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Is owning a home a pipe-dream for the young?

Mortgage repayments, deposits and suitability are some points to consider in the Irish property market

Last month Irish Times columnist David McWilliams urged first-time buyers to stay out of the property market. His reasoning? With supply so low, there are too many buyers chasing too few properties which means poor value for first-time buyers.

We take a look at some key affordability metrics in the Irish property market to offer an additional insight into how things look for first-time buyers today.

“There are a lot of challenges for first-time buyers [FTBs],” says Annette Hughes, director with EY-DKM Economic Advisory.

“It’s not just about a percentage of income [that goes on a mortgage], it’s also the ability to raise a mortgage, pay a mortgage, and to save a deposit and pay your rent in the meantime.”

An extra challenge for many is the impact of the pandemic. For the 440,000 or so currently on the pandemic unemployment payment, buying a home may only be a pipe dream this year.

Affordability: Mortgage repayments

A general standard used across the world to determine affordability is mortgage repayments as a percentage of disposable income. If this ratio is 35 per cent or less, then a property is generally deemed affordable.

This is a rough guide but it does offer an insight. And thanks to some data prepared by EY-DKM Economic Advisory, we can see where we stand today.

Overall, affordability – based on this metric anyway – is clearly better than it was during the boom years of 2006/2007. Since 2018, however, it has been declining across the country, with a greater disimprovement noted outside of Dublin.

According to Hughes, average earnings have increased by 16.2 per cent over the past five years, to stand at €42,350. This still lags far behind property prices, which have grown by 34.8 per cent over the same period, but it does mean that affordability is within the prescribed bounds.

The latest data for January 2021 shows the average price paid for a home by first-time buyers in Dublin was €388,941. In terms of net income then, a couple, each on average earnings, with a 15 per cent uplift for Dublin, would use 28.5 per cent of this on mortgage repayments after payment of income tax, PRSI and USC. As you can see from the table, this proportion has been relatively stable at about 27 per cent to 28 per cent since 2016, and has actually improved by a couple of percentage points since 2016.

It also compares favourably with the boom years, when couples could expect to pay 35 to 45 per cent of their net income on mortgage repayments.

Single buyers in the capital may struggle, however. Based on an average first-time buyer price of €388,941, a single buyer on an average income will need eight times their earnings to purchase – far in excess of the Central Bank’s limits. A couple, on the other hand, needs just four times their income.

Outside of Dublin, the corresponding average price paid by first-time buyers was €219,735 in January 2021, 43.5 per cent below the corresponding price in the capital. First-time buyer prices ranged from €380,897 in Wicklow to €140,633 in Offaly.

On the basis that average incomes outside of Dublin are 10 per cent lower than for the State as a whole, Hughes says that a first-time buyer couple was paying about 19.9 per cent of their net income in mortgage repayments in January, compared with 16.6 per cent five years previously. This is a 20 per cent increase on 2016, and shows how affordability is falling sharply outside of the capital.

Affordability: Deposit

Mortgage repayments are only one part of the financing conundrum – you also have to get a deposit together.

The Central Bank’s rules mean that first-time buyers have to come up with at least 10 per cent of the purchase price themselves, although there is an exception for 5 per cent of first-time buyers, which means a certain proportion will be able to borrow up to about 95 per cent. Saving this deposit is no mean feat.

Outside of Dublin, FTBs will need a deposit of €21,973, based on an average house price of €219,735. A couple saving €200 a month would need nine years to save enough for a deposit for the average house outside of Dublin. Double the amount saved and it’s still a lengthy 4½ years. It can be a challenge to accumulate.

Many new developments are concentrated in urban areas, particularly in Dublin. This means that availing of the Government’s Help to Buy (which applies only to new builds) scheme can be nearly impossible in other parts of the country. Figures from Revenue show that since the scheme started in 2016 just 64 claims were made in Leitrim (13 a year), 199 in Carlow (40 a year) and 171 in Sligo (34 a year).

This average deposit has risen substantially in recent years – more even than in Dublin – up by 30 per cent from the €15,255 needed in 2016, based on an average house price of €152,550, according to figures from EY-DKM.

In Dublin, first-time buyers will need considerably more. With an average house price of €388,941 in January 2021, a deposit of €38,894 would be needed. Thanks to Help to Buy this might be covered (it applies to properties costing €500,000 or less). However, those looking for a second-hand home will have to come up with the full 10 per cent themselves. And again, this has risen significantly in recent years, up by 18 per cent from 2016.

It means that it will take a couple saving €200 a month for 16 years to save enough for a deposit for the average house in Dublin. Or eight years if you double the amount saved each month.

Affordability: Access to finance

A big plus for putative house buyers here is falling interest rates. Back in 2016 the average interest rate was 3.75 per cent; now it’s just 3.13 per cent, and rates of as low as 2.25 per cent are now possible. This can make a mortgage considerably more affordable.

This is what made the Rebuilding Ireland Home Loan so attractive when it was first launched, as by offering first-time buyers an interest rate of 2 per cent it meant that they could borrow more while keeping mortgage repayments “affordable”.

Unfortunately, the interest rate on the product has since risen to between 2.745 per cent and 2.995 per cent – which means that low income buyers are actually being penalised by the State, as market rates can be found below these levels.

Affordability: Choice

It’s one thing being able to buy a home, it’s quite another being able to afford one that suits your needs. And this is an issue facing many first-time buyers at the moment.

There is no doubt that supply is on the floor. Figures from Sherry FitzGerald show that in January 2012 there were 51,400 second-hand properties available for sale across the country. However, as the market picked up again in the aftermath of the crash, supply started to fall and by January 2017 it had fallen to 22,100. By January of this year, it had fallen to a record low of 15,500.

With delays in construction due to the Covid-19 pandemic, the new homes market has also taken a hit. This means that there can be an affordability crunch on the most attractive properties that come to the market, given the obvious lack of choice out there. This, in turn, is driving prices up again.

“There is a substantial housing supply deficit in the market, which is driving up prices for those first-time buyers looking to purchase in the market,” says Hughes. Added to this is sustained demand, which may be fuelled further by the additional €16 billion in household savings banked during the pandemic.

“There is significant pent-up demand in the market; seeing a reduction in house prices any time soon is not a runner,” says Hughes, noting that in the four months to January 2021 prices rose by 1.7 per cent in Dublin, which corresponds to an annual increase of 5 per cent. Outside of Dublin, the rate of growth is even sharper, with residential property prices growing at an annual rate of 4 per cent in January 2021.

The Central Bank’s rules can help in this regard. As Hughes says, “The loan-to-income limits mean that any price increase in that same property over time will have to be met by a combination of a higher income or a larger deposit, if a transaction is to materialise, or the buyer will have to purchase a smaller property in the same location or move to a more affordable location.”

However, with gifts from parents or outright cash buyers still a significant factor in the property market, this can dilute the impact of the Central Bank’s rules to keep a lid on property prices. In value terms, about 40 per cent of all residential transactions last year were acquired with cash.

Affordability: Compared with rents

Finally, it’s worth considering how much you pay for housing if you don’t own it. While rents have started to moderate, they are nonetheless still high. This means that even if buying a home is expensive relative to your income – it may still be considerably cheaper than renting.

According to the Daft.ie rental report for the fourth quarter of 2020, for example, it’s €546 cheaper a month to buy a one-bed apartment in Dublin 2 than it is to rent. Similarly, the mortgage on a three-bed house in Dublin 15 will cost €1,164 a month, compared with €1,807 to rent it.

And this is the same in many parts of the country. In Waterford, for example, a two-bed house will cost €813 to rent, or €424 a month in mortgage payments.