Is the housing market getting more unfair?

Average wages, deposits, and mortgage lending rules ... is the Help to Buy scheme helping?

We all know that house prices are soaring – and will likely continue to do so unless supply expands dramatically. But as prices rise far faster than incomes do, inequality and access to the housing market are also rising.

According to the CSO, the average wage in Ireland is about €45,075 for someone working full time. But the median wage – ie, the wage around which most people cluster – is lower, at around €28,500. And around half the population earns less than this figure.

So what chance do they stand of owning a property as average prices continue to rocket?

Help to Buy was introduced earlier this year to facilitate those taking a first step on the property ladder but is it overwhelmingly helping those who would have bought anyway, rather than those who can't afford to do so?


And if two people earning the average income are priced out of even the apartment market, it must raise broader questions about the impact policy and regulatory decisions are having.

Home ownership is declining

Yes, cultural expectations are changing and, for some younger people, owning their own home is not as big a desire as it may have been in years gone by.

Yes, affordability is a somewhat nebulous concept; as we showed here, the cost of financing a mortgage can have just as big an impact on affordability as the price of the property can.

Nonetheless, arguably much of the decline in home ownership in recent years must be down to affordability, in terms of the growing differential between incomes and property prices.

As a report prepared by Indecon on the Help to Buy scheme noted: “The difficulties experienced by first-time purchasers in financing a deposit and mortgage repayments is likely to have contributed to the decline in home ownership evident for younger individuals and young families.”

Just 30 per cent of households, whose head is aged between 25 and 34, own their home today compared to 68.4 per cent in 1991.

And while it is too early to say categorically, early indications are that home ownership rates haven’t improved since Help to Buy was introduced – they’ve actually fallen.

Previously unpublished figures for the second quarter of 2017 from the Central Statistics Office show that home ownership levels in Dublin slid from 60.8 per cent as of end 2016 to 60.06 by June 2017. And across the State a similar decline was noted, with levels falling from 73.3 per cent to 72.1 per cent.

Given that there was a significant backlog of claims (about 1,200) when Help to Buy got up and running in January, this figure may surprise.

Rental market gives no chance to save

If home ownership is unaffordable, for those living in urban areas, it’s likely that they’ll be spending a hefty sum of their take-home pay on rent as prices continue to rocket.

Recent research from Sherry Fitzgerald shows that Dublin city dwellers are now spending as much as 55 per cent of their take-home pay on rent. This means that for every €100 in after-tax income earned, €55 goes on rent. So a single person on a salary of €35,000 will have take-home income of €2,405 a month, of which €1,322 will go on rent. It’s going to be very difficult to try to save a decent deposit on those figures.

Typically, financial experts recommend that a person keeps their housing costs to 30 per cent of their net income. When housing costs go above this level, it starts to impact on a household’s ability to save and cover other costs.

If Dublin is the most expensive city for accommodation costs, Limerick city is the cheapest urban place in which to rent, with dwellers giving up just 30 per cent of their after-tax income on their home. Bear in mind that even this cheapest location is barely within the general guidelines on housing costs. And even at that level, it doesn’t leave a lot left over to try and get a deposit together.

Mortgage lending rules having wider impact

Mortgage lending limits can play an important part in ensuring that we never return to the crazy lending of the boom years. That’s important to note. However, in the current environment, it could be argued that current limits are exacerbating inequalities.

Almost one in two purchases are currently being made by cash buyers. This significantly disrupts the playing field as it means that one in two buyers don’t have to abide by the lending rules.

And the restrictions make it much more difficult for the other cohort to clamber onto any sort of a ladder. Consider an example from a recent Society of Chartered Surveyors of Ireland (SCSI) report on apartment costs. An apartment coming to the market for between €338,000 to €500,000 would require a person with a combined salary range of between €87,000 and €129,000 to afford it – even though two people earning the average national wage will be on just €90,090 a year.

Once the price goes beyond €338,000, this “average” couple simply won’t qualify on income multiples of 3.5. The SCSI has priced everyone on earnings of €82,500 or less out of the apartment purchase option altogether.

The bank of Mum and Dad reigns

As house prices rise, so too does the amount people need to save for a deposit. According to the Central Bank, for example, it is taking up to two years more for Dublin residents to save a deposit for their first home than it did in 2014 since the introduction of the regulator’s mortgage-lending rules, as well as rent and house prices increases.

