Housing is hot issue in election that is officially kicking off

Housing will be front and centre in the general election campaign that officially kicks off today. There will be two strands to the debate: creating the conditions so that young, working people can afford to buy a home, and tackling homelessness.

Last weekend the Tánaiste and Labour Party leader Joan Burton unveiled her "Save to Buy" initiative to help resolve the former issue.

In a nutshell, she is proposing a savings scheme whereby first-time buyers would receive a €1 top-up from the State on every €4 that they save up to a ceiling of €1,200 a year. The scheme would run for up to five years, offering a maximum tax-free benefit to the savers of €6,000.

The money would be handed over the when contracts to buy the property are exchanged and Burton has costed it at €180 million, based on 30,000 borrowers availing of the scheme at its maximum level.

Its similar in design to Charlie McCreevy’s boom-time SSIA scheme from 2001, which was designed to encourage saving at a time when Irish people were throwing money around like confetti.

Burton’s scheme sounds great but it won’t solve the current problem.

For a start, it won’t do anything for those people who want to buy a house right now but can’t raise the deposit as per the Central Bank’s new mortgage lending rules.

Even if you are prepared to wait for up to five years, the chances are that house prices will have run away from you over that period, particularly in Dublin. House prices nationally rose by 6 per cent in 2015, while Aecom, a consulting group, estimates that construction tender prices rose by 5 per cent last year and will increase by 6 per cent this year.

Cost inflation is currently outpacing earnings growth, which was described this week by John Cronin, a banking analyst with Investec, as a "troubling situation" given the Central Bank's restrictions on loan-to-income multiples and the fact that the economics of new builds only make sense in certain parts of the country.

Housing output

Cronin said the next government needs to take “steps to facilitate an expansion in housing output at affordable levels”.

In its latest quarterly bulletin, the Central Bank cut its estimate for residential completions in 2016 to just 14,000 units, down from the previous forecast of 18,500 units. This outcome would be broadly in line with last year.

For 2017, the Central Bank expects 18,000 completions, some way shy of the 25,000 units a year that are we’re told Ireland needs to match household formations and changes in demographics. On this basis it would take years for housing supply to meet demand.

The Government has pinned a lot of its hopes on boosting supply on Nama’s plan – unveiled in December – to build 20,000 residential units over the next five years.

The State agency's focus is on starter homes for first-time buyers and on social housing. But this plan could be put on ice by the European Commission while it investigates a complaint lodged recently by a number of Irish builders alleging illegal state aid.

In the UK, a scheme called “Help to Buy” provides equity loans to both first-time buyers and home movers on new-build housing units with a purchase price up to £600,000 (€792,000).

The buyer needs to contribute at least 5 per cent of the property price as a deposit. The government then gives a loan for up to 20 per cent of the price with a mortgage used to cover the balance.

The borrower doesn’t pay any interest on the government portion of the loan for the first five years giving them a chance to get on their feet financially.

The loan must be repaid after 25 years. If the property is sold in the meantime for a profit, the government takes 20 per cent of the sale price, thereby capturing some of the gain.

There’s a similar mortgage guarantee scheme that applies to older homes. It comes with a list of approved lenders, who determine if you have the capacity to repay the entire loan.

Affordable finance

The scheme has merits. It would make affordable finance available to borrowers while continuing to limit the exposure of the individual banks, which was always the primary intention of the Central Bank’s macroprudential rules.

The domestic banks need to lend to grow their businesses and make profits, which in turn would make State-controlled AIB and Permanent TSB more attractive to private investors and facilitate the repayment of their taxpayer bailouts.

And it avoids a transfer of free money from the government to borrowers, which inevitably ends up in the pockets of developers by way of higher house prices.

Let’s say the government borrowed €1 billion via a 10-year bond at the same dirt-cheap interest rate of 1.156 per cent achieved by the NTMA’s issuance last month. Based on an average house price of €250,000, this money could fund 20,000 homes under terms similar to the UK loan scheme. Or 16,666 homes if the average price was €300,000.

The bond is effectively free money but in any event, the State’s interest costs would eventually be recouped from the borrower.

Ironically, the Labour Party proposed a similar scheme in November 2006, when it was in opposition, called “Begin to Buy”. It was drafted by Bruton’s predecessor as party leader, Eamon Gilmore, which might explain why it hasn’t been dusted off for this campaign.

Twitter: @CiaranHancock1