Pat Davitt, chief executive of IPAV, the Institute of Professional Auctioneers & Valuers
Fears of another property bubble are unfounded and misleading. Lately one senior academic stated in the media: “when you have a return to very generous credit, it effectively pushes prices significantly higher.”
But where is the evidence of a return to "very generous credit"? Figures compiled by the Banking & Payments Federation Ireland show that €3.9 billion in new mortgage lending was issued in 2014, less than half of what could be considered normal and a mere 10 per cent of that issued in 2006.
Lending in 2014 was on an upward trajectory because property prices had finally lifted off the floor and a seven-year Capital Gains Tax incentive, designed to encourage people to buy properties, was about to run out in December of that year.
Property prices fell, on average, by 54.9 per cent from 2007 to 2012. To reach 2006 levels again, not that anyone would want that, prices would have to increase by an average of 110 per cent, not the 8-20 per cent levels that now prompt headlines of “soaring”, “surging” or “bubble” property prices.
Forced out of best values
At a time when property prices were beginning to recover, having sank to 1980s levels, the Central Bank panicked and moved rapidly to restrict lending making it virtually impossible for first-time buyers and those wishing to move house – many who had bought at the height of the market – to buy when interest rates were and are at historical lows. Property prices are now well past the low point and thousands have missed the best values.
The rules stymied a market in recovery, robbed entrepreneurial confidence and spun the wheel of fortune in favour of cash buyers and investment funds.
Had it been otherwise we would now have a healthy cohort of young first-time buyers with valuable homes, contributing to their personal wealth over the longer term. Instead they are consigned largely to renting, and incredibly, at prices greater than the cost of servicing a mortgage. With such great value in the market these people should have been facilitated with a zero deposit requirement, once they had affordability over the medium- to long-term.
In 2006 first-time buyers bought properties at rates that were 110 per cent higher than in 2015. For example, a €500,000 home with a 100 per cent mortgage with an interest rate more than 6 per cent was typical. Yet in 2015 Central Bank rules would not allow such buyers to purchase at 55 per cent less (€225,000 in our example), with interest rates at about 4 per cent. The rules intended to help them began to work against them and their future financial security.
While the recent easing of the Central Bank rules will assist first-time buyers, along with the Government’s Help-to-Buy scheme, they continue to entrap other buyers, many of whom are still mired in negative equity. Because they’re stuck there isn’t sufficient movement in the market to aid supply or encourage builders to build.
As these would-be buyers continue to be forced out of the market, investors – largely international vulture funds – have been having a field day buying under-value properties with generous Nama discounts and lax corporate tax laws. Meanwhile private landlords pay tax rates of up to 52 per cent.
Some of the biggest problems impeding supply remain unresolved while house prices continue to rise.
State preference for rental over buying
Policy makers appear wedded to bringing more large institutional investors to Ireland. These so called “professional” landlords, are apparently seen as a far superior creature to the traditional Irish landlord. Presumably this justifies the far more attractive tax status they enjoy.
The Government’s action plan for housing and homelessness, called “Rebuilding Ireland” appears to set out a policy of encouraging renting over buying, identifying two countries, Germany and Switzerland, as good models. The plan implies these countries have been better insulated against housing booms and busts based on their lower home-ownership figures. This completely underestimates the impact of different property valuation methodologies for mortgaged properties where a range of factors are used to determine value over the longer term. This is always lower than “spot” value, the only methodology operated in Ireland and the UK and based solely on market conditions at the time of sale.
This somewhat surreptitious and unintended social engineering policy is having severe consequences, particularly for those now in their 20s and 30s. No surprise then that the chief executive of Ires Reit recently told The Irish Times: "We've never seen rental increases like this in any jurisdiction that we're aware of."
The full impact of this misguided policy will not emerge for some years to come. It’s not too late to turn it around.
Solutions
– The Government should extend the Help-to-Buy scheme to non-first-time buyers.
– Lenders should be prevailed upon to introduce European-style long-term fixed-interest rates for periods of 20 years or longer.
– The Central Bank should further ease the mortgage rules raising the 3.5-times income limit and amending the 20 per cent loan-to-value threshold for non-first-time buyers.
– Increased levies and boom-time taxes, passed on in full to house buyers, should be tackled. In particular the current rate of VAT of 13.5 per cent which typically adds an extra €15,000-€17,000 to the price of each new property. A reduction to 9 per cent would further incentivise builders to build. There would be no loss to the Exchequer as building ramps up. While a lesser amount is contributed from each house buyer, the Exchequer benefits from increased house sales.
– The State should facilitate smaller builders with affordable finance, subject to agreed building prices for new homes. This money would be repaid to the Exchequer.
