No evidence of slowdown in house-price spiral

The Government's action to ease the house-price spiral may not be as effective as many hoped. The main aim of the steps taken is to make houses more affordable for first-time buyers. While it is early days yet, it appears so far that apart from a limited number of apartment schemes there has not yet been any real evidence of a slowdown.

Some avoidance of the new tax measures, more lenient lending by some banks and building societies and falling interest rates are likely to combine to limit the impact of the steps recently announced on foot of the Bacon report on house prices.

Indeed, house builders at their annual conference in Killarney last weekend were reportedly sanguine about the likely effects on their business in the long term.

The construction industry appears confident that either mechanisms can be found to circumvent the tough new legislation, or that changes to lessen its impact will be made quickly.

The main measures to which builders and many investors objected were the elimination of interest relief on rental income and the introduction of stamp duty on all property not owner-occupied.

However, it has now emerged that some investors are simply flouting the legislation by backdating contracts thus allowing the purchasers to avail of the reliefs under the old regime. This practice is an open secret within the industry so much so that insiders joke that the time machine has now been reinvented.

The measures are designed to make property investment far less attractive for non-owner occupiers and thereby increase the opportunities for first-time buyers. Investors had been buying more than one third of all new homes at least in the Dublin market and with many having access to 100 per cent mortgages there was no catch. Not only would the property appreciate, but the amount of interest paid on the mortgage could be offset against rent, effectively making much rental income tax-free.

The recent Finance Bill dictated that only those who had entered into contracts before April 23rd could avail of these tax breaks, but so far many lenders have not noticed a drop in investor demand for new loans.

Despite the success of some in beating the contract deadline, however, they are unlikely to be able to overcome the December 31st deadline for final completion of property sales. This means this specific problem is probably short term.

However, the willingness of some lenders to increase the amounts they are prepared to lend is also likely to drive up prices, as home-buyers find they have more money in their pockets than before.

Many lenders are now actively considering increasing the amounts they provide and some are understood to have already started down the road. One bank told The Irish Times that a three-times salary limit is appropriate for most borrowers while higher income workers can probably repay 3 1/2 times their salary. The traditional limit was 2 1/2 times salary.

Others say that the limits should only be increased for those on higher incomes, while still others are close to implementing a net income limit, where the maximum monthly repayment would be around one third of net income of the borrower in that period. All these measures have the potential to overheat the market and are likely to be resisted by the Central Bank as well as some lenders including the biggest, Irish Permanent.

On top of this, the Government is also engaged in an uphill struggle against economic fundamentals in its bid to control house prices.

As inflation increases and interest rates fall, the real yield on investment and savings will diminish even further. They are already down to around 2.6 per cent, from an average over the past 10 years of closer to 6 per cent, according to recent analysis by Dr Dan McLaughlin, of ABN AMRO.

As inflation picks up, real yields the return on savings after inflation are likely to fall to 2 per cent or below. Low returns like this make borrowing more attractive, boosting spending and investment, particularly in assets such as housing. This is true for home buyers as well as for investors targeting the property market.

Furthermore, there is no sign of change in the original fundamentals which drove the market over the last few years. As Dr Peter Bacon pointed out in his report, economic convergence with European living standards, rapid growth in the number of new households being formed and existing levels of low-density housing, all combine to push up prices.

This is being reinforced by demographic trends, where 15,000 more people came into the State than emigrated in the year to April 1997. The total number of immigrants is around 44,000 and most of these are in the key house buying age group of 25 to 44 years.

Of course, other moves which are just as important to slowing down price rises have yet to be introduced. The longer-term supply-side measures proposed by Dr Bacon are not likely to take immediate effect but could well have a significant impact, if the Government proceeds with the serviced land initiative in a general way.

Greatly increased funding for local authorities to help the planning process will also have an impact as will initiatives to promote higher densities. For many young buyers one of the most important measures could prove to be the clamping down on excessive stage payments and delayed release of new houses.

Nevertheless, there must now be a serious doubt as to whether the Government's package will work. And much may depend on how quickly the supply side measures are introduced.