One of the key issues facing the Irish economy has been the performance of the housing market. Although economic activity has recovered, we still await a significant supply response in house building. There are a variety of reasons as to why supply has not responded to date and many of these have are focused on the cost of building a new home.
Yesterday’s budget measures went some way towards ensuring that developers can have some certainty about demand for new homes from first-time buyers. The new help-to-buy scheme is an income tax-based incentive – specifically for first-time buyers purchasing a new build. The incentive takes the form of a rebate of income tax paid over the previous four tax years as a contribution towards the required deposit, up to a maximum rebate of €20,000.
The rebate has received some criticism on the grounds that it is a demand-side measure when the problems are on the supply-side. However, the Irish housing market at present is still dealing with the legacy effects of the crisis. It continues to adapt to the introduction of the macro-prudential framework including Central Bank limits on mortgage borrowing by buyers. These measures, while necessary, have limited the ability of first-time buyers to access the new homes market.
Supply increases
The rationale behind the new rebate would seem to be that supply increases to meet demand. A major stumbling block has been that developers were unsure whether or not first-time buyers would be able to access mortgage funding to allow them purchase a home at price levels that made building new houses viable.
Given the risks involved in starting a new development, while not knowing if you will have buyers, many builders have been cautious about getting back to full production. The new scheme addresses this and provides builders with more certainty about demand from first-time buyers looking to enter the market.
That said, it is now very important that we see a response from the supply side.
Burden of costs
However, uncertainty about demand levels is not the only issue acting as a barrier to supply. The decision to build new homes is also driven by the relationship between prices and costs. New build homes are also subject to a range of charges, VAT and levies, increasing the cost of provision. The cost of funding for some development projects remains too high. In addition, the burden and cost of infrastructure provision to developers remains an obstacle to new building, as does the uncertainty and delay associated with the planning process.
Reductions in these costs would also contribute significantly to the viability of building new homes. In order to continue to increase the capacity in the construction industry the upskilling and reskilling of the long-term unemployed from the sector and the promotion of further recruitment of onsite operatives and construction professions is necessary.
On balance, this initiative is to be welcomed. However, there remain other constraints that need to be addressed by the market and by policymakers. Ensuring an effective demand for housing is one step towards a normally functioning market. Tackling the very real obstacles on the supply side remains the challenge for future housing market policy.
David Duffy is director of Property Industry Ireland