As the Indecon report noted, “even if there are two individuals, each working full time and earning the average earnings for full-time employees”, it is still difficult to save the required deposit to purchase an average first-time buyer new home in Dublin.

Not everyone has family or friends to help out. The bank of Mum and Dad is not open for all putative purchasers

Figures it compiled shows that first-time buyers earning €46,852 – either individually or as a couple – and buying a house valued at €239,998, will take almost 14 years to save the required deposit, or 11.3 years with the Help to Buy incentive, based on saving 10 per cent of their income. Push the value up towards Dublin prices, at €303,952, and the length of time for someone on these earnings rockets to 30 years.

As the report concludes, it is clearly “not feasible” for someone with average full-time gross earnings to fund a deposit “without significant assistance from family or friends”.

This means that more and more are turning to their parents for financial help, with research from the Central Bank showing that one in five new buyers is getting a handout to help them put the funds together for a down payment, with an average payment of about €10,000.

Estate agents Savills say that 15 per cent of their cash buyers are now first-time buyers – helped out, in some cases at least, by munificent and well-endowed parents.

But of course not everyone has family or friends to help out. The bank of Mum and Dad is not open for all putative purchasers.

Earlier this year, research from the UK's Social Mobility Commission found that financial gifts from parents are "exacerbating inequality and impeding social mobility". It's likely to be a similar story in Ireland.

Builders benefit

Since January 1st, the date Help to Buy scheme was introduced in Ireland, the share price of London-listed builder Cairn Homes has risen by 32 per cent from £1.315 to £1.74 as of October 24th.

Is Help to Buy helping?

It was designed to help first-time buyers get on the ladder, and to counteract restrictive lending limits imposed by the Central Bank by helping people who would otherwise find it difficult to do so raise a deposit but the Help to Buy tax relief is not a panacea.

As our figures show, the initiative is primarily helping people buying in the €300,000+ category, rather than those further down the rung. So far, of the 3,500 or so claims successfully made, almost one in two purchases (47 per cent) were for properties worth €301,000 or more, with 13 per cent of claims made for properties worth more than €376,000 and 5 per cent on those worth €450,000 or more.

And remember, while the maximum rebate available under the scheme is €20,000, purchasers of properties worth up to €500,000 (down from €600,000 originally) are eligible for the scheme.

Looked at another way, these figures mean that if you consider the mortgage lending rules (x3.5 times combined income) almost half of those people applying for the scheme must have incomes of €85,714 or more, while about one in five will have joint incomes of €107,000 or more.

Most startlingly perhaps is the fact that just 3 per cent of claims were for houses worth up to €150,000, with just 15 per cent in the “affordable” €151,000-€225,000 range – and just 39 per cent of successful claims were in the Dublin region.

The initiative, like pension fund relief, favours higher earners, given that the rebate is claimed on the basis of taxes paid; so the more tax you’ve paid by virtue of earning a greater income, the more you will be entitled to claim back.

Higher incomes

And it helps those on higher incomes more. Consider someone earning €126,315 looking to buy a property valued at €403,200. Without Help to Buy, it will take the couple about 3.2 years to save a deposit: with it, it will take just 1.6 years, or 50 per cent less time.

Now consider someone on €46,852 looking to buy a property worth €239,998. As mentioned, it will take 13.7 years without Help to Buy to save a deposit – or 11.3 years: the reduction in time for them thanks to the first-time buyers’ incentive is just 21 per cent.

As the Indecon reported noted, there is likely to be “an element of deadweight” in the scheme. Some people don’t need it, while particular affordability issues remain for those on lower incomes. As such, it suggested that by linking the measure to incomes, it may be more equitable.

Consider also the amount that people qualifying for the incentive are borrowing. If the scheme is helping people get their first foot on the ladder – people who may otherwise have been unable to do so – you’d imagine that the vast majority would be using the rebate to put together the minimum 10 per cent required under Central Bank rules for first-time buyers.

However, as figures from September 2017 show, some 36 per cent of those who have claimed the incentive had deposits of between 15 and 30 per cent of the purchase price, with a further 30 per cent having between 11 and 15 per cent. So less than one third bought with a deposit of 10 per cent or less.