The backroom boys in the Department of Finance are either bad at forecasting or very suspicious of their political masters. At every juncture, they err on the side of extreme caution.
Three months ago, with most restrictions lifted and tax receipts surging, they predicted a year-end budget deficit of €20.3 billion. This has now been revised down to €13.2 billion, a €7 billion swing in favour of the exchequer.
On the Friday before the budget, they produced a document projecting corporation tax receipts of €13.5 billion for 2021. Four days later – in the department’s economic and fiscal outlook report – this had risen to €13.9 billion.
Are they constantly being caught off guard by the strength of tax receipts or are they wary of painting too rosy a picture for politicians? I suspect it’s the latter. We have a history of pro-cyclical spending: hiking up spending when the economy is hot and close to capacity, only to find it bids up wages and prices.
Maybe Ministers Paschal Donohoe and Michael McGrath are in on the act: they held the line on a modest budget spend despite the extra money available.
That’s what makes the idea of having two help-to-buy initiatives on the go at a time of rapidly rising house prices so hard to fathom.
Budget 2022 allows for the continuation of the original help-to-buy scheme, which offers first-time buyers tax rebates of up to €30,000 on the purchase of new homes.
The Cabinet is said to be divided on the efficacy of the scheme with some concerned it maybe too generously priced and aiding households already in a position to buy.
There was significant criticism when it was introduced in 2017, with some saying it had the potential to drive up house prices. While it didn’t initially coincide with a pick-up in headline prices, it did run parallel with an acceleration in new home prices.
We’re now planning to add another weave to the tapestry in the form of a shared-equity scheme, which involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property.
Whatever you want to call them, they’re both help-to-buy schemes, which will fan further demand in a supply-constrained market and at a time of double-digit inflation.
Having one is questionable, having two is madness and something that must sit ill with the policy wonks in the Department of Finance.
House price inflation rose to a three-year high of 10.9 per cent in August with panic buying, increased working from home and the unwinding of lockdown savings cited as contributory factors. Half of the growth came in the last three months, the Central Statistics Office (CSO) said.
Minister for Housing Darragh O'Brien insists the shared-equity scheme will contain regional price caps and specific eligibility conditions around affordability to make it more targeted. The logic is that by boosting demand you elicit more supply. That can work but only in certain circumstances.
The UK’s help-to-buy equity loan scheme – which aided the purchase of 195,000 new-build properties between 2013 and 2018 – illustrates how it can work and how it can backfire.
Researchers from the London School of Economics assessed the impact of the scheme in two areas – London and Wales – under two metrics, price and supply. In London participants were offered an equity loan of up to 40 per cent on new-build properties of £600,000 and under, while in Wales participants were offered 20 per cent loans on properties of £300,000 and under.
The research found that the scheme led to a 6 per cent bump in prices in London and had no material impact on supply. In Wales it didn’t increase prices but did boost supply.
The differing impacts stemmed from the relative elasticity of housing supply in both regions. In London supply was found to be relatively inelastic because land prices were higher and planning more difficult to obtain. In Wales housing supply was more elastic for the opposite reasons.
The finding should serve as a warning to Ireland as supply in urban areas here has proved inelastic and planning is an ongoing issue.
The potential for such a scheme to inflate prices has been highlighted by the Central Bank and the Economic and Social Research Institute (ESRI) but the Government is not for turning.
The Central Bank is examining whether banks, which are expected to underwrite part of the scheme, will be in breach of the mortgage rules by participating. It said recently that it was considering “the interaction” between its mortgage rules and the Government’s proposed scheme.
The Government can, however, proceed without them. Despite presiding over a host of housing-related policies, the Government is having little joy in changing the dynamic for struggling renters and would-be buyers.
The help-to-buy scheme has helped almost 29,000 people buy homes in the Republic and maybe the Government deems the inflationary aspects of these incentives a price worth paying.