First-time buyers dominating the housing market and keeping new home prices on the rise - for now

The Government has gone in deep into the housing market. And it is having an impact. A host of data published this week tells the story. First-time buyer activity is back at Celtic Tiger levels, boosted by the various State schemes on offer and easier lending rules. Along with new supports for builders and developers, this demand is also having an impact on housing supply, where the total of newly completed homes could now exceed 32,000 this year.

The string of Government supports is affecting prices too and appears to be increasing the divergence between different parts of the fragmented housing market. One comparison in the latest CSO house price data is striking. New house prices this year are running 11 per cent ahead of 2022 levels, while second-hand prices are pretty much unchanged, up just 0.6 per cent. Pulled down by weakness at the higher end of the market, Dublin prices are 2 per cent down on the year.

It seems reasonable to conclude that this jump in new home prices is because most of the State supports — notably the Help-to-Buy scheme and the new shared equity scheme — are restricted to those buying newly built properties. And that elsewhere the market is struggling under the impact of higher interest rates, the cost-of-living crisis and affordability challenges.

The new homes market remains in its own bubble. As well as supports for demand, a string of new schemes to promote housing supply are also rolling out. So for developers supply is being part-underwritten and demand for houses is being supported. Many developers had warned that higher interest rates, rising costs and a shortage of builders would lead to a fall-off in building this year as a “viability gap” emerged. Whether this “gap” was quite as wide as the industry claimed is an interesting question, though higher costs were clearly a factor pushing up new house prices. And a fall-out of throwing money at the housing crisis from every conceivable direction is that developers will be one of the beneficiaries.

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Either way, apartment completions in particular are rising fast and John McCartney of BNP Paribas — whose optimism on housing supply has proved justified — says that total housing completions could rise to 35,000 next year on current trends. This is still below most estimates of what is needed but is a significant increase on recent years.

The Government, now within sight of the next general election, is going to motor on and hope that the rise in first-time purchasing and the increase in completions will win back some voters. The Help-to-Buy scheme was extended in the budget to the end of 2025 and cash is being provided for supply supports and will be — we must presume — for the Land Development Agency.

This does not mean that all its policies are ideal. The risk with demand supports, and particularly the Help-to-Buy scheme — which offers a tax refund to help with the deposit — is that they push up prices, meaning a lot of the cash is effectively a transfer from the taxpayer to developers. They will help some buyers get into the market, but a review in 2022 for the Department of Finance by Mazars found that not far off half the cash spent on the scheme went to first-time mortgage holders who would have gone ahead without the scheme, including many building their own homes.

The Coalition will argue that its mix of measures is increasing supply and first-time buyer activity while being quietly happy that house prices are not actually falling

Sinn Féin has promised to end Help-to-Buy in its first budget, saying house prices need to fall, not rise. And Labour finance spokesman Ged Nash dubbed the scheme “a con job“ in a speech on the Finance Bill this week. He added: “The market has simply added the subsidy to the price of the house as predicted and developers cannot believe their luck. It is a downright stupid use of public money.”

In a conclusion similar to the old response to someone looking for direction — “if I was you, I wouldn’t start from here”, the Mazars report found that “a rational approach would not design the scheme as it currently exists, but there are considerable risks with ending the scheme”. These include, it said, a reduction in supply as developers worry about potential buyers can finance their purchase. It seems the housing market is drugged up on State money and will not be easily weaned off.

And the supports — as well as the strong jobs market and rising incomes — are having an impact, along with the 2022 changes in lending rules allowing first-time buyers to borrow four times their income. The latest figures from Banking and Payments Federation Ireland show that on average 470 first-time buyer mortgages valued at €131 million have been drawn down each week in the first nine months of 2023 — that means €5.1 billion in cash has been out in the market looking for something to buy.

A substantial part of this first-time buyer firepower is directed at the second-hand market — but the lack of State support here means the price that first-time buyers can afford are lower. Goodbody economist Dermot O’Leary speculates that more first-timers are heading for the second-hand market because some of the new housing supply coming on the market is being driven by new State supports for affordable and cost-rental properties — and is thus not available to buy.

A string of Government schemes are now in place or rolling out to support rising supply — among which is one to support developers selling to owner-occupiers in cases where the sums don’t add up due to rising costs; one to provide loans to approved housing bodies to provide cost rental homes and a separate scheme to support private developers providing cost rental properties. There is a clear case for State intervention to increase supply — as opposed to demand — but ensuring value for money will be a big task.

The Coalition will argue that its mix of measures is increasing supply and first-time buyer activity while being quietly happy that house prices are not actually falling, which might upset much of its base. Sinn Féin says that more State cash is needed for building — and that lower house prices are part of the answer. Behind this lies a generational question that both sides have to contend with.

But where might house prices actually go? “Nowhere fast” might be a reasonable guesstimate. There is little reason to expect an uplift in the price of higher-end homes and some further weakness is possible. And with economic growth slowing and new home prices having probably largely adjusted to the new State supports and mortgage lending rules, the froth may also come off this part of the market before too long, even if first-time buyer demand will continue to provide some support.