The new Affordable Housing Schemes analysed

I haven't got all the information on this yet, but at first glance it looks like reckless lending and reckless borrowing.

If this had no impact on prices, then it would be a good idea.

But of course it will have an impact on prices.

So people will just end up with bigger mortgages for the same house?

Brendan

Here is the example given:


In summary :

House price: €320k
Deposit: €32k
Total borrowing: €288k = 4.1 times salary.

This is reckless lending.

Brendan

The central bank rules exist to prevent us pushing prices too high with credit, and too minimize future boom/bust cycles.

This scheme supports higher prices generally, by increasing the demand (number of potential buyers) at a given price point.

There will always be a cohort of people who just can't afford it right now. That cohort will always create political pressure for solutions to that. It will always be politically popular to provide those solutions.

This will enable one cohort who couldn't afford to buy, but then the pressure will come from the next cohort who still can't afford to buy...

SPC100 said:

The central bank rules exist to prevent us pushing prices too high with credit

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It has that effect, but the primary purpose was actually to protect the banks themselves.

It will also make it very difficult for

• First time buyers who want to buy second hand houses
• People trading up

As prices generally will rise.

Brendan

The 75 million the government will invest divided by say 50k equity per house means 1500 houses will be affected.

I think there is something like 25k ftb mortgage drawdowns a year.

So I guess it will not have an overpowering effect on the market.

But it will push prices up, as it gives extra buying power to some purchasers

The Central Bank's views are here:


A full financial stability assessment of the Affordable Purchase Shared Equity Scheme will require finalisation of a number of key design features, which do not explicitly form part of the General Scheme of the Bill. The Central Bank will be considering three specific dimensions from a financial stability perspective: (i) the impact of the additional financing through the scheme on households’ ability to withstand income shocks and avoid excessive indebtedness or negative net wealth; (ii) any additional risks to the banking sector, which in turn may be adequately mitigated through capitalbased prudential regulation, and (iii) the potential for any additional credit facilitated by the scheme to result in pro-cyclical house price dynamics.
...

Overall, taking a broader housing market perspective, the proposed scheme – in isolation – is likely to have a limited impact on the ultimate supply-side problem in the Irish housing market. We would, therefore, encourage a continued effort to focus on policies on the supply side of the market – including, but not limited to, some of the other elements of the Affordable Housing Bill. Such supply measures, of course, are longer-term in nature, and there may be a place for a targeted scheme that alleviates near-term challenges for certain potential homeowners. Still, we would encourage those considering the detailed parameters of the scheme – including its size, the time period over which it is allocated, eligibility criteria and the eventual exit strategy – to be mindful of the potential implications of increased demand for house purchases in a supply-constrained market.

Syndicated mortgage lending? Purely designed to support higher prices for new builds?

When things go bad who gets paid first State or Bank? Does this imply the banks have less security/collateral. All other things being equal, higher risk for lenders should be reflected in higher mortgage rate?

What about the the FTB? Do all these measures create a price wedge between new builds and existing stock? But a new build doesn't stay a new build forever. A new build is worth X today but as soon as I get my grubby FTB hands on it what is it worth tomorrow?

House price: €320k
Deposit: €32k
Ordinary mortgage €245k
Government loan/equity: 43k

Assuming that the ordinary mortgage has a first charge, then the Loan to Value would be 77%

So, in theory, the bank is in a better position.

Though as skrooge points out, a newly built house will fall in value once its status changes from new build to second hand.

Brendan

Developers will price the builds at what the market can pay, and this allows the FTB market to pay more for new builds, so I agree this will increase demand and price for new builds.

It gives more money to developers, so it might go into their pocket and it might encourage more supply, e.g. developer decides it becomes profitable to develop some land due to higher price.

although as will effect less than ten percent of new builds it might not be enough to have much market impact.

I normally hate this kind of tinkering but it makes sense here.

There is a kind of middle-income trap where people are too poor to buy but too rich to qualify for social housing.

The Central Bank limits are really binding in urban areas. The 3.5 LTI limit hasn't been adjusted upwards even though mortgage rates have fallen by about a percentage point since they were brought in in 2015. In many cases you are forbidding anyone from having a mortgage cost above 25% of net income. This is too conservative. Financial stability is important but so is letting people buy a house.

So it's not a bad bet by the government to give a long-term loan to 30-year-olds. They will (on average) have higher incomes in coming decades. Your lifetime income generally peaks in your early 50s.

NoRegretsCoyote said:

I normally hate this kind of tinkering but it makes sense here.

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This is an important point.

The analysis of this should be done on a practical, rather than an ideological basis.

I hate this type of thing as well.

But I don't think that this makes sense.

It will only improve supply if the price increases cause more houses to be built.

Brendan

Brendan Burgess said:

It will only improve supply if the price increases cause more houses to be built.

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Yes I think 90% of the problems are on the supply side.

I don't think this scheme will build many more houses, it will just change the allocation of them a little.

Ultimately you fix a housing crisis by building houses of any type and there are lots of structural reasons preventing this.

Good article in the times on state aid for ftbs:

As revealed by Eoin Burke-Kennedy in The Irish Times today, the State’s Housing Agency notified the Department of Housing last September that a similar scheme in the UK had resulted in a 6 per cent increase in house prices in the greater London area.
It is quite something when the Housing Agency (set up by the Government in 2010), the Central Bank and the ESRI all sound warning bells on a key policy tool of the State to tackle the housing crisis

We have to remember as a country we are Much better off with the lowest possible house prices. And we should therefore put all our effort into supply side rather than demand side.

