Tuesday 21 November 2017

First-time home buyers warned they are at risk of a new debt trap

Government initiative is 'wrong policy' to help young buyers
'Kieran McQuinn, ESRI research professor, stressed the Government's new help-to-buy initiative is not the right 'policy response' at a time when house prices and rents are growing sharply' (stock photo)
'Kieran McQuinn, ESRI research professor, stressed the Government's new help-to-buy initiative is not the right 'policy response' at a time when house prices and rents are growing sharply' (stock photo)

Mark O'Regan and Wayne O'Connor

First-time house buyers risk being lured into escalating levels of debt, as the Government's new help-to-buy scheme stokes demand to potentially dangerous levels, one of the country's leading think-tanks has warned.

And we're "treading a fine line" between driving the economy to produce more houses and pushing it into "overheating" territory, the Economic and Social Research Institute (ESRI) has warned.

Speaking to the Sunday Independent, Kieran McQuinn, ESRI research professor, stressed the Government's new help-to-buy initiative is not the right "policy response" at a time when house prices and rents are growing sharply.

"We would be quite sceptical of any measures that are further stimulating demand in the market."

He also warned young couples risk being forced to borrow at levels last seen during the Celtic Tiger. "If prices are going up - and first-time buyers are trying to get into the market - unfortunately they will have to take on more debt." He stressed the fallout from this initiative "needs to be kept an eye on".

He said it is vital younger house purchasers are not burdened by the same levels of debt they took on during the boom. The Institute predicts that unemployment will fall to a post-crash low of 5.6pc by the end of next year. This is two years earlier than expected. The ESRI, in its latest quarterly commentary, says a predicted upsurge in house construction will provide a major boost for job creation. It is predicted we could have essentially full employment before the end of 2018.

"The number of people out of work has been falling since 2013," said Dr McQuinn.

"Towards the midpoint of last year, the fall seemed to abate a little bit. In the last six months it has picked up again, and I think that's going hand in hand with more construction activity." However, if unemployment were to drop below 5.5pc, there may also be a risk the domestic economy is in "overheating" territory. "When it falls below 5.5pc the economy is running pretty strongly and you're certainly beginning to get into the overheating category," he said.

However, he said the country needs more housing, investment and infrastructure.

But knock-on economic risks need to be carefully noted, as the general pick-up in construction becomes more and more important in driving the economy forward.

He said while the number of new builds remains "very low", there are signs supply is beginning to pick up.

"Supply is key. Last year, we built around 15,000 houses. Effectively, we need to double what we're building at present. I think we will do that over the next couple of years, and we can see that supply is starting to come on stream."

But he stressed the challenge is to make sure we don't start building, "crazily high amounts like we did in the run up to 2007.

"If we start building 35,000 to 45,000 houses a year, then we're back into the difficulties we had in the mid noughties.

"We need to make sure that we don't get back into the space. There's so much talk about needing more housing supply. The problem is that when you crank it up, and there's so much political consensus, it can almost become like a juggernaut. Suddenly the whole thing can take off. Hopefully lessons have been learned."

Meanwhile, property expert Philip Farrell said prices have already increased by 3pc to 4pc in 2017 and should reach double figures by the end of the year. "Estimates at the start of the year were that prices for first-time buyers nationally were going to increase by between 5pc and 10pc. I think it will be the upper end of that and close to 10pc."

Sunday Independent

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