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I would be nervous about the new affordable housing initiative under which the State would take an equity share in a new home. The scheme, due to be brought to Cabinet by Minister for Housing Darragh O’Brien, is aimed at helping those stuck in the middle – without enough income to buy a property, but with too much to qualify for social housing schemes.
You can see the politics – a lot of people are in that position – but with housing supply still running well short of what is required, adding more demand in this way risks having one main result: higher prices.
State policy should be about getting more houses built, in the right places and at the right prices. Of course there are interventions needed, too, to support those who can’t afford to buy, or in some cases rent. The Government is pursuing new approaches here, for example piloting some cost-rental schemes and trying to increase the supply of social and affordable housing. All these involve State subsidies of one kind or another.
Will home-buyers be able to avail of both the help-to-buy and the new equity schemes? If so, they can get their deposit via help-to-buy and see a big cut in their initial purchase price
However, adding the proposed affordable housing scheme to the mix, involving the State taking up to 30 per cent equity on properties valued at up to €400,000, will further increase demand in a housing market where supply has already been hit by coronavirus.
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And it comes on top of the help-to-buy scheme, which offers a tax rebate for first-time buyers. With the new-home market already under-supplied and competition for apartments from institutional buyers, this points to upward pressure on prices in this area of the market as the economy emerges from the virus.
Will home-buyers be able to avail of both the help-to-buy and the new equity schemes? If so, they can get their deposit via help-to-buy and see a big cut in their initial purchase price. A lot of new homes will be selling for €399,999.
The building and property trades always love these kind of schemes of course and will row in, saying that they will help to increase supply. But there is already plenty of demand in the market – mortgage approvals have rebounded after a brief hiatus during the first lockdown. So there is plenty of incentive for builders to construct new homes. If this demand is underpinned by a post-coronavirus rebound in the wider economy next year, then the supply shortfall will be even more evident.
The virus will hit housing completions this year, due largely to a shutdown in construction during the first lockdown. Housing completions this year will fall to about 18,500, from 21,000 in 2019, according to the latest quarterly commentary from the Economic and Social Research Institute (ESRI). New commencements have also fallen sharply and the knock-on from this – the ESRI predicts – is for completions again below 20,000 in 2021.
Another report from the ESRI recently estimated that the necessary rate of completions to keep up with population trends was about 28,000 a year – others have put it at 30,000-plus. And the housing market is really a lot of smaller markets across the country and different housing types – for example, one key area of shortage is affordable smaller houses or apartments close to the city centre. The risk, in subsidising buyers when supply is tight, is that in many cases you are really just putting money into the pockets of those selling.
After the Celtic Tiger years, new Central Bank rules were introduced to limit how much people could borrow in relation to their income and the price of the property. With the bank holding tight over the years and ignoring nudge and hints that it needed to be more "flexible", the help-to-buy scheme chipped away at the rules for those who qualify – and applications for this are now high. The rationale was understandable – in many cases people on high rents can't afford to save a deposit. But with supply only rising slowly, prices rose steadily, until the coronavirus interruption.
Now the new newly proposed scheme would offer another way around the affordability barrier formed by the Central Bank rules. But it is just replacing one bit of equity – from the buyer – with another from the State. The buyer can’t get a big enough mortgage, so the State is stepping in. After five years, the plan is that the home-buyer would start paying what might be termed a rent to the State in relation to their stake.
Politically, the current administration knows it will come under relentless pressure on the issue, too, and so the temptation to 'do something' to help buyers in the short term is there
We don’t know exactly how it will operate, but there will be a lot to work out here. What happens, for example, if a buyer hits financial difficulty? Or house prices fall? There have been affordable housing schemes in the United Kingdom, albeit with somewhat different rules. A shared ownership scheme, in which buyers often have an initial equity share of less than 50 per cent, is run by housing associations based largely on properties developed for the purpose. Under a separate scheme the UK government supplies part of the loan finance for some purchasers on favourable terms.
Like the UK – and many other countries – the Irish Government is struggling with the issue of housing supply and affordability. Tackling the factors affecting supply and pushing up its cost is a difficult and complex challenge. Bigger State involvement in housing provision is now a given – already major increases in spending are promised.
Politically, the current administration knows it will come under relentless pressure on the issue, too, and so the temptation to “do something” to help buyers in the short term is there. Generation Rent, the twenty- and thirtysomethings who can’t afford to buy, do need to be the focus of Government policy. But increasing supply and finding ways to help drive down the cost of new homes need to be the focus. Demand isn’t the problem – houses are too dear and there aren’t enough of them.