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House affordability should be the government’s focus, not just house prices

ACCORDING TO THE latest DAFT property index, the average asking price for a home in Ireland is now just over €320,000. That makes the average repayment on a 90% mortgage around €1,300 a month much cheaper than the average rent of €1,721 and theoretically within the reach of the typical renter.

The catch? To buy that home, you will also need to find a deposit of €32,000, pretty much impossible to do when you are paying so much on rent.

For those unable to rely on the ‘bank of mum and dad’ the way around this is to use the Help to Buy scheme to fund the required 10% down payment.

However, the scheme only applies to new build properties which are €87,000 more expensive than average at €407,000 according to the same report. Making the mortgage required too large for many would-be First Time Buyers.

First Home Scheme

This is where the other big housing support, the First Home Scheme should come into play, launched in July 2022 it provides First Time Buyers additional finance for new builds through a shared equity plan.

When used with Help to Buy it gives First Time Buyers a further 20% of the purchase price upfront, in return for the scheme getting the same share of your home when you sell at an ultra low fixed interest rate of under 2% per year on average.

On a new build of €407,000 a buyer could therefore get most of their deposit of 10% funded through Help to Buy (€30,000) and then 20% (€81,400) from the First Home Scheme, leaving €10,700 from savings and €284,900 to be funded through a mortgage.

Including the average interest on the equity, the total repayments in this example would be €1,350 a month, only around €40 a month more than if the First Time Buyer had bought a non new build property for €320,000. If you want to work out your own budget you can use a mortgage calculator to work out your buying options or a mortgage repayment calculator to work out what your repayments would be.

Crucially though, with the new build, instead of forking out €32,000 you only need to find €10,700 for the deposit in this example thanks to the Help to Buy scheme. The First Home Scheme is based on a successful UK scheme introduced in 2013 and used with the Help to Buy Scheme has huge potential to free trapped renters by helping households who can’t access additional funds from family. Based on the UK numbers, the scheme could help over 30,000 Irish households to get on the property ladder. To date though only 1,255 homes have been purchased with the scheme, with 7,530 applying.

Low numbers

Some of the low take up so far is due to the lack of understanding of the scheme, but the biggest issue by far is the property price ceilings currently imposed by the scheme.

In Dublin for example the scheme can only be used to purchase properties for less than €495,000, but the vast majority of Dublin’s new builds are already considerably more expensive than that according to the same report.

The worry in Government circles is that without caps limiting the availability of the scheme new build house prices will rise even further.

They will, but that shouldn’t matter, as those houses are still more affordable due to the subsidies being available. It’s whether houses are affordable after the subsidies that matters, not whether house prices seem high or low.

Contrary to what many think, developers aren’t making super profits on new housing developments right now, as costs have shot up in the last few years. That’s why housing construction and supply are so limited. Higher new build prices will therefore stimulate supply by making developing more profitable and help fix the root cause of our housing crisis, supply.

Politicians and policymakers are paranoid about high house prices and the negative headlines that come with them, but that’s the tail wagging the dog. What they should worry about instead is expanding housing affordability.

The Help to Buy and First Home Scheme have huge potential to help us fix both housing supply long term and help trapped renters in the short term if we have the courage to lift the current caps.

Mark Coan is Founder of Online Financial Guide


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