Housing policy creating a vicious circle of demand and higher prices

The Government has said that increased demand for houses is necessary to get builders to construct more homes. And so it introduced the help-to-buy scheme, offering a cash incentive to first-time buyers of new properties. Added to the easing in mortgage lending rules by the Central Bank, the signs are that this has certainly boosted housing demand. But supply, inevitably, is slow to react. The result is predictable – a sharp rise in prices.

There is a clear risk here. It is that the current crop of young homebuyers will be caught in the middle, Much of the benefits to them of the easing of lending rules and the help-to-buy scheme will be eaten up by rising prices.

They will end up with larger mortgages – and the tax refund they receive via the help-to-buy scheme will end up in the pockets of the construction industry. The net result is that only higher earners – or couples both with decent incomes – can afford to get into the housing market.

If the promised rise in housing supply does not emerge quickly enough, price growth is going to remain well ahead of incomes, pricing more and more people out of the market. The figures published by property websites MyHome,ie and Daft.ie vary slightly in detail, but the underlying message is consistent. House prices are sharply on the rise , led by urban centres, particularly Dublin. On average, most forecasters now feel house prices this year will be at least 8 per cent ahead of 2016 levels, and more in Dublin.

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Clearly economic growth and rising employment and incomes are the fundamental factors driving demand. But the timing of the latest house prices rises also points clearly to the impact of the Central Bank easing its mortgage lending rules and the introduction of the help-to-buy scheme.

Rise

Davy economist Conall Mac Coille, author of the MyHome report,points out in a note this morning that the average mortgage approved to first-time buyers in February was €206,500, "up an enormous 15.2 per cent on the year."

This must refelct the Central Bank rule changes, which focused on allowing first-time buyers to borrow more. Meanwhile price inflation is highest for newly built homes, which qualify for the help-to-buy scheme.

Housing minister Simon Coveney argues that increased demand is needed to encourage a rise in supply, and points to an increase in planning activity and new house starts.

Housing supply may indeed be on the rise, but slowly and from an historically low base. Meanwhile as seen in the refusal of planning permission for Ires Reit for the final stage of an apartment development in Sandyford, local objections and council attitudes can still slow or stymie the building of new developments.

The policy problem now is that first-time buyers may now be taking out larger loans – allowed by the Central Bank’s new rules – just to chase rising prices. Meanwhile the benefits of the help-to-buy scheme may be acting largely as a boost to home builders’ profits, as prices rise to take account of extra buying power. What is needed is extra competition for buyers in terms of much greater supply – but at the moment it is the buyers who are left desperately wondering how high they can bid on a restricted stock of properties.

Rates

Higher demand may be needed to boost supply, but the risk is – until extra supply appears – the current crop of housebuyers are left caught in the middle. Both Daft and MyHome figures show a fall-off in the number of properties for sale – down 12.5 per cent year on year, say MyHome and at just over 20,000, the lowest since the Daft surveys started in 2007. So more buyers with greater spending power are chasing fewer homes. And all this is at a time when mortgage interest rates are at an historic low and will, at some time in the next two or three years, start heading higher.

Are we in a new bubble? Mac Coille calculates that the average house price to income level is now around 5 to 6, roughly in line with the UK and below boomtime peaks of 8 to 9. However as it is better-off people doing most of the buying, the actual figure for those in the market may be lower, he says. But as the goal of policy is to make house prices affordable for average earners,as well as the better off, this doesn’t provide much consolation. And the more prices accelerate ahead of incomes, the more difficult it will be for the average younger buyers to, in the words of the old cliché, get on the first rung of the housing ladder.