Fianna Fáil may have just pressed the pause button on the property market
The party’s new SSIA may cause a significant number of housebuyers to put their plans on hold for an unspecified period
Fianna Fáil leader Micheál Martin: the party says in government it would give first-time buyers €1 for every €3 they save towards a mortgage, capped at €10,000. Photograph: Gareth Chaney/Collins
The man who is now favourite to become the State’s next taoiseach has arguably just pressed a giant pause button on the property market. By promising first-time buyers a new special savings incentive allowance (SSIA) to help them save for a deposit, Fianna Fáil leader Micheál Martin has most likely caused a significant segment of buyers – one that accounts for about a third of new home sales – to put their plans on hold for an unspecified period of time.
It may take months to form a new government after polling day, and even more time to pass legislation for the scheme.
Under the proposal a Fianna Fáil government says it would give first-time buyers €1 for every €3 they save towards a mortgage, capped at €10,000.
It is auction politics at its best, and like so many politically-driven interventions in the property market it is likely to result in further uncertainty and unintended consequences.
If first-time buyers sit on their hands, as many will surely do, a significant chunk of demand will be sucked out of the market, albeit temporarily. This at a time when supply is coming on strong. According to Goodbody Stockbrokers, housebuilding hit a 10-year high of 21,000 units last year. The Government expects this to rise to between 24,000 and 25,000 in 2020.
Deferred demand will have the effect of pushing house price inflation lower – it’s already at a seven-year low of 1.4 per cent nationally and declining year-on-year by 0.7 per cent in Dublin – than it otherwise would have been.
The unwinding of this pause on sales at some future point, when the proposed SSIA scheme matures or if it fails to materialise, will then flood the market with potential buyers at a point when builders have probably slowed down development in response to slowing prices. That will add volatility to an inherently unstable market without addressing the root problem: affordability.
A key reason people cannot buy homes is because they are too expensive. Helping them borrow more will only lead to further price hikes. Demand-side measures fan further price growth in a supply-constrained market; it is a point that has been made over and over again.
The current Help-To-Buy scheme, which offers first-time buyers tax rebates of up to €20,000 on the purchase of new homes, may have coincided with deflationary pressure in the market but that doesn’t mean it isn’t inflationary. Prices are probably higher than they would have been without the subsidy.
The original SSIA scheme, which operated between 2003 and 2007, was engineered ostensively to dampen inflation, which had hit 5.5 per cent, and cool growth in an overheating economy by swapping spending for saving.
The problem was that Ireland’s overheating economy out-lasted the scheme and two-thirds of the €14 billion in funds locked into SSIAs flooded back out into the economy in the first four months of 2007, right when the State had gone from hot to boiling. The flames were doused with kerosene.
While intending to address some or other failure in the market, successive administrations have amplified the cycles of the property market – making the highs higher and/or the lows lower – without ever really coming to the aid of cash-constrained buyers.
In 2011 the then Fine Gael-Labour government offered prospective investors a capital gains tax (CGT) exemption if they held on to land here for seven years in a bid to whip up activity in a moribund property market. But the market was arguably about to take off anyway following the post-crash recession and many of the big US hedge funds that piled in here used special purpose vehicles (SPVs) to avoid tax altogether.
The measure also led to land hoarding, particularly in Dublin, at a time of chronic undersupply.
Vacant site levy
Now the Government is running in the opposite direction, penalising landowners for not developing with a vacant site levy. These reactive measures have done little to address one of the most pernicious and dysfunctional elements of the economy, housing.
“Housing is a big reason why many people across the rich world feel that the economy does not work for them,” a report in the latest Economist magazine states.
But the undersupply narrative – the one that suggests the answer to the housing crisis is to build more homes – may be a misreading of what is going on. A recent Bank of England study suggests the four-decade long surge in house prices in the UK, where property prices have quadrupled since the 1980s, was caused not by a lack of supply but by low interest rates.
Lower interest rates mean a lower cost of borrowing to pay for a home, and more people being in a position to afford to borrow to buy a house, a scenario that translates into higher prices. This argument, which is fast gaining currency, stems from the notion that the persistence of cheap credit inflates asset prices such as housing.
That has not deterred political parties here from flying the flag for more housing-related incentives.
There must be an election taking place.