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Analysis: Suspicions grow that government schemes are pumping up new build house prices

A divide has emerged between the price of new builds and second-hand homes, writes Paul O’Donoghue.

DEATH, TAXES, RISING Irish house prices – you get the idea.

The latest figures from the CSO showed house prices increased by 1.4% in the year to September, although Dublin properties fell by 1.9%.

But while a gap has opened up between the capital and the rest of the country, the more noticeable divide is between new builds and second-hand homes.

Whereas the value of second-hand properties sold dropped by 1%, new builds soared by 10.4%.

The divergence is now a consistent trend – both categories of housing have been relatively closely linked in recent years.

There was a divergence post-Covid, when second-hand prices grew significantly faster as both increased. 

But now they’re moving in opposite directions.

As the European Central Bank began increasing interest rates, second-hand price inflation slowed down significantly before recently turning negative.

This makes sense – as higher interest rates makes borrowing and mortgages more expensive, increasing rates would lower affordability and demand, moderating prices.

This has happened in the second-hand market. It has happened in the UK, where property prices marked their first annual drop since 2012.

It has happened in Europe generally, where house prices are down by almost 2% over the last year

But new home prices in Ireland are fighting gravity, surging despite the historic pace of interest rate hikes.

cso CSO CSO

So what could be causing this? Population growth? Sure. Still below-needed levels of construction? Of course. Venus being in the second house? Maybe.

But these factors – aside from perhaps the last one – apply to house prices generally, not just new builds.

So we come back to the same question – why are new build house prices rising so much, despite the surge in interest rates?

The big question

One thing it definitely is not because of, according to the government: government schemes aimed to support new build development.

These would be the Help to Buy (HTB) and Shared Equity schemes, both of which just apply to new build homes.

Both help prospective buyers pay more for a property, one by giving a tax refund, the other by the state buying part of a home.

The government has been warned about both before, with particular concerns about HTB. Long story short – most economists agree that giving prospective homeowners more buying power in a market already struggling for supply just creates more demand and further pushes up prices.

This could also counteract the recent interest rate hikes – interest rates go up, people can not afford to pay as much for a house. But if they use a new build scheme increasing their buying power, they can.

But an issue is the difficulty in saying what exactly does or doesn’t cause house price movements.

While shared equity hasn’t been in place long enough to be sure of the effect it is having, bodies such as the Central Bank have suggested it could be inflationary.

HTB has been around longer, so one might think there is a better idea of the effect it has had.

However, here again it has been difficult to say exactly its effect on prices.

A report from the Oireachtas Parliamentary Budget Office warned the initiative is likely pushing up costs, although it could not quantify by how much.

By contrast, consultancy firm Mazars found there was “not definitive evidence that HTB pushed up the price of new houses”.

(Although it should be noted that the report was not complimentary of the scheme, essentially calling it a waste of money as it gives extra funds to many buyers who already have deposits, and suggested it be scrapped)

However, the Mazars report was published in September 2022, while the Parliamentary Budget Office report is even older, published in June 2022.

Both of these were done before interest rates were hiked and before the divergence in price inflation for new and existing homes became as pronounced as it is.

More evidence

More recently, in February then-Davy Stockbrokers economist Conall MacCoille suggested the shared equity scheme could be behind the continued price rise of new builds.

While last month, Dr Karina Doorley, a senior research officer at the ESRI, said scrapping HTB would lower house prices.

The government has dismissed out of hand any suggestions HTB or shared equity could be causing house price inflation, with Housing Minister Darragh O’Brien saying in July that there was “no evidence” for this.

While the evidence may not be concrete, saying there is none is a little misleading given both Mazars and the Parliamentary Budget Office just said they were not entirely sure and the suspicions of watchdogs such as the ESRI and Central Bank.

A sensible solution would seem to be to commission a report looking just at the effect of the initiatives on housing costs.

Whereas previous reports on HTB were broad, looking at the scheme as a whole, this could be entirely focused just on how the two schemes affect prices.

When it comes down to it – why is this important?

It’s because the state will spend hundreds of millions per year on HTB and shared equity.

The whole point of these is to help people buy homes. If they are just pushing up new build prices, it makes it harder for everyone who isn’t using these schemes to buy.

This would make the schemes largely pointless and potentially a massive waste of state money.

Taxpayers should know whether their money is being spent wisely, or just feeding into the very problem it is trying to fix.