Second-hand homes will keep new property inflation in check

THE solution to the housing crisis puzzle is all ‘chicken and egg’. You can’t increase buyers’ purchasing power without having an increase in supply already in place or you’ll cause inflation as more money chases fewer properties. However, you can’t build more houses (according to builders) until the spending power of buyers has increased to cover the cost of building and a profit.

No one is going to build at a loss.

Complicating the equation even further is the ‘pent up’ demand stored away by the Central Bank mortgage lending restrictions which have kept a huge tranche of buyers out of the market for the last two years.

Drop the rules overnight and you have a stampede of ‘pent-up’ or postponed buyers for the same limited number of houses and you also get unsustainable inflation – this time rapidly upward.

Help to Buy’s 5pc relief up to €20,000 on new houses only is a tempered way of helping supply by encouraging new home construction.

And in the medium-tolong run it might prove to be a very helpful measure in getting builders back on sites amidst claims that in most parts of the country, the cost of building a house is still higher than the achievable sale price.

The big question now is: just how inflationary might Help to Buy be in the new homes market?

Well, in schemes where homes are reasonably priced and selling well, there’s no doubt that prices will increase and much of the benefit will be soaked up by the builders themselves.

But even this effect might be containable thanks to Michael Noonan’s refusal to extend the relief to secondhand properties.

Providing such a tax break for second-hand homes as well would have poured petrol on the flames of inflation and caused prices to shoot up almost immediately throughout Dublin and possibly to a degree also in Cork and Galway.

We can be grateful to Mr Noonan that he resisted pressure to make Help to Buy a universal relief.

But the non-affected second-hand homes will have another use – to act as a deterrent to prevent builders from increasing new home prices too much.

Because any ‘cheapening’ in the price of new homes produces an automatic deflationary effect in equivalent second-hand homes in the immediate vicinity.

So if I can get a new home for significantly less and obtain it more readily than an equivalent second-hand property, I’ll opt for the new home every time.

The result is that secondhand vendors in the vicinity must lower their prices in order to sell.

So the effect of Help to Buy is also deflationary – for second-hand homes proximate to new schemes.

The presence of newly cheaper second-hand homes in turn prevents the builder from increasing his prices too much from that point on.

Because if he hikes prices more, he loses buyers once again to proximate equivalent second-hand homes which would instead once again become better value.

In terms of boosting construction output, it is in areas where achievable prices are just shy of providing builders with a profit margin that Help to Buy will make a difference.

In these cases, sites are likely to reopen as profit becomes possible once more and construction will again commence.

Even so, the effects on supply will be small in the short term.

Analysts with two of the country’s biggest estate agency networks both predicted that the move might increase supply of new homes by 10pc to 20pc within three years – but only in city locations and only where sites were active already or near active.

Thus far, the numbers of new homes being produced are still far too small to let inflation run loose to any noticeable degree.