Tuesday 18 December 2018

If you can't buy a house, blame the Government, not the Central Bank

Ministers need to provide coherent policies to make it easier for people to buy their own homes

'Throwing more borrowed money at the limited supply of houses will not make it any easier for people to get on the housing ladder.' Stock image
'Throwing more borrowed money at the limited supply of houses will not make it any easier for people to get on the housing ladder.' Stock image

Brendan Burgess

Last week, the Central Bank announced it was leaving its mortgage limits unchanged. A first-time buyer cannot borrow more than 90pc of the price of the house and they cannot borrow more than 3.5 times their income.

Cue the usual howls of protest from auctioneers and mortgage brokers. A starter home in Dublin will cost around €300,000. With the high cost of rent, it's too much to expect a young couple to save the €30,000 deposit. Critics of the Central Bank seem to think that we should go back to the bad old days of 100pc mortgages.

As it happens, the Central Bank rules allow lenders to exceed the maximum 90pc loan limit in up to 5pc of cases. However, the lenders have decided that in a society which does not allow repossession of homes, it's not very clever to lend more than 90pc to anyone. So even if the Central Bank relaxed the 90pc rule, it wouldn't help people buy their first home.

Throwing more borrowed money at the limited supply of houses will not make it any easier for people to get on the housing ladder. It will just push up the price of houses further, leaving borrowers with bigger loans and higher repayments and a real risk of a repeat of the arrears crisis. So what can the Government do to help young people buy houses?

Government policy should be aimed at bringing down the price of houses. But, instead, Government policy seems designed to do the very opposite. The Government imposes 13.5pc VAT on the selling price of a new house. The price will also be inflated by a development levy. The buyer will be charged 1pc stamp duty. And on top of that, those who make sacrifices to acquire their own newly built home without government assistance will pay a social housing levy which adds about another 5pc to the price of the house.

The Government could bring down the price of new houses in the morning by scrapping all these charges. They amount to about 20pc of the price of a house, so a €300,000 new house could fall by as much as €60,000 to €240,000.

But, I hear you shout, surely the developer will pocket that €60,000 for themselves so that the house-buyer will be no better off? There will definitely be an element of this. The €60,000 reduction in taxes and charges will not be passed in full, but some or most of it will be. And if we make it more profitable to build new houses, then developers will build more houses. And if more houses are built, the price of houses should fall.

But even if the price of a house were to fall to €240,000, it would still be a challenge to save the €24,000 deposit required.

You would think that the Government might have some plan in place to make it easier for people to save the deposit. But again, Government policy does the very opposite. The Department of Social Welfare is planning to launch a pensions auto-enrolment system in 2020. In summary, all employees will be more or less obliged to contribute 6pc of their gross salary to a pension fund which they will not be able to access until they are 65. So a couple earning €80,000 a year between them will have to pay about €5,000 into a pension fund.

This is the money they would have been putting aside for the house deposit. And employees won't be getting the pay increases they might have expected, as employers will be obliged to contribute 6pc to the pension fund as well.

The pensions auto-enrolment system will mean it will take everyone a few years longer to get the deposit together. But for some people it will kill off the dream that they will ever be able to buy their own home. They may well have better pensions in retirement, but they will need them to pay the rent.

So how can the Government help people save the deposit? It's not rocket science. First-time buyers should be able to take an advance from their pension fund towards the deposit on their home. The advance would be secured as a second mortgage on the property, so that if the house is sold, the advance would be repaid to the pension fund. Or if they still own the home on retirement, then the advance would be deducted from the tax-free lump sum paid from their pension fund.

Why is our housing policy so dysfunctional? Probably because the ministers are all going in different directions. The Minister for Social Welfare wants to maximise the number of people with pensions. The Minister for Finance wants to maximise the tax take and the Minister for Housing wants to minimise the problem. Is it too much to ask for someone to co-ordinate the efforts and come up with a coherent response?

Brendan Burgess is founder of the consumer website askaboutmoney.com

How government pushes up the price of a newly built house

Price the buyer pays €303,000

What the developer gets €240,000

Social Housing Levy €10,000

Development Levy €15,000

VAT€35,000

Selling price of house€300,000

Stamp Duty €3,000

Total government take €63,000

This excludes Coprporation Tax paid by the developer & PAYE/ PRSI/USC etc paid by employees at various stages of the process

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