This quarter’s MyHome.ie report shows Ireland’s housing market grinding tighter. Asking prices are up 7 per cent and the stock of homes listed for sale continues to decline.
With price gains limited by regulations on affordability, the heat in the Dublin residential market has been transferred to rising rents. According to the Private Residential Tenancies Board (PRTB) Dublin residential rents rose by 4.5 per cent in the three months to June 2016, up 9 per cent on the year.
And homebuilding has provided little respite. Housing completions look set to equal close to 15,000 in 2016, still well below household formation requirements. In this context it is no surprise to see political pressure to address the lack of housing supply mounting – with speculation focused on the Central Bank’s review of its mortgage lending rules in the autumn. Sadly, much of the public debate still rests on the assumption that short-term measures such as tax reliefs, or looser lending standards, can provide an effective panacea for the housing crisis, or at the very least create the illusion of action.
To their credit, respondents to a MyHome survey provide a more mature outlook. The majority (73 per cent) expected no change to the Central Bank’s rules. When asked how the Government could best respond to the housing crisis only 11 per cent suggested buyers should be allowed to borrow more. In total, 48 per cent suggested the Government should take measures to stimulate housebuilding. The message that tackling planning constraints and high land and housing construction costs is the most effective way to help housing supply appears to have hit home.
However, the role of tax reliefs in driving the last boom is less well understood. While there may be political support for Minister for Housing, Planning and Local Government Simon Coveney’s plans for a Help-to-Buy scheme focused on a tax rebate for first-time buyers, this doesn’t necessarily equate to effective policy.
The experience of the UK provides a salutary warning. The recent rebound in UK house prices can be traced back to the introduction by the then chancellor of the exchequer George Osborne of his Help-to-Buy scheme – ignoring warnings from the IMF, the Bank of England governor Mervyn King, the Office for Budgetary Responsibility and even the Royal Institution of Chartered Surveyors (RICS) that such policies could fuel a fresh house-price bubble in the UK.
Three years on these predictions have been borne out. UK house prices have grown so quickly valuations are back at peak-2007 levels relative to incomes. According to mortgage lender Halifax, the average house price is now 5.6 times the average income, only marginally below the previous 5.8 peak recorded in 2007. Median loan-to-income multiples for UK first-time-buyers were 3.6 times earnings in July, a new record high.
A key part of the UK Help-to-Buy scheme is due to expire at the end of 2016. The mortgage guarantee scheme provided insurance to banks on high 95 per cent loan-to-value mortgage loans, helping to encourage cuts in mortgage rates. However, with competition in the UK mortgage market heating up the end of the scheme is not expected to have a large negative impact on lending.
However, the UK government may find it harder to extract itself from the equity loan scheme – effectively providing a cheap government loan to first-time-buyers worth 20 per cent of the purchase price of new-build homes. The equity loan scheme had been intended to end this year, but has now been extended to 2020. It will be a brave chancellor who allows the equity loan scheme to expire, potentially hurting UK house prices and the profitability of the larger homebuilders.
Yet despite these enormous subsidies the supply response has been disappointing. In 2015 UK housing completions equaled 171,000 – still well below their long-run average of 193,000. A stark statistic is that the UK built 2.1 million homes during the 1980s but just 1.6 million over the past 10 years.
In this context, the UK policy response is slowly turning to the supply side. The UK’s National Planning Policy Framework (NPPF) was intended to increase the pressure on local authorities to approve housing developments. Regularly published league tables now expose the most obstructive and inefficient councils in granting planning. Just this week Sajid Javid, the communities’ secretary upped the ante, outlining changes to planning rules to create a de facto presumption in favour of housing on suitable brownfield sites.
In this vein Mr Coveney deserves some recognition for putting forward plans to expedite larger housing developments without interference from local authorities, allowing applications to be made directly to An Bord Pleanála. However, as in the UK the temptation for ineffective short-term measures will always be there, providing the illusion of action, but ignoring the more difficult structural reforms that are required.
Conall Mac Coille is chief economist at Davy and author of the MyHome.ie Property Report