Budget 2017: New help-to-buy scheme explained
Income tax rebate for first-time buyers aims to boost housing supply and property market
The budgetary measures on housing were long anticipated to address affordability, inadequate levels of new homes construction, low housing stock and rapidly rising rents.
What’s the silver bullet then?
Well . . . a help-to-buy scheme for first-time buyers that will give a rebate of income tax of 5 per cent of the purchase value of a newly built home, up to a value of €400,000. That translates to a maximum rebate of €20,000 in cash. Properties costing from €400,000 to €600,000 will qualify for the €20,000 rebate, but the scheme will not apply to homes over €600,000 in value. It will be back dated to July 19th last and will run until the end of 2019.
Brilliant, a first-time buyer’s grant with a different name. So anyone buying a house for the first time will get a leg up on to the property ladder?
No. It only applies to buyers of newly built homes. For a new house costing €300,000, a couple buying their first home will get a rebate worth €15,000, but they will still need to save €23,000 for a deposit and have a combined income of about €75,000 to meet the mortgage rules. So many Dubliners dreaming of one day buying a house close to where they grew up can forget it. And with a cap of €600,000 on the value of the new home, they can start swotting up transport routes to and from the wider Dublin area, pushing into Kildare, Meath, Louth and Wicklow.
That seems a bit unfair?
Not if you’re happy to live outside Dublin. The idea is to kickstart new homes building at a more affordable level. Developers insist the margins just are not there at the moment for them to build starter homes, and the banks will not finance them anyway. The current focus in Dublin is on pricier developments aimed at the cash-rich trading up or down. help-to-buy is likely to have the greatest impact outside Dublin initially, and even then there is going to be a time lag as we wait a couple of years for new homes to come onstream.
But isn’t it the age-old argument that such measures simply push up the price of new homes?
Yes, but Minister for Finance Michael Noonan is taking a gamble on higher prices boosting the supply of homes. The rebate is designed to offset the cost of higher deposits required from first-time buyers, and in turn boost demand. Essentially it is a grant to the developer. Others would argue that it is a counter measure to the Central Bank’s stringent mortgage lending requirements which have made it exceptionally difficult to save a deposit for a new house at current rates. Financial brokers’ group PIBA, termed it a “perverse situation” that one arm of the State has to respond to address a problem created by excessiveness in another.
An Irish solution to an Irish problem so?
You could say that. But to put it in context, just under 2,000 new homes were sold in the first half of this year for less than €400,000. And of these, less than a third were bought by first-time buyers, so in reality that does not comprise a massive market jostling for new homes. The measure will only be inflationary if there is a huge market rushing for houses and as a consequence driving up prices. The fact that the rebate has only been set until the end of 2019 means it can be closely monitored, and if the effects are adverse the Minister can pull it.
How do we know that the builders will buy it?
Initial soundings are encouraging from the Construction Industry Federation, though they would have liked a cut in the VAT rate for builders. Leading building firm Cairn Homes welcomed the measure, and critically noted that the rebate would not solely manage to revive the housebuilding industry, but should work when coupled with the Housing Action Plan provision for fast-tracked planning measures, and the Local Infrastructure Housing Activation Fund announced earlier this year.
Is that it for Budget measures around housing then?
Pretty much, and given the pre-Budget hype around addressing the housing crisis for buyers there are a lot of glum faces out there today, most of them saying the budget did not go far enough. Claire Solon, president of the Society of Chartered Surveyors Ireland said it did little to address the supply shortage. “In the short term at least, this will just mean greater competition for those few properties that are available across all sectors including tenants, students, social and affordable housing. As we have seen increased competition means higher prices.”
The Institute of Professional Auctioneers and Valuers was similarly disparaging, expressing surprise the scheme was not extended to first-time buyers of second hand homes. IPAV chief executive Pat Davitt also said it was “disappointing” that VAT on building costs had not been reduced when this had worked so effectively in other jurisdictions to stimulate house building.
Meanwhile Minister for Housing Simon Coveney was blue in the face on Tuesday fending off criticism that his budget was a one-trick pony, citing his other Action Plan measures as complementary to the help-to-buy scheme, including fast-track planning and the local infrastructure fund. All talk about inflating house costs he said, was “academic, when the houses aren’t there in the first place. They need to be built first.”
Meanwhile what about tenants facing soaring rental costs, is there any respite there?
Not really. The hope is that the “help-to-buy” scheme will create movement out of the rental sector and free up rented accommodation. Landlords have also got their expected 5 per cent increase in the amount of mortgage interest they can deduct from 75 per cent to 80 per cent in 2017. But this will not exactly be a boon for landlords, accountancy network TaxAssist says that the actual average savings to many landlords is likely to be a about €77 a year. This may be insufficient to stem the steady flow of cash-strapped landlords out of the private-rented sector.
Any respite then for those stuck in negative equity, and in need of more than a starter home?
Not really. They’ll just have to console themselves with the prospect of making the most of what they have and avail of the extension of the Home Renovation Incentive Scheme by two years to the end of 2018. Alternatively they could rent a room, as the income ceiling here has increased by €2,000 up to €14,000 annually. In line with average rental prices, this represents a significant chunk of tax free earnings for homeowners and a partial solution to the seriously pressurised rental sector.