Lessons from the crash are being ignored

FIRST TIME BUYERS’ GRANT IS REPEAT OF A FAILED CELTIC TIGER POLICY

THE Government’s plan to provide grants to first time buyers – in the form of PAYE tax rebates – mirrors a failed Celtic Tiger policy and will likely only benefit developers.

The policy – which will see first time buyers of new home given grants of up to €20,000 to help them meet new mortgage lending requirements – also flies in the face of measures introduced by the Central Bank specifically to prevent the emergence of another credit fuelled property bubble.

The new first time buyers grant – which applies to new builds only – announced by Finance Michael Noonan in his budget speech on Tuesday will see first time buyers given a PAYE rebates of five per cent of the value of the property, capped at €20,000

In his speech Minister Noonan said he was introducing the grant to help first time buyers who can’t meet Central Bank lending requirements to put a deposit together.

The very reason for these lending requirements – strict as they are – is to ensure buyers were not provided with loans and credit that they can not afford to repay, as occurred in so many cases during Ireland’s property boom.

In what appears to be an almost entirely political move the Government – backed by Fianna Fáil – will use tax payers money to help buyers, who should not qualify for mortgages, skirt legal lending requirements.

In the wake of the crash the lack of regulation of Ireland’s banks and the mortgage industry was acknowledged as one of the leading causes of the property crash and the subsequent depression.

Now rather than trying to strengthen governance of the banking sector the Government is taking steps to actively undermine policies designed to prevent another catastrophic economic collapse.

The even greater irony is that the new grant scheme is unlikely to help many first time buyers and in the long run it may actually make life more difficult for them.

Most experts agree the grant will simply lead to houses prices increasing further and more money going to developers.

There is precedent to back up this argument.

During the Celtic Tiger era a similar €5,000 grant was introduced, again to help first time buyers.

It proved to be a costly failure and within months of its introduction house prices across the country had increased by, you guessed it, an average of €5,000.

Prior to its introduction the Economic and Social Research Institute (ESRI) – whose repeated warnings about Ireland’s overheating property market were routinely ignored by the Fianna Fáil government – had predicted precisely that outcome but their advice was shot down.

There was a similar experience with the 20 per cent ‘Help to Buy’ loan offered to first time buyers in the UK.

The introduction of the new grant ignores the most basic tenet of economics, the law of supply and demand.

Having more first time buyers, with more to spend on the same number of houses means that inevitably house prices will go up.

With its grant policy the government is missing the point and failing to address the real reasons behind the current housing crisis.

In fact the Government’s failure to grasp the basic supply and demand nature of Ireland’s housing problem was clearly articulated by Minister Noonan in his budget speech.

Announcing the grant Minister Noonan said the measure was being introduced to address “the acute shortage” of new homes being built by increasing demand for new houses.

His logic appears to go against the most basic economic rules as to how prices are set.

It is extremely difficult to see how increasing the demand for housing without doing anything to increase supply can do anything other than send prices spiralling further upwards.

The solution is not to throw money at buyers but to give builders an incentive to construct more houses, be that by taxing undeveloped lands, reducing development levies, speeding up the planning process or by lowering VAT on construction as suggested by the Property Industry Ireland (PII) lobby group.

PII’s suggestion has merits. At present about 10,000 house a year are being built generating VAT of around €328 million.

According to PII reducing the VAT rate to nine per cent could allow 20,000 homes to be constructed with the Government taking in €437 million in taxes.

That’s more houses and more money for the Government.

There is no doubt First time buyers need to be helped but a political solution that repeats costly mistakes is not how to do it.