Helping first-time buyers ‘may increase house prices’

Economist Colm McCarthy says incentives will ‘add to the pressure of excess demand’

 

Economist Colm McCarthy has said Government assistance for first-time buyers will not address the issue of a shortage of housing and will only serve to increase house prices further.

Lorcan Sirr, a lecturer in housing with Dublin Institute of Technology and Professor Tony Fahey of University College Dublin agreed that the key pillar of the Government’s housing plan could cause house prices to increase further.

“The problem with giving grants to people who might be thinking of buying houses, is that it doesn’t summon forth any additional houses. It does summon forth additional people who might be trying to buy them, and it will push up the price of houses” said Mr McCarthy, who was speaking to The Irish Times Inside Politics podcast at the MacGill Summer School in Glenties, Co Donegal.

But Minister for Housing Simon Coveney said any moves for first time buyers will also aim to increase the supply of affordable new homes for that market.

“We will look to do that in the budget through a support mechanism purely for new houses. I have heard some criticism that if you give first time buyers more money to buy a house, that simply just overheats the market even more,” the Cork South Central TD told Inside Politics.

“We are only talking about giving first time buyers the capacity to raise a mortgage more easily for new houses, at a certain price level. Whatever we do for first time buyers, it must drive supply as opposed to simply overheat demand.”

The Government is working on a so-called help-to-buy scheme for first time-buyers, which will be outlined by Minister for Finance Michael Noonan on budget day in October. The scheme will provide first-time buyers with assistance in purchasing a home and will be tied in with incentives for developers to build new houses.

Mr Coveney yesterday unveiled his action plan for housing which aims to increase the number of homes built per year to 25,000 by 2021. It also aims to provide 47,000 social housing units in the same period, with funding for social housing increased to €5.35 billion from a previously announced €3.7 billion.

But Mr McCarthy warned: “Giving grants on the demand side of the market, or giving tax breaks on the supply side of the market, does not address the issue. The issue in housing in Ireland is that there is a serious shortage in housing, particularly in the area around Dublin. Prices are far too high, and we need to address that.

“Giving people extra credit or tax breaks or whatever to add to the pressure of excess demand is just not a smart thing to do”, he added.

Also speaking on the podcast, Mr Sirr and Professor Fahey agreed with Mr McCarthy. “Absolutely, the idea of assisting first time buyers has been proven nationally and internationally over the decades to just merely inflate the price of houses. So in a weird twist of fate, the government could very well end up pricing people out of the market that they had intended to help in the first instance,” said Mr Sirr.

Mr McCarthy was also critical of the continuing practice of allowing residents of local authority housing to purchase their homes at a discount.

“The Government is keen to spend more money on local authority housing which seems fine, but simultaneously they have put a hole in the same bucket into which they pour more water. Allowing people to buy local authority houses at a discount is debatable given the shortage of social housing stock”.

Professor Fahey defended this policy, saying the presence of home owners in an area had a stabilising social effect, and that areas in Dublin where many local authority houses were bought had benefitted over the decades.

Referring to economist Milton Fridmann’s aphorism that you should only make new mistakes, Mr McCarthy said “it seems to me that in trying to deal with this new housing crisis, the politicians are reaching for old mistakes”.

Separately, economist Jim Power said on Wednesday that, if necessary, overseas developers can be brought into the Irish market to help in the delivery of houses. He told Newstalk Breakfast radio show that funding for developers will have to be a key part of the Government’s housing plan.

On the same programme the chairwoman of Threshold Aideen Hayden said her agency’s response to the plan was broadly supportive. But she said the plan is incomplete until a strategy on the rental sector is published.

Deirdre Fallon, President of the Irish Planning Institute said it was unclear how the plan’s fast track proposal for planning applications will work.