The Government is to discuss expanding the Help-to-Buy scheme in the budget. Sinn Féin, meanwhile, promises to phase it out if it is in power after the general election.
The Coalition says it is a vital supporter to house buyers, a case also made by the construction sector. The main Opposition party says that it is pushing up prices and putting money in the pockets of developers, rather than helping buyers. Can we tell where the truth lies? Lets look at the evidence.
1. Help-to-buy basics
The Help-to-Buy scheme offers first-time buyers of new homes valued at less than €500,000 a repayment of income tax and deposit interest retention tax (Dirt) paid in the previous four years. As well as new-build houses bought from developers, self-build homes also qualify.
The maximum amount which can be claimed is €30,000, or 10 per cent of the value of the property, whichever is lower.
The idea is to provide a route for first-time buyers to come up with the required deposit. The scheme kicked off in 2017 and was enhanced in 2020. It is currently due to run out by the end of next year.
2. What are the parties saying
The Government is promising to retain the scheme and some expansions are reportedly under consideration for the budget. Housing minister Darragh O’Brien has pushed for an extension of the scheme beyond the end of next year and has also reportedly floated an increase in the €500,000 limit for the cost of qualifying homes.
One option is to relate the limit to the area where the person is buying – so it would be higher in Dublin, for example, where houses cost more. O’Brien has also floated the idea of increasing the payment to renters seeking to buy, by allowing them to count in some past rental payments as well as taxes.
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This would be a significant change – as the existing concept is a refund of money paid to the State – and means more could claim close to the €30,000 limit. An issue for lower earners or people returning to the State is that they may not have paid enough income tax or Dirt to qualify for much of a Help-to-Buy rebate on these.
On the other side of the fence, Sinn Féin’s recent housing plan proposes a phasing out of the Help-to-Buy scheme.
New home price inflation soared during late 2022 and early 2023 - much of this attributed to higher housing costs - though the annual rate of price increase of new and existing homes is now similar again.
This is a change from its previous stance, which was to abolish the scheme immediately. Its latest proposal is to begin cutting the amount of money available to buyers under Help-to-Buy in 2026 from €30,000 to €24,000, and continue cutting it by €6,000 annually to 2029, with final drawdowns in 2030.
This, the party says, is to give it time to ramp up new housing delivery, including more social and affordable homes, providing other options for first-time buyers.
The Labour Party has also long been critical of the scheme and would plan to phase it out over time, focusing resources instead on delivery of more affordable and cost rental homes.
3. What is the evidence?
There are four key – and linked – issues with the Help-to-Buy scheme. Does it help people to buy houses? Does it do so in a cost-effective way which is in line with other politics? Does it lead to an increase in house prices? And does it increase supply? Revenue statistics allow much of this to be probed.
Let’s look at the last question first. The most up-to-date analysis, conducted by Mazars for the Department of Finance in 2022, says that there is no “definitive evidence” that Help-to Buy has pushed up the price of new houses.
It acknowledges that it is boosting demand at a time when supply is constrained but its analysis found that up to 2021 the higher price of new-builds largely reflected higher standards of housing. It would be interesting to see this analysis repeated today.
New home price inflation soared during late 2022 and early 2023 – much of this attributed to higher housing costs – though the annual rate of price increase of new and existing homes is now similar again. A Central Bank research paper found limited evidence of increases in the prices paid for houses using the scheme.
Does it help people to buy houses? Well it has clearly been popular with 50,714 applications made under the scheme from 2017 to last month, valued at just over €1 billion. Just under one-quarter of these were for self-build houses with the rest for houses bought in the normal fashion.
So Help-to-Buy is a big factor in the market and many developments are planned with its €500,000 limit in mind. Whether developers inflate prices to these limits or reduce them is impossible to tell – possibly both in different cases. Certainly the property price register shows many schemes just under the price limit.
Is the scheme a cost-effective way of helping homeowners? Here problems have been identified. The Mazars review pointed out that many borrowers did not need the cash to fund their deposit.
They can tell this because the Revenue Commissioners publish details on the loan-to-value ratio for people availing of the scheme – how much they borrow compared to the price they pay for their house of apartment.
The scheme fits poorly within Ireland’s spatial plan - which aims to have more people living closer to urban centres and fewer having to undertake large car-based commutes.
Around 30 per cent have loan-to-value ratios of less than 80 per cent – so by definition they have enough cash to fund their deposit and some to spare and around half have LTVs (loan-to-value) of 85 per cent of less.
A separate calculation done by Mazars calculated that close to half the cash paid out through the scheme could be categorised as “deadweight” loss – in other words helping people who could already afford the deposit.
For self-builds the figure was even higher, with more that three-quarters of the money paid out not going to people with relatively low LTVs, indicating a “very poorly targeted and inefficient intervention” in this area. Every State scheme of this type has some element of deadweight, but the figure for Help-to-Buy is high.
Mazars also pointed out that the median (average) level of income per approved application was €86,5000 in 2019, which was towards the top of the income distribution. This is still likely to be the case, given the high income level needed to consider buying a house.
The Central Bank study found that the main impact of the scheme was to boost household liquidity – meaning borrowers could afford to buy, or hold on to some savings, for example. This was of more value to lower and middle income households where finances are tight.
The scheme fits poorly within Ireland’s spatial plan – which aims to have more people living closer to urban centres and fewer having to undertake long, car-based commutes.
According to Mazars “it is clear that Help-to-Buy has been facilitating, if not causing, the building of new houses in the Dublin commuter belt, rather than contributing to the building of apartments within the urban footprint”.
This is because houses can be built in these areas for less than the €500,000 limit. Around 9 per cent of the population live in Meath and Kildare combined, but these two counties account for 23 per cent of all Help-to-Buy applications to date.
In terms of encouraging new housing supply, Mazars found the data “inconclusive, although the output of certain types of houses – three-bed semis in particular – did increase and some areas likely experienced higher output than they would otherwise have seen.
They also interviewed people involved in the sector, who argue that the scheme has an important role in encouraging supply and helping buyers, providing a way to bridge some of the affordability gap facing many buyers and thus assuring developers there would be demand for a certain type of housing. It is now, in other words, baked into areas of the market.
4. What to do?
Mazars said that abolishing the scheme immediately would be a mistake but it did call for some immediate measures – such as ending support for self-builds – and a clear indication that the scheme would be phased out over a period of time.
A few years on, it rolls on and a further extension may well be announced in the budget, perhaps even on enhanced terms. This would be to ignore the criticisms of the cost-effectiveness of the scheme and its impact on where houses are built. Two of the main Opposition parties have opted for the phase-out option.
This recognises that there are some projects under way which are based on the scheme continuing and that it would take time to ramp up affordable housing provision in other ways. The contrast between the Government’s focus on Help-to-Buy and Sinn Féin’s plan to phase it out and introduce a new affordable housing scheme, as well as boosting general supply, will be a central focus of the election housing debate.
Also, Sinn Féin wants to abolish the other demand support scheme, the First Home Scheme in which the State takes an equity stake in the property.
The Government remains committed to this scheme which Mazars said should be tweaked as Help-to-Buy was phased out.
The Commission on Housing said buyer incentives need to be carefully focused and favoured the shared equity route as it gives the State scope to get some cash back in time. It is all part of a wider debate on how the billions which will be spent on housing should best be allocated.
