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# supply vs demand
Noonan defends first-time buyers plan as critics warn it will create 'bidding war'
Cutting VAT on new homes would have been a better approach, one economist has said.
THE HOUSING MEASURES announced by the Government in the Budget have received a mixed reaction.
One of the main talking points was the help-to-buy scheme for first-time buyers.
When announcing details of the Budget yesterday, Finance Minister Michael Noonan said: “The scheme will provide a rebate of income tax paid over the four previous tax years up to a maximum of 5% of the purchase price of a new house up to a value of €400,000 to first time buyers of new houses.
“Pro-rata rates will apply to lower priced houses. A full rebate calculated on €400,000 will also apply to houses in excess of €400,000 and up to €600,000. No rebate will be paid on houses in excess of €600,000.”
The initiative will apply to new builds only. Noonan said it will help first-time buyers save a deposit. He said he expected the building industry to increase the supply of new affordable homes in response.
The move was welcomed by the Construction Industry Federation, which said that the scheme will help to address “the chronic lack of supply in new builds”.
However, a number of economists have warned the scheme is likely to lead to a jump in property prices as it will increase demand.
David McWilliams didn’t hold back in his Irish Independent column today, saying all the good work done to halt a second property crash was “undone in a day”.
Speaking to TheJournal.ie today, Dr John McCartney, Director of Research at Savills, said the scheme is better for developers than buyers.
There are not enough housing units to go around. First-time buyers are competing with each other. If you give them each €20,000 on the same day the likelihood is that they’re going to react by each bidding more until the €20,000 is exhausted and ultimately the price will go up and up.
“Some people will still be disappointed and the people who win the bidding war will do so at a higher price point.”
McCartney noted the Irish housing market, including social housing, is based around the private sector and, in order to increase supply, building houses needs to be worthwhile for developers.
“We do need to incentivise developers to build because at the moment it’s not worthwhile for them.”
Cutting VAT
McCartney said an alternative to the approach taken by the Government would have been to cut VAT for developers, noting the positive impact the 9% rate has had on the tourism sector.
However, he noted the “optics” of this would not be good.
At the moment the Exchequer is not making any money from new homes anyway, it’s not a big stream of income to forfeit. The problem with that – the optics of cutting VAT – is that it’s very overtly a subsidy to developers.
He added that the approach taken by the Government, although it is likely to increase house prices, is “more palatable from a political point of view”.
“It’s a pity the minority government did not feel empowered to just make the simple argument of ‘Get over yourselves, the practical reality is we need the private sector developers to build’,” and cut VAT, he said.
On Today with Seán O’Rourke, Noonan defended the scheme, saying it will help young couples who are struggling to save a deposit for a house. Noonan described the scenario faced by people trying to get onto the property ladder as “like climbing a sand hill”, saying the rent they have to pay is “a drag on their savings”.
On the same programme, a woman criticised the first-time buyers scheme, telling Noonan her price range is €120,000 to €160,000, meaning she can’t afford to buy a new build.
Noonan told her the scheme is “designed to help people like yourself put the deposit together”, but she wasn’t convinced.
The minister said the purpose of the initiative is to increase the supply of housing and if he applied it to second-hand homes it would benefit sellers rather than buyers.
Homelessness
As part of the Budget, an extra €105 million is to be allocated for the Housing Assistance Payment (HAP) scheme to deliver 15,000 tenancies. A €28 million increase will see some €100 million being spent on emergency accommodation.
McCartney said while extra funding is to be welcomed, the current housing crisis boils down to a lack of supply, noting many people are in “a really difficult situation”.
He said the increase in HAP funding is “in principle giving renters more money, but not increasing units”.
McCartney said even if people receiving social welfare payments can now pay more, they are still likely to be outbid by other people who can afford to pay more rent.
One positive from the Budget is that we will get more units built. Once builders start building they can start making working capital and will build more. Pretty quickly that becomes self-sustainable.
The Peter McVerry Trust was among the homeless charities to welcome certain aspects of the Budget, but criticise others.
In a statement, the organisation welcomed the additional €28 million allocated to provide additional emergency homeless accommodation, saying: “The new funding is recognition by Government that we need to increase the availability of suitable emergency beds for those in need and to ensure that we respond to the rising numbers in homelessness.”
It also welcomed the additional €105 million allocated towards the HAP scheme, but added: “The impact of this funding and the HAP scheme in general is being eroded because of unrestricted increases in the cost of renting and the lack of security of tenure for tenants.”
Read: Budget 2017: The new first-time buyer scheme ‘will just drive up prices and developer profits
Read: Here’s how the Budget will affect first-time home-buyers
