Budget Build-up #1: Will The Budget Help Homebuyers Or Boost House Prices?


This is the first in a short series of pieces looking at particular issues relevant to Budget 2017.

Although final details won’t be known until Budget day, October 11th, there is already an awful lot of debate as to whether an expected package of measures intended to improve the lot of First Time Buyers (FTB’s) and boost new home construction will help or hurt the Irish housing market.

With prospective homebuyers facing rising prices and limited supply, calls for the Government to ‘do something’ may be  understandable but unless those measures are very carefully constructed, any  intervention in the upcoming Budget could make things worse rather than better.

Getting housing interventions right will be very important if the Irish property market is to develop in a healthy fashion through the next couple of years.

It has been suggested that the new measures will give FTB’s greater buying capacity to purchase new homes and this, in turn, will stimulate new homebuilding. As the diagram below illustrates, FTB’s are now spending about double the amount they spent on new homes three years ago but that increase has primarily translated into more expensive homes rather than more homes.

  • The most recent data -- for the three months ending in July 2016 -- show the average price of a new home bought by First-Time buyers has jumped by almost 80% over the past three years while the price paid for existing homes has only climbed about 23%. As a result, the average price paid by FTB’s for new builds has climbed well above the average price paid for existing dwellings.
  • In spite of the surge in prices, the number of new homes bought by FTB’s has only risen by 14% over the past 3 years as the supply of new builds has fallen consistently and considerably short of what is needed. 

The difficulties faced by would- be purchasers in recent years stem from strong and rising demand in the face of weak and largely unresponsive supply to this point;

  • Homebuyer demand is now very strong, reflecting improving employment, the end of austerity, a return to net immigration, historically low borrowing costs and a gradual recovery in consumer confidence. As our recent homebuyer survey found, pent-up demand-- reflecting purchases postponed through the last seven or eight years-- is re-emerging and putting extra pressure on very limited supply.
  • Housing supply remains very weak for a variety of reasons and the number of new homes built this year is likely to be only about half the amount needed to meet ‘normal’ demand and IS altogether smaller in relation to the ‘pent-up ‘ demand that is now re-appearing.
  • In these circumstances, it will be very hard to design fiscal measures that don’t simply translate into more demand chasing limited supply, resulting in more of a boost to prices than to activity. In light of the failure of the sharp rise in new home prices in recent years to meaningfully increase supply, it may be very difficult for new measures to deliver a notable boost to building.
  • Unless the Minister for Finance is very careful in the way new measures are introduced, an uptick in housing prices could mean that Central Bank lending limits bite even harder for many would-be purchasers. If house prices rise becuase of Budget measures, many borrowers will have to save longer for larger deposits in order to meet loan to value and/or loan to income limits.
  • The history of the Irish housing market is not at all encouraging in terms of the impact of Government interventions on prices or activity; will Budget 2017 spring a major surprise or another disappointment for homebuyers? 

This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.