Budget plan to help first-time buyers will backfire, warns economist

Ronan Lyons says tax relief for those struggle to buy property will only increase prices

Economist Ronan Lyons: the current supply shortage was primarily a function of high construction costs

Economist Ronan Lyons: the current supply shortage was primarily a function of high construction costs


Plans to help first-time buyers in the budget are likely to increase house prices without making it easier for those struggling to get on the property ladder, economist Ronan Lyons has warned.

The Government is considering some form of income tax rebate scheme for first-time buyers and/or state top-ups of mortgage deposit savings similar to those in the UK.

However, Dr Lyons said the current supply shortage was primarily a function of high construction costs and could be not be addressed by demand-side measures.

“Given first-time buyers compete above all with other first-time buyers, relief for them would primarily boost demand,” he told the annual policy conference of the Dublin Economics Workshop in Wexford.

Dr Lyons said the Central Bank’s rules, which are currently under review, have had a positive effect in anchoring demand for housing.

However, he said the loan-to-income (LTI) restriction, which requires that income limits of 3.5 times are applied to mortgages, was too blunt a tool and unfair in the context of huge regional price discrepancies.

“Any LTI restriction that is binding in Dublin will not be binding in Leitrim, while any LTI restriction that is binding in Leitrim will be prohibitively binding in Dublin.”

“Therefore, it offers no protection against the kind of bubble Ireland experienced in the decade to 2007,” he said.

Dr Lyons also noted that the regulation merely shifted demand from the artificially expensive market (Dublin) to elsewhere and this might explain why house price inflation was cooling in Dublin but accelerating in other parts.

He advocated shifting the focus of the rules to the loan-to-value limits, which require first-time buyers to have a 10 per cent deposit for the first €220,000 of a house price and 20 per cent thereafter.

Addressing the conference on the current anomaly in Ireland’s growth statistics, Davy analyst Conall Mac Coille said the Central Statistics Office (CSO) needed to produce a measure of growth, which excluded the multinational sector.

He also said patents and copyrights domiciled here need to be treated differently in the national accounts , as financial assets rather than productive assets.

The decision by several big companies to move intellectual property assets and patents here last year caused a wild 26 per cent swing in the State’s headline rate of GDP, prompting the “leprechaun economics” jibe from US economist Paul Krugman.

By including IP assets as part of the capital stock, in other words what is produced here in Ireland, the true level of economic activity was being distorted, Mr Mac Coille said.

Economist Colm McCarthy, meanwhile, spoke on the topic of debt sustainability.

He said reducing the measure of debt sustainability to gross government debt divided by GDP was hard to take seriously as a predictor of sustainable access to sovereign debt markets.

Mr McCarthy said the alternative short-hand measure for Ireland, as suggested by the NTMA, which substituted GDP with a measure of government revenue placed Ireland at the high end of the euro zone league.

“Pursuing growth-friendly policies, ending the ongoing deficit and avoid off-balance sheet build-up contingent liabilities for a long period of years is the formula which worked during the 1990s and must now be pursed again,” he said.