Are first-time buyers now financially exposed in the market for new homes?

The property market has split. The average annual increase in prices of 2.9 per cent in the Central Statistics Office data this week does not tell the full story. It is a tale of two markets. New home prices rose 10.4 per cent over the year to last November, while the price of existing homes fell by 1 per cent. Some of this can be put down to the sharp rise in building costs that have pushed up the price of new builds. But there is another crucial element. State supports to buyers are only available on new homes, and this has surely been a factor supporting prices.

It has also created incentives that are driving the behaviour of buyers and developers and injecting a boost into the market that is going to be hard to withdraw without causing upheaval. And with Sinn Féin promising to abolish the schemes and the Government not committing beyond an end date of 2025, there is a risk of new buyers who max out on the schemes being exposed to negative equity if the market has to adjust to their abolition.

State supports to buyers are directed through the Help-to-Buy scheme, a tax refund of up to €30,000 and the First Home Scheme, in which the State takes an equity stake in the property. With high building costs in city centres, the houses involved are largely in commuter counties, particularly around Dublin. There were just over 2,000 Help-to-Buy applications in Meath, Kildare, Wicklow and Louth in the first nine months of 2023 compared to 568 in Dublin. And those counties combined have around half the population of Co Dublin. An examination of the property price register, meanwhile, shows many houses priced to fall just within the €500,000 Help-to-Buy limit and schemes also starting to be priced to fall just within the limits in individual counties — for example, €425,000 in Meath.

Sinn Féin’s promise to abolish the schemes is based on its — reasonable — contention that they are artificially pumping up prices

The incentives are helping buyers into the market. And by doing this they are encouraging development. But they are also leading to young buyers being pushed into longer commutes — the opposite of Government policy, and benefiting developers who are able to price based on the schemes. And the schemes are helping some buyers who do not need support, and encouraging others to buy more expensive properties.

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Many first-time buyers are not just using the schemes but actively targeting them, according to John Fahy of broker Pangea Mortgages. In his experience, even when an alternative property is available at a lower price, some buyers are seeking more expensive new builds, availing of maximum support under the two schemes. The attractively priced “green mortgages” that will generally apply to new builds provide another incentive to favour this over a draughty old home. Meanwhile, those hoping to move from existing homes to a new property will likely find themselves in difficulty having to compete against subsidised first-timers.

With new home prices racing ahead, are some of the first-time buyers vulnerable if prices reverse? Sinn Féin’s promise to abolish the schemes is based on its — reasonable — contention that they are artificially pumping up prices. And house prices in Ireland are clearly too high. But a jolt downwards also creates risks.

Some of the pitfalls for current buyers that may lie ahead are pointed to by Fahy. A fundamental factor is that the day after a new house is bought it turns into a second-hand home, and thus the next purchaser does not qualify for any supports. Much then depends on what the property is “worth” on the second-hand market, where demand will still be strong but in many cases at a lower price point. If house prices in new developments are being inflated to the price limits set by the schemes — and the evidence suggests some are — this danger increases.

Meanwhile, what happens if the schemes end? This would have clear implications for affordability for new buyers, the sums for developers and the future value of homes bought with supports in earlier years

In terms of the newer First Home Scheme, Fahy cautions that many buyers are not planning for how they will redeem the State equity stake in time. And if they are hoping to extend their mortgage to buy out a Government share in a few years as the rules allow them to do — then depending on salary trends and interest rates, they may struggle to do so.

Meanwhile, what happens if the schemes end? This would have clear implications for affordability for new buyers, the sums for developers and the future value of homes bought with supports in earlier years. It would be one way to achieve Sinn Féin’s goal of lowering prices, but many recent buyers would not thank them for it. This is the minefield of housing market trade-offs which any government faces.

So with the future of the schemes in question, new buyers need to think carefully and consider where they want to live, rather than the maximum they can afford. Are they, for example, happy to stay where they are buying, with an ongoing State equity stake, if the sums do not allow them to buy this out?

If the current Government is back in power, in some form, it will face the dilemma of what to do at the end of 2025, particularly if the gap between new and existing homes grows further

The new homes market has been hooked up to a State-support scheme that will be very difficult to remove. Sinn Féin will plan to cut construction costs in other ways and ramp up Government-supplied social and affordable properties to fill the gap. But it could be a messy transition that leaves some recent buyers in negative equity and slows private development.

If the current Government is back in power, in some form, it will face the dilemma of what to do at the end of 2025, particularly if the gap between new and existing homes grows further. The bets would be on further extensions of the schemes if only to try to underpin supply. And some in the industry are calling for Help-to-Buy to be widened to first-time buyers of second-hand homes, a move that would support prices for those who bought in recent years but represent another artificial crutch to prices.

Whoever wins the election, billions will continue to be poured into trying to solve the housing crisis. The tale of the Help-to-Buy and First Home schemes shows that demand supports are not the way to go in a market with constrained supply. But turning off the sugar rush of the demand schemes will be a mighty complicated task. Either way, those buying now need clarity on what lies ahead to help make their decisions.