Raiding pension pots the latest harebrained solution to property crisis

Developers can't build homes at affordable rates. Our solution? Let buyers raid their pension pots to bridge the gap. This is one of the crazy, harebrained ideas being considered by Fianna Fáil, Fine Gael and the Greens as part of their programme for government.

The scheme would allow first-time buyers draw down a tax-free lump sum from their pension funds, possibly up to €20,000, to get over the hurdle of saving for a deposit at a time of record rents.

So, to deliver the necessary profit margins for builders, we’ll encourage buyers to partially dissolve their retirement savings, mindful that pension coverage, particularly among the under-35s, is already problematic. Two out of three workers in the private sector have no occupational pension.

Spiralling accommodation costs have made Dublin the most expensive place in the euro zone to live, costlier than Paris, Berlin and Rome

The Fianna Fáil proposal, outlined in policy papers, is said to have the backing of Fine Gael.

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It maybe a case of Stockholm Syndrome on the part of the establishment parties. They've been held captive for so long by the property industry here, they're beginning to talk and act like it.

A Fine Gael source was reported in the Sunday Independent as saying: “Owning a home is wealth. It means you don’t have to pay rent when you retire, and therefore don’t need as big a pension.”

Financial reality

It’s not that this sentence is illogical – it has a clear-cut logic – it’s just so removed from the financial reality of low- and middle-income earners struggling with high rents, childcare costs and now possibly more precarious work as a result of the pandemic.

And the next government’s answer is to make them divvy up part of their pension to get on the property ladder.

With a 5 per cent annual return, the €20,000 taken out at age 35 would be worth €95,298 at age 67 – that’s a big loss on the point of retirement.

This is political short-termism in its purest form and from the very same parties that want to autoenrol workers into pension schemes so worried are they about the likely financial health of future retirees.

It’s also a strategy that directly supports high-price housing, something that we’re trying to get away from, not just for the sake of struggling buyers but to ensure we remain attractive to foreign investors.

Buyer incentives play well with a certain cohort of voters

Spiralling accommodation costs have made Dublin the most expensive place in the euro zone to live, costlier than Paris, Berlin and Rome, according to a report published this week by pay and pensions specialist Mercer.

As any economist will tell you, freeing up more money to chase the same number of properties merely drives up prices. In this case, buyers would be channelling their pension savings into more expensive homes or into the pockets of developers.

Demand-side measures fan further price growth in a supply-constrained market; it’s a point that has been made over and over again.

Still we’ve had a sequence of subsidy or tax-break schemes since the mid-2000s culminating in the recent Help to Buy scheme that have aided some buyers but done little to square the affordability circle for the majority.

Starter homes

Dublin commuter belt starter homes are now typically selling for €350,000 while city centre apartments start at €450,000. These figures are seven and nine times the average full-time salary.

On the basis of the current mortgage rules, there’s an affordability gap in the Dublin market of between €50,000 and €100,000 on the lowest-priced homes: that isn’t scalable with a €20,000 pension raid.

A recent Parliamentary Budget Office report on Help to Buy shows the scheme is typically used by people on high incomes that probably were in a position to save for a deposit anyway, not necessarily the target group, trapped renters. First-time buyers with sufficient pension resources to raid probably fall into the same category.

Proponents of the Help to Buy scheme maintain it hasn’t been inflationary, citing the fall-off in house price inflation since its inception, but that proves little as there are many factors underpinning the headline rate. And the price of new homes did rise in the immediate aftermath of the scheme’s introduction.

Perhaps a stronger argument is the one made by developers. Many claim the scheme has been instrumental in encouraging them to build. But their margins could have been widened through addressing the cost side of the equation, perhaps via a reduced rate of VAT. This would also have stimulated building too, but, crucially, at a lower price point.

Cheap credit

Excluding the financial crisis, we’ve have a four-decade-long rise in property values, an international phenomenon that’s increasingly being linked to low interest rates. Cheap credit gives people greater buying power.

It has created untold social problems here, from homelessness and poverty to capacity constraints and infrastructural issues across the economy and, on a basic level, the inability of workers to live near their place of work.

The Government has deployed multiple redress strategies, from easing development standards and penalising land hoarding to increased buyer subsidies and rental supports, but the situation remains unchanged. People on average incomes can’t afford to buy.

The speculative development supply pipeline – the one that we rely on almost entirely for our housing needs – only operates, it seems, in a rising market, and it remains to be seen how the Covid-19 crisis and the likely negative impact on house prices plays out in terms of supply.

Buyer incentives play well with a certain cohort of voters and it seems governments will keep throwing them into the mix regardless of their efficacy.