Affordability, not lax regulation and tax incentives, is key to addressing the housing crisis

House Prices and Affordability

In March this year, the UN wrote to Ireland to express its concerns about the commodification of housing in Ireland, stating “Heavy private housing investment combined with the cuts in public housing budget has been making housing in Ireland significantly unaffordable” and called on the Government to take progressive measures to ensure adequate housing for all without discrimination and to address the issue of financialisation and its impact.

In response, the Irish Government referred to “very considerable components” of the population whose housing costs were affordable, but acknowledged that “high housing cost burdens were concentrated among particular cohorts. Private renters, those living in Dublin and the surrounding mid-east region and low income households were paying a significantly higher proportion of their incomes on housing payments.”  To break this down – there are 340,000 tenancies registered with the Residential Tenancies Board; almost 222,000 households in Dublin, Kildare, Meath and Wicklow were ‘owner occupied with a mortgage or loan’ on Census night 2016; and 760,000 people are living below the poverty line.  These are the people referred to as having a “high housing cost burden”, and their number is not inconsiderable.

It is true that 612,000 households were recorded as ‘owner occupied without loan or mortgage’ in Census 2016, however 534,000 (87%) are older households, where the reference person is 50 years old or more, and 320,000 (52%) are 65 years and over.  What about affordability for those who are looking to buy their first home now?

The median sale price in 2018, according to the CSO, was €215,000 – 5.6 times the average annual earnings in that year.  For first time buyers the price was higher ranging between €255,000 and €257,000 (depending on the type of transaction), or about 6.6% of average annual earnings.

Not surprisingly, Dublin was the most expensive county, with a median price of between €334,825 and €334,999 (8.6% of average annual earnings) for all buyer types (and staying about the same for first time buyers), and Roscommon was the cheapest (with a median price of €90,000, or 2.3% of average annual earnings, increasing to €120,000 for first time buyers (3.08% of average annual earnings).

With house prices at this level, what are the options available?

Relax the Central Bank Rules

Under the Central Bank Macroprudential Rules (the Rules), a first time buyer can borrow up to 3.5 times their income and must have a deposit of at least 10%.  There are exemptions, in that 20% of  first time buyer mortgages can exceed the income cap and 5% can have a deposit of less than 10% of the purchase price.

For second time and subsequent buyers, the income cap remains the same, at 3.5%, and the deposit required increases to 20%.  Again, there are exemptions in that 10% of a lender’s second and subsequent buyers can exceed the income cap and 20% can have a deposit of less than 20% of the purchase price.

For borrowers looking to buy a rental property, the Rules require a deposit of 30% of the purchase price (although 10% of borrowers in this category can have a lower deposit) and there are no Loan to Income criteria.

Other exemptions include ‘negative equity mortgages’, which are exempt from the Loan to Value ratios and ‘switcher mortgages’ are exempt from both Loan to Value and Loan to Income ratios.

Last week, the Central Bank of Ireland was accused of making it difficult for first time buyers to buy their own home due to lenders’ strict application of the Rules and a reluctance by some to use the exemptions allowed within them.  At the same time, the Central Bank published its quarterly Mortgage Arrears & Repossessions Statistics.  This showed that, while the number of mortgage accounts in arrears over 90 days continued to decline, the number in late state mortgage arrears, those over 720 days, has increased and account for 45% of all mortgages in arrears at the end of March 2019 (and over two thirds of all mortgages over 90 days).  Almost half these mortgages in late stage mortgage arrears are held by non-bank entities, with one in five held by unregulated loan owners.  Of the €2.6 billion outstanding in mortgage arrears, €2.3 billion is owed by those in late stage mortgage arrears.

This unsustainable situation is the legacy of light touch regulation.

Help-to-Buy Scheme

The Help-to-Buy Scheme was introduced in Budget 2017 to assist first-time buyers with a deposit on the purchase or self-build of their first home.  According to the Revenue’s Help-to-Buy Annual Report 2018, 10,349 applications had been made to the end of 2018, of which 9,790 were approved.  The total cost of claims to the end of 2018 was €142 million, including €18.2 million in retrospective claims (for purchases or builds between 19 July and 31 December 2016).  Roughly two-thirds of claims were in respect of properties valued at between €226,000 and €375,000 – or between 5.8 and 9.6% of the average annual earnings in 2018, and over a third had Loan to Value ratios of 90% or more.

The data presented in the Annual Report indicate two issues with this Scheme:

1. One quarter of first time buyers availing of it can pay a deposit of more than 20%, indicating less of an issue with affordability in this cohort and, consequently, less of a need for this support.
2. Over a third of those availing of it have a deposit of 10% or less, making their mortgages more vulnerable to economic shocks into the future.

This week, Goodbody’s latest quarterly Irish Economic Health Check suggested an extension to the Help-to-Buy scheme beyond the end of the year to boost housing supply and increase home ownership.  However, the data indicate that this is not what it does at all.  By providing cash incentives to those who already have a significant deposit on the one hand, and artificially boosting the payment capacity of those who do not on the other, the Help-to-Buy Scheme is propping up house prices, rather than making homes more affordable.

The Solution?

The real issue is the affordability of a home.  The Government’s estimate of €320,000 as affordable is deeply flawed. Cooperative developments in Dublin, Waterford and Cork by O’Cualann Cohousing Alliance show that it is possible to make new homes available for less than €250,000 per unit.   The cost of bringing some of the 183,000 vacant homes identified by the last Census into use, or a rezoning of living spaces above shops in urban centres, would likely be less again. 

Innovation around design, materials and land use is what is required.  Not a return to the old financial tropes that played a key role in the current crisis.