There will always be folks who don't qualify for social housing and can't afford to buy. There will always be people who can't afford to buy. Throwing money at them is politically expedient but not Very useful.

Efforts that reduce the value of land, and the cost of building, and speed up build process is what the government should focus on.

Is the prevailing thought that this will raise prices because the developers can increase the price by the amount the government will contribute? I lived in London when a similar plan was launched and I had friends who otherwise would not have been able to afford to buy benefit from it.

In recent weeks there have been articles in the Irish Times around construction material costs increasing dramatically, and a shortage of labor. This would indicate that the costs of building houses is going to increase, so should we not expect that prices will rise as developers seek to maintain the same profit margins or do we expect private developers to cut their margins?

I understand there are certain tax breaks for developers but is this scheme not an indirect way for the government to maintain the private building sector?

It sure is a way to maintain the private building sector...........in case you haven't noticed............given the structural under supply of housing for the last ten years being a house builder in Ireland isn't that attractive a place to be.......if it was we wouldn't have a housing shortage.

The housing market is always a multi-variant equation.........but one aspect of it if you look at the P&L math for a home builder in Ireland is there very little 'juice' left at the end in respect to the capital at risk and the duration that capital is at risk. In fact a client I know looked at the Return on Invested Capital for an Irish housing project with a rosy time to deliver built in and when you looked at duration and return and came up with an IRR.....it was pitiful. Hence why the only capital touching the Irish housing market today are pension backed funds where pitiful returns are accepted (when levered up) and as compared to sovereign rates.

Land pricing, building regulations, planning permission costs/uncertainty, VAT on new builds, scarcity of skilled labour/trades unions increasing costs, building material supply inflation, strictest mortgage lending criteria (3.5x LTI) in Europe capping borrower purchasing capacity way below European peers...........the property developer is the one sitting at the end of this chain of inputs not in his/her control........going from the moment a developer steps on a piece of land to view it as a potential purchase acquisition target with no planning permission in situ....... to delivering the first unit is I would conservatively say a ~2-3 year process..........not sure many salary men on this board would have the kahunas to take the leap of faith developers and their financing partners take.

Anything the government can put in place that increases the probability distribution that a home buyer will exist in 24-30 months that will take a property developers product of them at say a 20% gross margin all the better for the country as whole.

I share concerns that the shared equity scheme will facilitate higher, and perhaps unsustainable borrowing, but I think some of the other criticisms of the scheme are unfair.

Obviously this scheme is a demand side measure rather than a measure which will fund the building of houses, so the shared equity scheme will not necessarily increase supply. But it is likely to increase supply.

The report quoted by the Housing Agency on the impact of the same scheme in London is not relevant to the Irish situation because London has some of the highest land prices and most restrictive planning rules in the world. Therefore I would not expect the scheme to increase supply in London. The same report finds that the scheme significantly increased supply in Wales which is far more comparable to the Irish housing market (but with stricter planning).

Builders in Ireland are not building first time buyer housing because they and their funders are not confident that first time buyers can actually buy the dwellings on completion. A scheme which increases first time buyers' purchasing power may prompt builders to start building for that cohort - I say may because it is difficult to know in advance.

The costs and benefits to the state also have to be assessed in view of the alternative options available to promote increased home ownership which are being promoted by critics of the shared equity scheme such as Sinn Féin and the Democrats. These parties are arguing that instead of measures such as the shared equity scheme local authorities should be building affordable housing for sale. This approach ignores the risks inherent in being a property developer - after the last crash local authorities were left with 4,000 affordable houses they couldn't sell for instance - but everyone seems to have forgotten about that now. This approach also ignores the very severe capacity problems in this sector. Social house building by urban local authorities is very low - Dún Laoghaire Rathdown CC built and bought 13 houses in 2020 for example. Can we realistically believe they will be able to provide enough social housing for people on the waiting list, plus affordable housing not to mention housing for those in direct provision accommodation? I don't believe this is realistic.

letitroll said:

Land pricing, building regulations, planning permission costs/uncertainty, VAT on new builds, scarcity of skilled labour/trades unions increasing costs, building material supply inflation, strictest mortgage lending criteria (3.5x LTI) in Europe capping borrower purchasing capacity way below European peers...........the property developer is the one sitting at the end of this chain of inputs not in his/her control........going from the moment a developer steps on a piece of land to view it as a potential purchase acquisition target with no planning permission in situ....... to delivering the first unit is I would conservatively say a ~2-3 year process..........not sure many salary men on this board would have the kahunas to take the leap of faith developers and their financing partners take.

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Any sector open to real competition looks to take cost out of the process. The construction sector looks for hand-outs.
The State is the biggest single purchaser and developer in the country. Where is the plan to bulk buy modular homes to be constructed on State land, thus circumventing many of the supply side constraints, kick starting a more efficient supply chain and shortening the construction cycle. The gross inefficiency of the State is matched by the gross inefficiency of the construction sector itself.
I'm not sure how many salary men on this board would so myopic and blinkered that they wouldn't see that the solution to so much of the problem was within their control if they were looking at becoming a developer.

So much of this comes down to one simple thing, for everyone in the long process involved in delivering homes; stop whining and just do your job properly.