Prices rise in any market where demand exceeds supply. Housing is no exception. Last year some 14,000 homes were built in Ireland. But economists suggest that double – or even triple – that figure may be needed in future. Given a growing imbalance in the housing market, property prices are expected to rise by eight per cent , or more, in 2017.
Demand for housing will be boosted by the Government's help-to-buy scheme which has just come into operation. This offers first time buyers an income tax rebate – to a maximum of €20,000 – on properties valued at €500,000 or less. The five per cent rebate and a change to Central Bank rules, which allow first time buyers to borrow up to 90 per cent of the value of the property, mean a buyer needs a five per cent deposit to secure a house loan.
However, this boost to demand does nothing to improve housing supply, with the result that rising housing prices may negate the tax benefits now on offer to first time buyers. By contrast the Government has taken few immediate initiatives to boost supply and to narrow the gap between the 14,000 houses built last year and the many thousands more that may be needed annually to bring the housing market back to a more stable position.
Banks, no doubt chastened by their mistakes in financing a property bubble that exacerbated the financial crisis, have become more reluctant lenders: either unwilling to provide finance to developers or to offer loans at competitive rates. That is allied to a lack of liquidity in the housing market where just one per cent of the national housing stock is listed for sale – below the four per cent turnover level of a market functioning normally. The lack of liquidity is more acute in Dublin where a mere 0.7 per cent of the housing stock is on offer for sale.
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Strong demand for houses in a market with few sellers means higher prices. That must prompt the Government to fully develop and accelerate supply side measures to boost the housing stock and help rebalance a dysfunctional market.