Imagine if Irish governments over the past 20 years had decided not to intervene in the property market other than to provide social housing.
Imagine if we’d had no tax breaks for developers, no Help to Buy schemes (there are currently three on the go), no rent supports, and no major overhaul of the regulations to make building apartments easier (done for the benefit of foreign investors).
Would our housing problem be any worse?
The fact that one can legitimately pose such a question is an indictment of State housing policy in itself.
We’ve had dozens of policies and strategies all feeding into a steadily worsening problem characterised by a widening affordability gap, declining rates of home ownership and greater numbers availing of rent supports.
According to the Economic and Social Research Institute (ESRI), almost 300,000 households, or 54 per cent of households that are renting in the Republic, received some kind of State support to help with the cost of housing in 2020, the main one being HAP (Housing Assistance Payment).
Now that house price inflation has been pared back to almost zero on the back of higher interest rates, you can see – more clearly at least – one of the main policy misfires, namely the inflationary impact of the three Help-to-Buy schemes: the Help to Buy tax rebate, the shared equity scheme and the local authority Home Loan scheme.
While headline inflation has dropped to just 1.5 per cent nationally and prices have actually dropped by 1.4 per cent in Dublin, the cost of new homes, the majority of which are bought by first-time buyers availing of these schemes, rose by 11 per cent year-on-year in the second quarter.
This level of inflation, driven also by the relaxation of the Central Bank of Ireland’s mortgage rules, is entirely at odds with the rest of the market (the cost of existing dwellings rose by just 0.6 per cent over the same period).
It also comes on the back of the most aggressive sequence of interest rake hikes ever undertaken by the European Central Bank, which should be deflationary.
Developers will claim the price increases reflect the rising cost of construction, but this level of price growth far outstrips the current uptick in wages or material costs, suggesting the various State interventions are fanning inflation in a market characterised by a lack of affordability.
As far back as the 2000s, Irish governments have been warned about the potential inflationary impact of introducing demand-side measures in a supply-pinched market. They’ve ignored them all.
The Government’s own Housing Agency warned in 2021 that an initiative similar to the shared equity scheme in the UK had resulted in a 6 per cent increase in house prices in the Greater London area.
To bridge the affordability gap, governments can in theory do one of two things: lower house prices or bolster wages.
Irish governments have consistently chosen the latter on grounds that helping people to pay more will entice builders to build more, which will increase supply, a seeming win-win, except it’s not.
We have prices on a perpetual upward curve with fewer and fewer people able to buy, which means more people renting and more upward pressure on rents. This leaves more people in need of social housing or the Government’s preferred option, rent supports. In Dublin, house prices are now 10-12 times the average income, while mortgages are cheaper to fund than rents in all but two local areas.
There’s another dimension to this. With buy-to-let investors and the Government acquiring about 70 per cent of the stock of new homes coming on stream every year, the impact of demand-side measures such as Help-to-Buy is magnified.
Speaking on The Irish Times Inside Business podcast last week, John McCartney, director and head of research with BNP Paribas Real Estate, said Ireland’s housing problem stemmed not so much from a supply shortage but from the fact that “we have high house prices and rent levels relative to incomes”.
“When you think about it in those terms there are only two ways to resolve that – one way is to reduce house prices, but no government is going to pursue a strategy of reducing house prices when 70 per cent of households have housing equity that would be destroyed by that course of action,” he said.
“And therefore the only remaining approach apart from doing nothing – which is probably what they should do, but politically that’s not possible – is to try and boost incomes to allow people to pay the higher prices that are being asked for housing.”
On the 11 per cent level of inflation for new homes, detailed in the Central Statistics Office’s latest Residential Property Price Index, Mr McCartney said: “I think the bulk of it really relates to the Government’s strategy of subsidising buyers to pay higher prices in the hope that that will then draw out more supply.
“Higher prices are really the objective of the exercise, although nobody’s prepared to say that, and it does I think question the wisdom of how do you hope to address an affordability crisis by driving up prices. It’s perverse,” he said.
Of course, there are other factors feeding into the housing crisis – but we’ve had it for over two decades with multiple government interventions that don’t seem to adequately address the problem and may in fact be exacerbating it.