Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

A housing boom needs housing!

There has been talk this week – following Minister Murphy’s comments about Help-to-Buy – that July will be a bumper month for the housing market. In particular, the new Minister talked about Help-to-Buy being reviewed and potentially scrapped if it is found that the scheme is pushing housing prices.

The scheme lowers the minimum deposit required by first-time buyers of newly built property. Therefore, some agents believe that first-time buyers will move now, rather than wait and gamble on it still being there in six months time.

Certainly, if it were to be wound down, it would be an ignominious end to the scheme first mooted less than a year ago and only in existence since the start of the year. And there is precedent for this kind of boost.

The end of mortgage interest relief and the imminent introduction of Central Bank rules both had this kind of effect in the market. Mortgage interest relief was ended in December 2012 and, with this well flagged, there were over 9,000 transactions in the housing market in the final three months of 2012, compared to fewer than 5,000 in the first three months of 2013.

The final three months of 2012 actually made up 36% of all transactions that year, compared to the 25% you might expect if transactions were spread out evenly. Similarly, when the Central Bank announced in September 2014 that it would introduce mortgage rules in early 2015, this led to a similar rush in the market. The final three months of 2014 made up 37% of transactions that year.

Both these show that policy changes – and announcements that policy will change in the future – can have a real effect on the day-to-day housing market. But there are two reasons to think that what the Minister said will not have the same kind of effect.

Firstly, what the Minister said is actually in line with his predecessor and general government policy. In February, the Department of Finance issued a request for tenders, looking for an independent assessment of the impact of the Help-to-Buy scheme.

Now, being honest, it’s hard to understand the timing of such a review. Normally, policymakers under “ex ante” and “ex post” reviews of policy measures. This means you make a rigorous assessment ahead of time of the likely impact of a new policy. And then, once it has had its effect, you review and assess that and learn for future policy measures.

The review being undertaken is neither ex ante or ex post. It is taking place just as the measure is finding its feet. What a review of Help-to-Buy could achieve, based on perhaps three or four months of data, is hard to see.

This is particularly so given the second reason why it’s unlikely the Minister’s comments will lead to a bumper summer: there are very few homes eligible. If people do want to take advantage of Help-to-Buy, newly built homes need to exist!

In January and February of this year, the first months of the scheme, 2,175 new homes were started around the country, according to the Department of Housing. This was actually 3% below the total for the same two months in 2016.

A similar picture emerges if you look at the figures from the Property Price Register. There were approximately 2,800 new homes sold in the first half of 2017. This figure may rise slightly as more transactions are registered for the quarter. Granted, this exceeds the 2,600 new homes sold in the first half of 2016 – but is well short of the 3,700 sold in the second half of last year.

Given the country needs roughly 4,000 new homes every month, it is hard to see how a “housing boom” could take place without the housing.

As for the scheme itself, it is an attempt to address a supply-side issue – the high cost of construction in this country – by further stimulating demand.

My doctorate was on the Irish bubble and crash of the 1990s and 2000s and one of its main findings was that the typical deposit asked of first-time buyers was a crucial factor determining housing prices: the smaller the deposit, the higher house prices went.

If the new Minister wants to tackle the chronic lack of supply of new homes, it makes sense to focus on supply, rather than further fuelling demand.

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An edited version of this post was originally published in my column in the Sunday Independent.

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