Helping or hurting first time buyers

Posted: October 31, 2016 in Budget 2017, Coveney, Housing, Uncategorized

Fine Gael and Fianna Fáil are in a spin over the Governments controversial first time buyers scheme. With an allocation of just €50m in Budget 2017 this may seem a little surprising. Less so when you consider the weight of opinion opposing the measure.

The proposal is to allow first time buyers purchasing a new home to reclaim tax equal to 5% of the value of the house up to a maximum of €20,000. It is available on properties valued up to €600,000 and on mortgages with a loan to value ratio from 70% upwards.

Even if you thought such schemes were a good idea this one is pretty badly designed.

With a budget allocation of just €50m at best only around 3,000 buyers will benefit. The change in the Loan To Value ratio will benefit those purchasing properties at the higher end of the price range with access to substantial savings – the very people who currently do not need any help in purchasing their home.

This is nothing short of a mansion tax. To make matters worse, not only will the hard pressed first time buyer struggle to avail of this scheme, but the resulting house price inflation will make home ownership even more difficult.

We know, or at least we should know, that house price inflation is driven not only by low supply and high demand but also by easing access to credit.

This is why house price inflation went through the roof at the height of the boom despite supply exceeding demand.

This is also why the Central Bank introduced their prudent mortgage lending rules – to break the link between credit supply and house prices.

Hardly surprising then that the Governor of the Central Bank Philip Lane was less than enthusiastic with the scheme, suggesting in a letter to Pearse Doherty TD that it could lead to house price inflation.

Davey Stockbrokers are just the latest in a long line of experts and industry voices who are predicting that it will push house prices up even further in 2017.

On Budget Day Fianna Fáil Housing Spokesperson Barry Cowen heckled Michael Noonan during his speech, describing the so called help to buy scheme a ‘mansion tax’. He has repeatedly called for the threshold €600k to be lowered.

Unfortunately there has been little media scrutiny of Fianna Fáil’s first time buyers scheme as outlined in their 2016 election manifesto. This may be because the manifesto is no longer available on their website. Similarly the housing and mortgage policy section of their site is strangely blank. Thankfully the proposal remains on many of their TDs individual websites.

The proposal was to help up to 80,000 first time buyers with a contribution of €5k for a single person and €10k for a couple through an savings scheme. There are no limits on the purchase price of the home, no restrictions on the type of home being bought and no loan to value ratio requirement.

Exactly where Fianna Fáil proposed to get the €800m that such a scheme could potentially cost the Exchequer is not outlined in their proposal. Maybe this is why it has been removed from their website.

Deputy Cowen’s mansion tax charge –though correct- rings a little hollow when his own scheme would presumably have been available to all first time buyers including those purchasing homes in excess of €600k.

No wonder Fianna Fáil TDs in Dublin are questioning the wisdom of their housing spokespersons proposed amendment to lower the cap to €400k – after all they stood on a manifesto that promised relief to all first time buyers, including the very wealthy.

But more importantly Fianna Fáil’s scheme would have exactly the same impact on house prices albeit driving them up at a slightly slower rate than Fine Gaels scheme. Either way the struggling first time buyer would be worse off.

In his letter to Pearse Doherty Central Bank governor Philip Lane did acknowledge that help to buy schemes could stimulate construction and he is right. The only problem is that they will be building the wrong kind of houses.

Helping young working families purchase their first home is a good policy objective so long as it is accompanied by improved regulation of the private rental sector and increased provision of social housing.

The best way to assist the first time buyer is to bring the cost of housing down. There is no policy consensus on how best to achieve this objective. Part of the problem is that we do not have sufficient data on the all in cost of producing homes.

There is some anecdotal evidence from the Institute of Chartered Surveyors, the Construction Industry Federation and NAMA but much of this is strongly contested.

The Dáil Housing and Homeless Committee spent a considerable amount of time discussing this very issue. Our conclusion was that, as intervention must be evidence based to avoid unintended consequences, the Housing Agency should be tasked with providing an independent state wide audit of the all in cost of producing private homes with policy recommendations on how to reduce the cost.

This recommendation was made in June and had it been adopted by Government could have provided evidence based policy recommendations in time for Budget 2017. Unfortunately Minister Coveney ignored the recommendation.

The real beneficiaries of both Fine Gael and Fianna Fáil’s schemes are the builders and the banks not the first time buyer. This approach to housing policy didn’t work the last time it was tried – why on earth would anyone think it will work now.


First published in the Sunday Business Post on 30.10.16

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