Tuesday 12 November 2019

Home truths: Why Help to Buy puts brakes on inflation

Right first time: Generally speaking, first-time buyers will prefer a new-build to an older home, as new homes are better insulated, safer and more energy-efficient
Right first time: Generally speaking, first-time buyers will prefer a new-build to an older home, as new homes are better insulated, safer and more energy-efficient
Mark Keenan

Mark Keenan

The incoming Housing Minister appears to have the Help to Buy scheme in his crosshairs for scrappage. The tax-relief scheme, which allows first-time buyers to claw back 5pc of the purchase price of a new home up to €20,000, has been blamed for a recent surge in property prices.

And house prices have been surging of late. According to the most recent Irish Independent/Real Estate Alliance (REA) Average House Price Index published last month, the average house price across the country has risen by 11.2pc over the past 12 months - in contrast to the 4.5pc increase registered in the full year to June 2016.

But blaming Help to Buy, which was introduced by Simon Coveney last year, is missing the big picture entirely.

Supply is at its tightest in memory. Dublin currently has just one tenth of the stock for sale which is required for a 'normally' functioning market. Therefore the only plausible way to control house prices is to greatly increase supply.

Every business needs profit to exist, and development is no exception. Much higher standards of building regulations introduced since the boom mean that new homes are now far more expensive to build than ever before. On top of this, local authorities are still charging levies at boom-era levels (albeit reduced very slightly). Finally, bank finance-starved developers are paying far more for their borrowings - as high as 14pc to private equity outfits. So in order for new-homes sites to go 'live' and produce houses, developers need to compensate for all these higher costs in the end price. It means that prices achievable in some areas still don't justify site activation, while prices in other areas have been teetering on the threshold.

What HTB has achieved is that it pushed many sites which are now producing new homes over that vital threshold into economic plausibility, making them active and bolstering supply.

The evidence is in the output figures. The level of new residential completions for 2017 will be in the region of 18,000 units. This compares to 12,666 units in 2015, the year before HTB was introduced. While not near enough to the 30,000 per annum required, the statistics show an increase of 42pc in new-home provision from 2015-2017 and quite clearly demonstrate that Help to Buy is helping to increase stock - and therefore exerting a braking effect on prices.

But not only has HTB brought more new homes to market - by making new homes so much more attractive to purchasers in certain areas, it has caused a 'drag' effect on the values of existing second-hand homes around them. So existing homes near those now productive sites are less expensive today than they might have been had those HTB-enabled new homes not gone ahead.

Generally speaking, a first-time buyer will prefer a new house anyhow to a property which is 10 or 20 years old. But new homes built under improved building regulations introduced since the boom will also save them pots of money in the long run because they are far better insulated and more energy-efficient than their Tiger-era predecessors. They're also likely to be better built and a safer purchase overall, thanks to amendments to the building regulations made in 2013 following the pyrite and fireproofing scandals.

But throw a €20,000 discount into the equation and there's absolutely no contest.

The result is that in order to sell their property, a second-hand vendor nearby will always have to cut their price well below the new-house price - likely by €30,000 to €50,000 on a bog-standard semi.

This 'drag' factor was commented on last month by REA in reaction to the results of our aforementioned June survey, which looked at the price movements of semi-detatched homes nationwide based on actual sale prices.

Spokesman Healy Hynes said, "Agents in areas such as Ashbourne, Co Meath, North East Wicklow, Waterford city and Rathfarnham, Balbriggan and Rathcoole in Dublin, have been reporting that where there are new homes available, the prices of second-hand properties have been under pressure.

"The building landscape has changed completely in those last 10 years, with new energy regulations meaning that it may be as cost-effective for buyers to go for new homes, which will all be A-rated, rather than upgrade existing stock.

So, Help to Buy has had both 'push' and 'pull' benefits when it comes to controlling house prices. The runaway inflation we are now experiencing is being caused by other factors entirely and would be even more rampant without HTB.

Removing Help to Buy, therefore, will not only cause dozens of sites which are now crossing the viability threshold to be postponed (cutting future supply) and therefore inflate prices further, but it will also eliminate that 'drag' factor that these schemes otherwise would have exerted on existing home prices in those areas, had they gone ahead.

If there is a good reason for eliminating HTB, it is this: the scheme is massively unfair to existing homeowners, many of whom bought their homes at Celtic Tiger-era prices and suffer from Tiger-sized mortgage repayments along with negative equity compared to better-off and more financially footloose first-time buyers.

As taxpayers, existing owners are not only subsidising the home purchases of the more financially comfortable, but they also subduing the values of their existing homes into the bargain.

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