Evidence does not support case for shared-equity housing scheme

It is one of the curious things about life in Ireland that property developers and the construction industry here openly tell us that it's just not financially viable for them to build houses that people can afford to buy. At least, not enough of them, and certainly not enough of them in Dublin for first-time buyers.

Somehow they seem to avoid taking any responsibility for this (the stupid prices they often pay for land being a good example) and instead pressure the Government to introduce various measures to support the market.

It’s a clever tactic given the pressure being applied by voters on politicians (as evidenced in last year’s general election campaign) to sort out a dysfunctional housing market that has persisted for the past decade.

Thus we have ended up with calls for a variety of financial supports, lowering of the building specifications (notably for apartments), relaxation of the planning rules and scrapping height restrictions, reducing VAT, and for the Central Bank to loosen its macroprudential rules which limit the amounts that people can borrow to purchase a home.

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We get artificial supports that transfer money from the State to purchasers to give them an extra few quid to buy a house at the price that developers decide they can deliver them.

It is expected that as many as 8,000 families a year might buy homes on the scheme in the first two years

The help-to-buy scheme was introduced in 2017 to help first-time buyers to purchase new-build properties. It offers up to €30,000 in cash to assist buyers purchase a home, and more than 22,000 applications have been approved since it was established, according to the Minister for Housing Darragh O'Brien.

The estimated value of approved help-to-buy claims to date is about €389 million, according to the Department of Housing. That’s a huge transfer of money from the State to developers. And data suggests that many of those who have been approved for the scheme would have been able to afford a house under their own steam.

Equity share

The Government is now proposing a shared-equity scheme that would see the State take an equity share, of up to 20 per cent, in the purchase of a new home. It is aimed at helping close the affordability gap for those who may earn too much to be eligible for social housing but not enough to pay the full current market price themselves.

It is expected that as many as 8,000 families a year might buy homes on the scheme in the first two years. The State’s stake would be interest-free for the first five years, with a fee kicking in in year six. Some €75 million of State money has been earmarked for the scheme.

In The Irish Times on Monday, Pat Farrell, chief executive of Irish Institutional Property, one of the many lobby groups here for the property industry, said the shared-equity initiative needed to be implemented as "quickly as possible" and called for a sober, data-driven debate to take place on the merits of the scheme.

The fine details of the scheme are still being worked on but there are good reasons to believe that it could lead to higher prices.

Further revving up demand and constrained supply can surely only mean one thing – higher prices

Recent figures from the Banking and Payments Federation Ireland showed that 9,091 new mortgages worth €2.1 billion were drawn down by borrowers here during the first three months of the year – the highest number of drawdowns in the first quarter of any year since 2009.

So demand for housing remains strong while supply continues to be constrained. Covid-19 lockdown restrictions shut many building sites across the country in the early months of this year and will result in thousands of new homes not being completed in 2021 as previously planned.

Further revving up demand and constrained supply can surely only mean one thing – higher prices.

ESRI warning

In February, the Economic and Social Research Institute (ESRI) warned that the shared-equity scheme risked driving up prices and worsening affordability issues. ESRI researchers Conor O'Toole and Rachel Slaymaker said the current housing situation in Ireland was "so constrained" that increasing purchasing power for households through a loosening of credit constraints entailed by such a scheme "will very likely lead to higher house prices".

"Such rises in house prices are likely to exacerbate affordability problems down the line," they told the Oireachtas housing committee.

In March, the Central Bank told the same committee that a scheme that resulted in higher levels of demand “could result in upward pressure on house prices”.

Now we learn that the Government was warned three weeks before Budget 2021 – when it announced the shared-equity scheme – that it could end up inflating house prices.

As revealed by Eoin Burke-Kennedy in The Irish Times today, the State's Housing Agency notified the Department of Housing last September that a similar scheme in the UK had resulted in a 6 per cent increase in house prices in the greater London area.

It is quite something when the Housing Agency (set up by the Government in 2010), the Central Bank and the ESRI all sound warning bells on a key policy tool of the State to tackle the housing crisis. The sober debate has been in full swing for some time: the evidence isn’t supporting this latest measure to tackle the housing crisis.