Would a Sinn Féin government take the housing market back to the future? In an interview with The Irish Times, party leader Mary Lou McDonald said she would like to see average house prices in Dublin fall to €300,000. This is a big drop from the average (median) €420,000 being paid now by a new purchaser in Dublin – the average price for all sales is a bit higher as those moving house pay a bit more. A sizeable drop of close to 30 per cent would be required to get to the €300,000 level. And a big question is whether this could ever be achieved, short of the economy collapsing into recession. With supply increases taking time, the quickest route to putting downward pressure on new home prices might be doing away with demand supports such as the Help-to-Buy scheme. The last time house prices in Dublin were around this level was in the 2015/6 period, after the financial crash.
1. The market now
Despite the sharp rise in interest rates, prices have continued to rise across the State, increasing by 2.3 per cent over the year to October. Dublin prices have edged 0.6 per cent lower, effectively a standstill, with the decline seeming to largely relate to a drop in the selling price of more expensive homes.
The resilience of prices against a backdrop of 10 interest rate increases is notable, according to Kieran McQuinn, research professor at the Economic and Social Research Institute (ESRI). Demand remains strong, notably from first-time buyers, likely because of the rise in population and the strong jobs market.
The stable price trend reflects continued low levels of stock on the market, according to Marian Finnegan, managing director of Sherry FitzGerald estate agents. New home building has picked up a bit, but it is below demand levels, while supply on the second-hand market remains very low.
As things stand, McQuinn believes that prices will continue to edge higher on average across the State next year, as interest rates start to slowly fall from their current levels and growth in the domestic economy continues, albeit – according to the ESRI – at a generally slower pace. Either way, the performance of the market over the past year indicates that achieving a big fall in prices would be no easy task.
2. Why €300,000?
The sharp rise in house prices since they bottomed out in the middle of the last decade has, quite simply, priced many out of the market. Most first-time buyers still buy in the second-hand market and they are also the predominant buyers of new homes.
In Dublin, finding a home with at least a couple of bedrooms for less than €400,000 would be rare; this would need a household income of at least €90,000 to meet Central Bank borrowing rules, which require a loan to be at most four times’ household income. The average €420,000 price would require an income of at least €95,000.
In reality, house buyers often do not borrow right up to the four times limit. As interest rates go up, the repayment burden can in some cases be too high as the threshold is approached. In other cases people benefit from support from their family and need to borrow a bit less. The Central Bank has reported that the average loan in the first half of the year was 3.3 times’ incomes. Allowing for the deposit, this would require a joint income of €105,000 to afford the €420,000 average, which would include smaller apartments as well as houses.
Looking at a three-bedroomed house, the Society of Chartered Surveyors Ireland (SCSI) has estimated that the cost of delivery in the Dublin area means a sale price of €464,000. Using the 3.3 times’ income calculation, it says this would require a household income of €127,000, a point referred to by McDonald in her interview and raised recently in Dáil debate.
A house price of €300,000, were it to be achieved, would clearly make homes more affordable to a much larger number. Using the maximum four times’ income rule it would require household income of €67,500. On the basis of the average 3.3 times income’ figure, the required household income level would be €82,000. The bottom line is such prices would mean middle to higher income single people could buy, as could dual income, average earning couples.
3. Could it be achieved?
Getting house prices down to much lower levels would require big changes in either supply or demand in the market – and most probably in both.
As the SCSI reported, the average cost of delivering a three-bed semi-detached house in the Dublin region is over €460,000. Under the current Government, various supply and demand supports are in place, or being ramped up, to try to close the gap between building cost and affordability. As part of this, State-sponsored building is rising – and a key part of Sinn Féin policy is that it will accelerate this supply of social and affordable homes by redirecting and increasing State resources. Whoever is in government, the likely impact of increased State-sponsored supply on house prices in the years ahead gives rise to an interesting debate. However, there are barriers – in planning, water-supply and so on – to quickly ramping up supply. And most estimates have the level of demand for homes, resulting from the natural increase in the population and immigration – running well ahead of current supply levels.
So “catching up” with this demand and increasing supply to the extent that it brings down the average house price is a very big ask. Bringing more homes on to the market at more affordable prices – through various forms of State subsidy to supply – is still challenging, but is clearly more achievable. And unlike reducing the overall level of house prices in the market, it involves things that are largely under the control of the Government, even if there are barriers too.
More State-built homes will lead to prices being lower overall in the market than they would be otherwise. So would cutting costs to developers through measures such as reducing the VAT on new builds. but achieving a 30 per cent fall in prices looks unlikely, unless demand collapses.
Clearly, the Sinn Féin goal will not be to reduce demand, as this generally happens due to a recession. The last big fall in house prices in Ireland followed the bursting of the credit bubble after 2008, which led to a collapse in prices and a large rise in the number of homeowners in negative equity. A repeat of that is not on any party’s wish list. And lower demand, as McQuinn points out, also has an impact on housing supply, as builders draw back, reckoning they will face problems selling.
4. Who would be unhappy?
Clearly, McDonald is targeting those who want to buy houses and not those who already own them, whose total wealth would fall. One twist here, as she referred to, is that many families use funds from their own house or elsewhere to help their children on the housing ladder. And so while they would lose on their own home value falling, some of this would be made up by a lower requirement when helping their children. Nonetheless, a fall in house prices – were it to happen quickly – would in itself have some impact on consumer confidence. One point worth noting is that McDonald did not specify a time period within which she hoped the €300,000 target would be achieved.
Another group who would not welcome sharply falling prices would be those who bought homes recently and might face into negative equity as a result. This would mean their outstanding loan would be worth more than their home value, restricting their ability to move. In turn, a sharp fall in house prices would be likely to affect bank lending policies, particularly if they feared more was to come.
One step which might reduce new house prices in the short term would be to remove the supports to demand currently in place, notably the Help-to-Buy scheme which Sinn Féin says it would phase out. This offers a tax rebate of up to €30,000 to help a first-time buyer to get together a deposit to purchase a newly built home. Critics argue that this has pushed up the price of new homes – and these have risen by more than 10 per cent over the past year, driven also by higher building costs. This provides a case for doing away with the scheme, but inevitably it would disadvantage those planning to buy compared to those who have already done so in recent months. And the industry says it would damage supply - measures to cut other costs they face might help to compensate.
5. Housing policy
What Sinn Féin would do first with housing policy, if they form the next government, will be interesting to watch. Finnegan of Sherry FitzGerald believes that whoever is in charge, what the market needs is a period of stability with clear indications that current incentives will remain in place on both the demand and supply side, leading to a steady but gradual rise in supply.
Sinn Féin would, no doubt, plan to make some key changes in their early months to show its intent. What any party addressing the issue will have to face are the interminable trade-offs of housing policy and the length of time it takes to realistically achieve big increases in supply.
