IMF warns help-to-buy scheme adding to property pressures

The Government's recently introduced help-to-buy scheme for first-time buyers is likely leading to an increase in demand in the property sector, the International Monetary Fund (IMF) has warned.

The scheme, which gives first-time buyers 5 per cent tax back of up to €20,000 on the purchase of a new home, has been blamed locally for fuelling further inflation in the housing market.

In its latest report on Ireland, published on Friday, the Washington-based organisation also voiced its concern over the initiative, saying it could be adding to demand pressures. It has welcomed a planned review into the scheme, which was introduced in the last budget.

The organisation said housing pressures have continued to rise in recent years due to a “mismatch between renewed demand and the lagged supply response”.

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It calls for close monitoring of house prices and also on the impact of caps on rent increases given their “potentially negative implications for incentives to develop a rental market”.

“The rapid increase in house prices calls for close monitoring with a view to maintaining prudent lending and mitigating financial stability risks,” the IMF said.

Economic competitiveness

“Ensuring affordable housing is crucial for the well-being of the Irish population and important to economic competitiveness,” it added.

The IMF also backs the introduction of a levy on vacant sites and a speeding up of restructuring of distressed loans. It goes on to warn of continued pressures on housing, saying a more robust supply of property will take time.

The recommendations come as property prices rose by nearly 10 per cent in the 12 months to the end of March, according to the Central Statistics Office.

Elsewhere in its latest report, the IMF said Ireland is expected to continue to experience healthy economic growth over the next few years but will face a number of serious challenges.

The organisation said Brexit represents the most pressing test for the country with the overall effect of it likely to be “negative and significant”.

“Risks are most acute for traditional sectors that depend on trade with the UK, with potentially sizable consequences for activity and employment outside of the main urban centres,” it said.

In its latest review, the IMF also cited mooted changes in corporate taxation, such as the Common Consolidated Corporate Tax Base (CCCTB) and possible reforms in the US as issues that are contributing to economic uncertainty.

The report said that overall conditions continue to be good at least in the near term. However, it says given the open nature of the economy, a further reinforcing is needed to strengthen resiliency.

“After a sustained period of sacrifice by the Irish people, economic recovery is well underway. Growth is robust and broad-based, and unemployment is at levels not seen in almost a decade,” it said.

“The challenge now is to translate the recovery into a new foundation for sustainable and inclusive growth. This would require ‘future-proofing’ the economy against the re-emergence of boom-bust dynamics and broader risks. It will also require well-targeted use of limited resources for the benefit of all,” the review added.

Risks

The IMF said the medium-term outlook also remains positive with growth expected to continue, albeit at a slower pace.

In addition to citing risks posed by Brexit and changes to corporate taxation, it noted the danger in calls for a retreat from global integration, as indicated by US president Donald Trump.

The organisation backs moves to introduce new metrics to measure economic growth, which it said would allow for more informed analysis and policymaking.

It added that spending pressures remain high with pent-up demand needing to be carefully managed to ensure resources are maintained to insulate the economy from emerging risks.

Moreover, the body calls for a broad and stable tax base, particularly given calls for the continued unwinding of the universal social charge.

The IMF urges the Government not to use temporary revenue gains to fund budget measures.

“Recent corporate tax windfalls point to concentration risks and potential volatility. In this context, unexpected revenue upsides should be saved,” it said.

Given what it calls the “limited fiscal space”, it suggests there is a need to build consensus on priorities and urges against further cuts to the universal social charge unless this is somehow compensated in some other way. However, it goes on to say that addressing infrastructure gaps is one area the Government should focus on.

“Spending pressures are high. While the recovery provides needed breathing room, fiscal space remains constrained,” it said.

“Pent-up demand will need to be managed carefully to ensure that resources are maintained to insulate the economy from emerging risks,” the body added.