New homes will still be good value after stamp duty changes says estate agent Ken MacDonald

Yesterday's announcement from the Department of Finance that first-time buyers would be exempt from stamp duty irrespective of the price of the property, and backdated to March 31st, 2007, will help restore confidence to the market and result in buyers moving back into the market even in advance of the autumn selling season. It represents a significant turning point in the fortunes of the Irish residential market, especially in the second-hand market, which will consequently have a positive impact on the new homes sector.

Past experience shows that any change to stamp duty usually results in upward pressure on prices, e.g., the changes to stamp duty for first-time buyers introduced as part of Budget 2005 was followed by a rapid upward adjustment in second-hand property prices at the lower end of the market. While some adjustment in second-hand prices is inevitable on foot of today's proposal, the current market environment will ensure that this does not translate into a sudden jump in prices and will instead happen at a more gradual pace over an extended period of time. The fact that there is no price limit at which stamp duty is charged for first-time buyers will also help to offset any dramatic change in prices.

One of the main consequences of this is to put both new and second-hand properties on an equal footing with respect to price for first-time buyers. Up to two-thirds of first-time buyers purchase a new home and the exemption from paying stamp duty is often seen as one of the main factors influencing their decision. However, new homes still retain a number of advantages over second-hand properties that will ensure they maintain their popularity amongst first-time buyers. There is a wider availability of new homes within an affordable price range for first-time buyers. For example, figures from the Department of Environment, Heritage & Local Government show that 53 per cent of all new homes sold in 2005 cost less than €250,000 compared to 43 per cent of all second-hand homes. Many new homes developments require deposit amounts well below the typical 10 per cent required on second-hand properties, e.g. a booking deposit of €3,000 followed by a further €7,000 on signing contracts.

The price of a new home is fixed, so that the purchaser knows immediately whether or not they can afford to purchase the property, whereas the price on a second-hand property is typically a guide and subject to negotiation. Buying from plans can allow for a long lead-in time (from three months to two years) before the property is constructed and ready for occupation. This can be an attractive prospect for many first-time buyers, providing for a period of savings before they close the sale on the property. Many also have better design and layout, especially with regard to modern apartments.

Most new homes come ready to live in, with fitted kitchens and kitchen appliances, built-in wardrobes and floor/wall tiling, removing the need for any significant refurbishment work. New homes also have the advantage of having a stamp duty exemption for all owner-occupier buyers, provided the property is not greater than 125sq m (1,345sq ft). While the cost of borrowing has gone up due to the increases in interest rates over the last 18 months, a number of other factors have helped to balance out the affordability equation for first-time buyers. This includes increased mortgage interest relief as part of Budget 2007; wage growth averaging 5.5 per cent across all sectors of the economy; rising disposable incomes due to successive cuts in income tax rates, widening of the tax bands and increases in tax credits; more moderate growth in residential price inflation; and intense competition between mortgage lenders on interest rates. As a consequence, first-time buyer affordability is actually in a better position now than it was towards the end of last year. The proposals outlined in the Programme for Government to further increase mortgage interest relief for first-time buyers (most probably as part of Budget 2008) will help to maintain the favourable affordability environment, even if interest rates increase again before the end of the year.

Ken MacDonald is managing director of new homes specialists Hooke & MacDonald