First-time buyers grant would help builders, not buyers

A €5,000 grant during the Celtic Tiger era was a miserable failure

4th October, 2016
A first-time buyers grant will help builders, not buyers

The property market crash was supposed to have ended hapless housing policy in this country.

But with the Budget just a week away, the government is poised to bring in a first-time buyer grant worth around €10,000 for newly-built homes – backdated to those purchased since July 19 last.

This type of “help to buy” scheme sounds great on the face of it. What first time buyer would not want to have another €10,000 in their pocket, particularly if they are struggling to meet the Central Bank’s new mortgage lending rules on having a 20 per cent deposit?

The government's argument is that a time-limited first time buyers grant will encourage builders to build more homes at a time of chronic housing shortage. There were just 12,000 homes built last year, and 6,000 of them were one-off houses and another 4,000 or so were from unfinished housing estates being completed. It is a long way from the 35,000 new homes per year that are needed.

But a €5,000 first time buyers grant was tried out during the Celtic Tiger era – and was a miserable failure.

The supply did increase to the point where 100,000 homes per year were being built,. But builders kept increasing house prices even further – and first time buyers were just left paying even bigger mortgages over 30 or 35 years. That left them even more exposed when the recession hit. There was a reminder of the consequences of this yesterday when Tánaiste Frances Fitzgerald and Social Protection Minister Leo Varadkar launched a new free advice service for the 82,000 households who are still in mortgage arrears.

There has been no shortage of experts warning the government against proceeding with the first-time buyers grant.

The European Commission, in its recent inspection report, said it could be costly and counterproductive “given current supply constraints”. In short, it believes that it will only drive up prices of the limited number of new homes on the market.

The Economic and Social Research Institute’s director, Professor Alan Barrett, delivered a helpful reminder of the uselessness of the first-time buyers’ grant at a recent meeting of the Oireachtas budget scrutiny committee.

“For years we have had analysis, and many people in the room will remember the €5,000 first-time buyers grant. All it did was to increase the price of houses by approximately €5,000. We give the payment to one group of people but we may as well just give it straight to the developers and builders because ultimately they will get it,” he said.

Many developers are debt-laden after over-paying for sites during the property crash. The government’s argument is that it is not giving in to builders on their demand for a cut in VAT from 13.5 per cent to 9 per cent. But the main building industry lobby group, the Construction Industry Federation, is in favour of a type of “Help to Buy Scheme” along the lines of the one adopted in Britain three years ago. The British government has been loaning first-time buyers up to 20 per cent of the total cost, with no interest repayments for five years. But since the scheme has come in, houses prices in Britain have continued to rise and there is still a chronic shortage of supply.

Just yesterday, the Trinity College Dublin lecturer Ronan Lyons warned that giving grants to first-time buyers will only help to push prices up further – as they will bid more vigorously against each other. However, he noted: "Politically, it may be necessary to be seen to be doing something to help first-time buyers."

But rather than being fooled, first-time buyers should be demanding instead the imposition of a proper site value tax to force the owners of sites with planning permission to start developing them rather than hoarding them until house prices rise further.

There is a vacant site tax coming in – but not till 2019 and it will only be 3 per cent per year. The ESRI believes that fast-tracking a higher site value could have a significant impact in increasing the supply of new homes.

That could help make homes more affordable – which is supposed to now be a key part of government housing policy.

But so far, all the discussion at government has been about the first-time buyers grant. All the available evidence shows that the first-time buyer grant will be a “Help to Builders” rather than a “Help to Buyers”. The government has just over a week to make up its mind.

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