The difficulties for Government in finding a balance between housing supply and affordability
The Government, by launching its 75-point plan to boost the construction sector in the middle of an election campaign, has inevitably raised questions about the credibility of some aspects of its plan. One is its proposal to assist first time buyers of new houses, by offering to subsidise their mortgages for a brief period. Minister for Finance, Michael Noonan has rejected criticism that State support for the mortgage market could help to create another housing bubble.
At present banks are offering mortgages on a loan to value ratio of 80 per cent. This requires purchasers to have 20 per cent on deposit in order to secure a loan. As Mr Noonan has said, for many first-time buyers this has meant house purchase is no longer affordable. The housing market remains dominated by cash-buyers who are less reliant on mortgage finance. And, because of limited demand, too few new houses are being built. Eight years ago, at the peak of the economic boom, close on 100,000 houses were built annually. But last year fewer than 10,000 units were completed, and since 2006 national house prices have halved.
As yet, the Government has merely floated the idea of assisting first-time buyers in this way. Nothing has been decided, or will be, before next October’s budget. Hopes raised now - before next week’s elections – for some potential purchasers, risk being dashed later, after the Coalition has examined a questionable proposal more closely. Taoiseach Enda Kenny has emphasised that the planned State-funded insurance scheme awaits the result of an economic impact analysis in July. The Government intends to guarantee a portion of mortgages for first time buyers, which could enable them to secure loans of up to 95 per cent of the value of the property.
However, this would also mean the State, and the taxpayer, being exposed to potential losses, at a time when one in five existing Irish mortgage loans remain in arrears. A worry must be that the Government’s emphasis on boosting demand may result in first time buyers outbidding one another in competing for a very limited supply of new houses, and pushing up prices. How to ensure a concern for more affordable housing is balanced with measures to increase housing supply, in order prevent a property bubble developing?
That remains a key challenge for Government. The shortcomings of the Government’s strategy have been identified as the paucity of measures to improve the supply of housing, notably in Dublin where pricing pressure is most obvious. Some of the Government measures, outlined in its 75-point plan to boost supply are welcome. But clearly more needs to be done on the supply side to ensure a balanced recovery in the housing market, and to minimise the risk of a property bubble developing.