New mortgage scheme is playing with fire

THIS time things will be different, the Government says of its Construction 2020 plan that aims to jump start the dormant building industry. To all others, bar the gullible, it's groundhog day. We've been here before and we got our fingers burnt.

Announced last Wednesday, Construction 2020 is the Government's grand plan to get building back to "sensible, sustainable levels". In Taoiseach Enda Kenny's eyes it will triple housing output over the next six years and create 60,000 construction jobs.

A key part of the strategy - and the most controversial - is a state-backed mortgage insurance scheme that will allow first time buyers of new homes secure a loan with a smaller deposit than our now more prudent banks would be willing to accept. In essence what this means is the Government is encouraging the banks to give mortgages worth 95% of the value of a house.

Sounds Celtic Tigerish? It is. But according to Enda Kenny "we're not going back to credit being thrown away like confetti". To ensure that doesn't happen tight regulation of the scheme will be required. However, our experience gives us no cause for confidence here.

The housing shortage, which mostly affects Dublin, has come about because banks won't lend to either builders or buyers. This wasn't supposed to happen - the Government promised, but failed, to force the banks to lend and the simple conclusion is they are unable to control the banks. So, if the banks now go on a lending spree to cash in on the State backed mortgage insurance scheme there's no reason to think they will be reined in and that carries the risk of creating another property bubble.

Meanwhile, the almost inevitable result of bringing more potential buyers into the Irish property market is that prices will rise rapidly. This isn't simply a function of supply and demand, it has to do with the way the property market is allowed to operate. If an estate agent has more than one prospective buyer for a house what inevitably follows is a kind of behind the scenes auction where the buyers are driven to outbid each other. The original ‘guide' price is meaningless; it's a case of wringing the highest price possible out of the buyer - all in the client’s interest of course - in a highly unregulated market.

This system doesn't exist everywhere. In other EU countries the asking price really is the price, not an invitation to join a bidding war. The Government could introduce greater regulation of the way estate agents operate, which would give some control over house price inflation and help ensure prices don't get outside the reach of first time buyers. But that lacks that happy days, giveaway feel that is the natural precursor to polling day in Ireland.

And if the Government wanted to introduce a really simple way of stimulating the construction industry it could cut taxes on building materials. Although builders’ wages have dropped, it still costs too much to build a house because bricks and mortar cost are so expensive. Rather than giving people more money to spend and risk another housing bubble, the Government could help bring house prices down to realistic levels by cutting taxes on building materials. But perhaps like the previous Government, they too are greedily eyeing a flood of tax revenue from the construction sector.