Economist identifies impacts of housing crisis in RE/MAX market report

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Impending changes to Ireland’s corporation tax code means Ireland will have to increasingly compete for foreign direct investment.

National competitiveness also relies on sustaining an economic model where inward migration is essential, according to a new RE/MAX Housing Market Report, produced by economist Jim Power for the independent Irish real estate group.

The availability of an abundant supply of high-quality housing, to rent or purchase at affordable prices, is therefore an essential pre-requisite for economic success and social solidarity, the economist concludes.

“Securing FDI on the basis of non-tax attributes means adequate housing will have to be a key part of Ireland’s overall offering. However, in the short-term, our current lack of affordable quality housing to rent or buy will make it more difficult to attract MNCs here,” Mr Power stated.

Abundant supply of high-quality housing is a necessary condition for labour mobility within a country and between countries. For Ireland, inward migration is an essential support to the economy, and expensive housing can be a major impediment to such labour flows, Power adds.

The RE/MAX Housing Market Report addresses trends in Irish house prices and private rents, as well as supply and demand issues. The mortgage market and lending regulations, the cost of residential building, and the impact of the Government’s Housing for All policy and Budget 2022 also come under the spotlight.

Lending Rules

Commenting on the latest CSO data on house prices, Paul Gartlan, Regional Director of RE/MAX Ireland, said that affordability is under pressure due to supply issues driving higher house prices, and the Central Bank’s mortgage lending rules.

August 2021 house prices were 10.2 per cent higher than a year earlier, according to CSO figures, although average Dublin prices are still 14.9 per cent lower than the February 2007 peak.

“Mortgage regulation is sensible, but when the rules effectively lock people on average incomes out of home-ownership, it would seem that a degree of latitude is required,” Mr Gartlan commented.

Facilitating home ownership for younger people who aspire to it would take pressure off the rental market, ease rents, and alleviate growing pressure on the Housing Assistance Payment (HAP ), Jim Power outlined in his report, while calling for an adjustment to lending terms.

“Regulation is prudent, but adjustment is required when the rules are having negative unintended consequences.

“Enabling those earning up to €50,000 to borrow up to 4½ times income would bring some equity to the situation, and give hope to a large cohort of the younger generation. In addition, long-term fixed rate mortgages should become the norm, and would protect borrowers from short-term interest rate volatility,” Mr Gartan added.

VAT Reduction on New Homes

Addressing housing supply issues, Jim Power says a reduction in the VAT rate on new housing to five per cent for owner-occupiers, would reduce the cost of delivery of new houses.

“This would significantly narrow the price gap to the amount that could be borrowed. It is worth noting that new house sales in Northern Ireland and the UK attract zero VAT rates.

“Under current EU VAT rules a zero per cent VAT rate is not possible. However, a 5 per cent levy for a period of at least 5 years does make sense, so we do not force new house buyers to borrow to pay an upfront VAT bill to Government, as well as paying interest charges on that borrowed money over the lifetime of the mortgage,” Mr Power reflected.

The Irish mortgage holder is getting a very raw deal too, according to the RE/MAX Market Report. The latest data from the Central Bank shows that average Irish mortgage rates in August were the second highest in the Euro Zone, and are 1.27 per cent above the Euro Zone average.

With the exit of two more mortgage lenders from the market, the further diminution of competition will further disadvantage Irish mortgage holders, Jim Power outlines.

Future-Proofing

Affordability and mortgage constraints has the knock-on effect of forcing people into an expensive rental market, Paul Gartlan of RE/MAX says.

“In many cases, average monthly rents are higher than monthly mortgage repayments. Renters would prefer to build up equity in an asset, but lending regulation is limiting their prospects of home ownership”, the real estate agent asserted.

Lending should be reviewed in the overall context of the housing crisis, Jim Power believes, in order to help future-proof standards of living and the draw on State supports.

“Given that many younger people have poor or no pension arrangements, the financial implications later in life of continued renting and never actually owning a home, are significant”, Mr Power concluded.