We should probably stop calling our housing problem a crisis. The latter denotes something temporary, something finite. We’ve been dealing with housing-related issues – homelessness, undersupply, soaring costs – for three decades and it’s not obvious what we’ve got to show for it.
“Affordability erosion” – from which everything else radiates – now seems locked into the system. The average price paid for a home in Dublin in the 12 months to January was €453,075 – nine times the average full-time salary. This is roughly the same as it was prior to the 2008 crash and yet there is no credit bubble, no pending collapse.
And Government policy to address the issue is a mere jumble of contradictions. Take its new shared-equity loan scheme, ostensibly designed to boost home ownership. It will almost certainly do the opposite.
The scheme, which is still being finalised, involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property.
Critics say helping more people to buy in a supply-constrained market only pushes up prices. But Minister for Housing Darragh O'Brien insists his scheme won't and has promised regional price caps and specific eligibility conditions around affordability to make it more targeted. He also hopes that boosting demand will elicit more supply.
A similar scheme rolled out in the UK, which has similar property issues, provides the ideal test case. Very few studies had been done on the precise impact of the UK’s help-to-buy equity loan scheme – which aided the purchase of 195,000 new-build properties between 2013 and 2018 – until researchers from the London School of Economics published a paper last year.
A tale of two areas
They assessed the impact of the scheme in two areas – London and Wales – under two metrics, price and supply. In London, participants were offered an equity loan of up to 40 per cent on new-build properties of £600,000 and under, while in Wales participants were offered 20 per cent loans on properties of £300,000 and under.
The research found that the scheme led to a 6 per cent rise in prices in London but had no material impact on supply. “Both of these effects are arguably contrary to the policy’s objectives which are to improve affordability and promote new construction,” the study said.
In contrast, in Wales the scheme was found not to be inflationary and to have had a “statistically significant impact” on supply. The differing impacts stemmed from the relative elasticity of housing supply in both regions. In London supply was found to be relatively inelastic– in other words less likely to respond to price signals because land prices were higher and planning more difficult to obtain. In Wales, housing supply was more elastic for the opposite reasons.
But here’s the rub. The research concluded that the UK’s housing affordability crisis “tends to be most severe in the supply-inelastic markets of the southeast and especially in London” and that ultimately the scheme stimulated housing construction in the “wrong areas”.
Does this sound familiar? It’s not hard to see the London impact playing out in Dublin. The housing problem here is similarly centred on the capital, which exhibits similar supply inelasticities to London. So there’s every chance the scheme here will end up pushing up prices in the least affordable zone, an outcome that will hardly boost home ownership.
A previous UK government-commissioned study, suggesting the UK scheme led to a 43 per cent jump in the supply of new homes, which the Minister here seems to be hanging his hat on, is dismissed as lacking “the proper identification of the effects using a rigorous empirical approach”.
Central Bank
The potential for such a scheme to inflate prices here was highlighted this week by Central Bank in a submission to the Oireachtas Joint Committee on Housing. The regulator noted that the scheme would operate by increasing the purchasing power of households but that the supply response to increasing house prices has, to date, been "sluggish".
It follows similar criticism from the Economic and Social Research Institute, the Institute of Professional Auctioneers and Valuers and the former secretary general of the Department of Public Expenditure and Reform, Robert Watt, who said "the property industry want an equity scheme because it will increase prices".
A long-standing problem with these types of schemes is that they end up helping the wrong people. Figures from the Revenue Commissioners show that more than 40 per cent of the first-time homebuyers who have availed of the Government’s current help-to-buy scheme already had the necessary deposit to secure a mortgage.
The Central Bank is hostile to the plan for another reason. Banks are expected to divvy up half the equity pot underpinning the scheme, meaning they could find themselves tied into the purchase twice – once via a traditional mortgage and additionally via the new scheme.
In the regulator’s eyes, this would be tantamount to a breach of its own mortgage rules, which it believes safeguards the system from excess lending while keeping a lid on prices. For many the Government’s plan is merely an elaborate workaround of the Central Bank’s lending rules.
Perhaps the most depressing aspect is that the Government’s solution to affordability erosion in housing is to conjure up a scheme that will saddle people with more debt. This is why the industry is so positive and the regulator so negative.
