Ronan Lyons discusses the most important measure for housing in the Budget
Ahead of the budget, there was much talk about the proposed ‘help to buy’ scheme for first-time buyers – by myself among others. It seemed likely that the measure would be an attempt to get around the Central Bank’s mortgage rules – in which case, the primary result would be more house price inflation, not more construction. The alternative was that it effectively did not ‘get around’ the Central Bank’s rules, in which case, the measure would likely have little effect.
While the full details have not yet been published, the Budget did set the mechanism and limits of the scheme. It is not a grant – i.e. where eligible parties simply ask for a cash transfer (to the developer). Rather, it is an income tax rebate. This may seem like the kind of detail that only accountants would enjoy but it is an important point.
It means that, in order to get the 5% released, the buyers will have to have paid that 5% in tax over the previous four years – and specifically in income tax, not USC or PRSI. An example might help illuminate things. In Dublin, the average property currently is worth roughly €320,000. Five percent of this figure is €16,000, a little bit below the cap. The would-be buyers will have to have paid an average of at least €4,000 in income tax for the previous four years.
This is a relatively small hurdle, if you have had two incomes for that entire four-year period. However, if you are a single-income household and particularly if you have only recently started work in Ireland, either due to unemployment or to having lived and worked abroad recently, this may not be so easy. In some ways, this is the opposite of what Mary Mitchell-O’Connor was looking for: it is the tax system rewarding those who never left.
If you meet these criteria, then your extra 5% will be unlocked. The assumption is that, at this point, the Central Bank will recognise that free 5% as being part of your deposit. Given that the Central Bank rule is technically a loan-to-value requirement, not a minimum deposit requirement, this is not likely to be an issue.
However, this still leaves the important loan-to-income limit to be addressed – and it is actually here where the market is completely dysfunctional. As recent Central Bank figures have shown, a prudent household will be able to save for a deposit in less than 3 years. With the scheme, this may accelerate – for those who have a longer employment track record.
But we are still left with the uncomfortable fact that housing prices in Dublin are well above those elsewhere. This is a sign of ill-health in housing supply, not of inevitable strong demand to live near capital cities. There are many large cities that enjoy affordable housing – but unfortunately, there are also many that do not and Dublin is one of those.
In order to buy a property worth €320,000, a buyer would need savings of €42,000. With the Budget measure, this will fall to a requirement to have €26,000, with the rest being topped up by the State. But, with a desired mortgage of €278,000, the buyer will still need an income of €80,000, in order to stay below the cap of 3.5 times income. While banks are allowed exempt some borrowers from either LTV or LTI, it is most unlikely that any lender will ‘waste’ an LTI exemption on a couple that have already stretched the LTV rule to its limit.
The new scheme in all likelihood replaces the patrimony of parents with the patrimony of the state, for those lucky enough to have solid incomes throughout the last few years. It will probably skew middle-class preferences towards new builds slightly, away from second hand – but only slightly. Newly built family homes have been viable throughout most of Dublin for almost three years now but the scale of building is small.
The Budget has set aside €50m for this measure – enough for over 3,000 deposits to be topped up, if the average price of a newly built home is €300,000. In a housing market with a shortfall in construction of at least 20,000 units a year, though, this is far from the silver bullet the market needs. Indeed, by pushing up prices where building is already viable, it will incur a significant cost for probably very little gain.
The more important measure for the housing market in Budget 2017 may ultimately turn out to be the changes to the Living City Initiative. This is a very generous tax relief designed to rejuvenate older properties in inner city areas around the country by bringing owner-occupiers into those areas. However, its original design was very peculiar, with large tracts of older properties in need of renovation excluded – and large Georgian properties in the right zones excluded because of a maximum size limit.
That limit is now gone, as is the requirement that the property be owner-occupied and that the property must have at some previous point been used as a dwelling. This means that significant amounts of dilapidated commercial and retail property throughout Ireland’s main cities now come with a significant tax incentive for renovation and conversion into residential property. This could turn out to be a game-changer for run-down neighbourhoods – we will wait and see.