage market for a new lender with no baggage or legacy debts to come in and make a fortune. 

This scheme looks like a watered down version of the British ‘Help to Buy’ scheme. The British one is quite reckless because it applies to all houses and all buyers. This Irish scheme would focus on first-time buyers only and apply to two and three-bedroom houses only. It has also been suggested that it would involve a house price cap, which would prevent the subsidised lending from driving prices up too high.

Where will this cap be set and by whom? What factors will be taken into account in calculating the cap? What impact will that price cap have on the housing market? These are difficult questions that arise when government starts meddling directly in the housing market.

The checks and controls might make the government feel better about interfering in the housing market with a subsidy, but this could be a dangerous first step.

Online Editors

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