Sparks are flying between the Government and Opposition on the proposed help-to-buy scheme, a part of the Affordable Housing Bill currently before the Dáil.The Government said the scheme, under which the State will take a stake of up to 30 per cent in a new property, is an essential measure to help first-time buyers. However, a range of economists have warned that its main impact will be to push up house prices. What are the key arguments?
The scheme
The shared equity scheme is being introduced by Darragh O’Brien, the Minister for Housing. It proposes that the State will take an equity stake of up to 30 per cent in qualifying homes, though the Minister has said the average will be around 20 per cent. This reduces the amount of mortgage needed by the buyer, aiming to close the gap for people who earn too much to qualify for social housing schemes but still can’t afford to buy.
Full details of how the scheme would work have still to be published, but it is expected to involve the homeowner paying what the Minister called a “modest” charge to the State, or local authority, each year, after an in initial five-year period of no payment. This is effectively a rent related to the part of the property owned by the State. There will also be rules about the terms on which the homeowner can buy out the State and the terms on which the property could be sold.
There would be no general income limit for applicants, it appears, but the Minister has said there will be rules to "to tailor eligibility to meet individual affordability needs only". This suggests an attempt to ensure that only those who could not afford to buy will qualify, a different approach to a similar UK scheme. So presumably if your income is high enough to buy the property using Central Bank rules – generally that borrowings can only go to 3.5 times' incomes – then you won't qualify.
There will be limits on the house price level which will qualify. In the Dáil on Wednesday the Minister said these price caps would be set on a regional or “area” basis. It also appears that homebuyers would be able to also use the current Help-to-Buy scheme, involving a tax refund of up to 10 per cent of the price to help raise a deposit, as well as the new shared equity scheme. However this has not been fully clarified.
Some €75 million was set aside in the budget to fund the scheme – and the Government has approached the banks to put up a similar amount via a special purpose vehicle, though it is not clear whether they will sign up, or what this would mean for the annual payments made by the household.
For and against
Mr O’Brien has said the scheme opens up the possibility of home ownership to a group currently locked out of the market. He points to a long-term trend of declining home ownership in the State – and figures show that the vast majority of people in their 20s up to mid-30s are renting. The key policy concern is that those on average incomes may now be permanently locked out. The Minister said he hoped that about 2,000 home buyers could avail of the scheme this year and 8,000 over three years.
However the Minister has faced strong criticism from a range of quarters. Politically, the charge has been led by Sinn Féin housing spokesman Eoin O’Broin who has said the scheme risks saddling households with high debt and adding to developer profits. It would do nothing to make houses more affordable, he has argued.
ESRI economists Conor O’Toole and Rachel Slaymaker warned at a recent Oireachtas committee hearing that in their view the scheme would be likely to push up house prices, due to the constrained supply now in the market.
The Central Bank also reportedly has concerns about how this relates to its mortgage lending rules.
And senior public servants outside O’Brien’s departments have also issued warnings, according to correspondence released under FOI. Robert Watt, former secretary general of the Department of Public Expenditure and Reform wrote to O’Brien’s department saying :“In the context of an affordable scheme ... The property industry want an equity scheme because it will increase prices.”
The economics
The crunch factor in the Irish housing market is lack of supply – around 20,000 new homes were built last year, but we need 30,000 plus. There is a particular shortage of smaller, more affordable homes. Despite the pandemic shock to the economy, prices rose by 2.2 per cent last year, due to supply shortages and the fact that incomes in many sectors were not significantly hit by Covid, and in some cases not at all.
The key concern is that with supply constrained ,the boost to demand will add to housing inflation. This may be difficult to prove afterwards as house prices are affected by a host of factors; the ESRI researchers explained that their view was based purely on the impact of the scheme, holding other factors constant. O’Brien has said that fears the scheme could boost house prices are nonsense, given its small scale related to the market.
If house prices rise to fully account for the subsidy, then most people availing of the scheme will be no better off – apart perhaps from those who are first in – and the developers and landowners will indeed benefit.
Much of the debate relates to whether the extra demand will in time lead to the sector supplying more houses – higher supply could hold down price inflation. Department of Housing officials say their talks with developers have led to indications that there would be additional supply – and that planning permissions are there to allow this to happen.
UK experience
Evidence from a similar scheme in the UK is mixed. In place since after the financial crash, the scheme has extended loans to well over 250,000 buyers. A report by the UK National Audit Office quoted government-commissioned research suggesting that between 2015 and 2017 it had increased new housing supply by around 15 per cent and helped significant numbers to buy faster.
However illustrating the difficulty of targeting help from such schemes at those who need it, just two in five UK buyers said they could not have afforded a property without the scheme.
Overall, the audit office said that the scheme seemed to have met its own short-term objectives of increasing supply and home ownership. However it warned that both the taxpayer and the homeowner would be at risk if the market turned down sharply. The long-term impact and value for money of the scheme would take time to judge, it said.
A key debate in the UK has been what impact the scheme has had on prices. The audit office report said previous estimates that people purchasing under the scheme generally paid higher prices for properties than those buying under their own steam were, in its view, incorrect. Comparing like-for-like properties, it said the premium was just 1 per cent. This refers to the premium on houses bought via the scheme, rather than wider price trends.
An interesting study undertaken by the London School of Economics and referred to in the Dáil by O’Broin looked at the impact of the UK scheme in part of the Greater London Area (GLA) and on the English/Welsh border, in other words a built up and a more rural area. It estimated that in the GLA the scheme increased prices by around 6 per cent over what they would otherwise have been, but did not lead to any significantly increase in supply in an areas where planning and cost make new home building difficult.
Out on the rural border, the opposite happened – there was no price increase but supply did rise. This illustrates the difficulty of targeting such schemes to deliver supply where it is needed,The LSE paper concluded that it led to houses being built in the wrong places and had increased developer profits.
The bottom line
It appears the Government will press ahead with the scheme despite the misgivings. This is part of a wider plan to spend a lot more State resources in the housing area, trying to target the vital area of affordability. The key question is whether this is a good use of money and will direct help at those who need it. The vital problem is the impact of increasing demand on a market where supply is likely to remain constrained as the building sector gets back to life after the pandemic.
