Help to buy could pose risk of negative equity for first-time buyers

Gap between price of median new home and second-hand home continues to widen

With a decision due from Government on whether to extend the help-to-buy scheme or not, we can expect to hear a lot about how difficult first-time buyers (FTBs) are finding the market, as the property industry ramps up its lobbying machine.

Last week, we heard how FTBs are being crowded out due to a sharp rise in purchases by institutions operating in the private rented sector, and State-linked buyers for social housing.

There is no doubt that finding a shiny new apartment to buy has become a tougher task. In Churchtown, Irish Life disappointed those interested in trading down and first-time buyers alike when it acquired the Fernbank development and put it on the rental market.

In nearby Dundrum, Glenveagh had been toying with potential FTBs by advertising a development on, pitching “luxury apartments ideal for single buyers and young couples”.

It has now decided to offload the 90 Herbert Hill apartments in a single sale, at an estimated €50 million for the job lot. This works out at a hefty €555,555 per apartment – potentially far more than it could have hoped to achieve by selling each apartment individually.

There’s no better example of FTBs being excluded from the sales market than in Dublin city centre, where figures from the Central Statistics Office show that there were just 93 sales to FTBs in Dublin 1 and 2 last year. This in spite of thousands of apartments being constructed along the docks.

For whatever reason, Dublin’s city centre has never been a popular location with FTBs. In 2017, there were only 94 FTB sales in Dublin’s core.

But the CSO data also tells us that there were 13,500 FTB transactions in 2018 – the highest figure achieved since its records began in 2010. The figure was probably far higher in the Celtic Tiger years but there is strong growth momentum in the current market.

Help to buy

What about the help-to-buy scheme and its impending dissolution? The scheme is due to expire at the end of the year, unless Minister for Finance Paschal Donohoe gives it a stay of execution. It's easy to see why he might be inclined to do just this.

Of the 13,500 FTB sales last year, some 4,100, or 30 per cent of the total, were for new homes. No surprise there, perhaps – after all, a 5 per cent rebate on the purchase price is going to swing many people in favour of a new home over a second-hand one.

But where it gets interesting is when we consider the median purchase price for a new home by a FTB in Ireland last year – €324,999. This ties in with the average sale price from new home developers such as Glenveagh (€287,000) and Cairn (€309,000), as well as the help-to-buy figures, where more than 50 per cent of buyers paid more than €301,000 for their home so far.

But it doesn’t necessarily tie in with sales data for second-hand homes.

FTBs opting to buy a second-hand home will spend almost €100,000, or 41 per cent less, based on median prices from the CSO, which put a second-hand FTB home at just €230,000 last year.

FTBs may be buying the pricier new homes because they are using the 5 per cent help-to-buy rebate to close the price gap, and the deposit requirements are less onerous.

A second-hand home selling at €230,000, for example, will require a down payment of at least €23,000. On a new home worth €325,000, on the other hand, you’ll need just €16,249 up front thanks to the help-to-buy scheme.

Plenty of money left over then, perhaps, to furnish and decorate your new home.

What if this grant is withdrawn? FTBs will face a significant shortfall on the deposit for a new home, as they will now need €32,500, as opposed to €23,000 for a second-hand home.

Will builders keep building if FTBs can potentially no longer afford the deposit needed, or are no longer given such an incentive to opt for a more expensive new home option?

UK experience

While there might be compelling evidence to continue with the scheme – if ramping up new-home building continues to be what the Government wants – the Minister should consider the UK experience before making a final decision.

A recent survey from, for example, the “for sale by owner” platform, found that when the UK scheme was introduced in 2013, help-to-buy home-buyers paid £10,000 (€11,613) less for their home than the average FTB house price of £197,000.

Fast forward six years and the “the deficit is nearly £63,000, with help-to-buy home-buyers paying way over the odds as a result of using the scheme”. Not too dissimilar to our own gap of €100,000 or 41 per cent.

And not only that, but UK developers have boomed on the back of it. Since the help-to-buy scheme was introduced, for example, the profit per house of one of the larger builders, Persimmon, has almost tripled, rising from £22,114 in 2012 to £60,219 in 2018.

But it’s the survey’s warning on negative equity that might strike the most fear into the heart of Irish FTBs – and the Government.

Given the differential between new and second-hand homes in the UK, it warns that “a softening of property values would leave many in negative equity when considering their help-to-buy property within the wider landscape of the first-time buyer market climate”.

The Government might find itself stuck between a rock and a hard place. Withdraw the help-to-buy scheme and it could cool new house prices or the pace of new development, and leave some in negative equity. Retain it and it could be artificially propping up prices and feeding the margins of developers. Over to you, Minister.