02 November 2016

Blog: Irish "housing" eyes are smiling

by Scott Fulton | 2 November 2016

While it has produced more than its fair share of builders, Ireland’s recent history of residential development is somewhat less impressive. The financial crisis hit the industry hard. As the market for new homes evaporated under the pressure of a systemic banking crisis, the majority of developers were highly leveraged and long of land at high prices. As a result, the housing industry almost disappeared overnight.

It has taken the Irish housing market a long time to recover, and the signs are yet nascent, but green shoots are apparent. More than that, the new coalition Government has made increasing the supply of new homes a priority within its “Programme for Partnership Government”.

Michael Noonan TD, the Irish Finance Minister, has launched the first tangible initiative with his proposal for a “Help to Buy” scheme which would provide first time buyers (FTBs) with a tax rebate of up to €20,000 for new homes up to a value of €600,000. While the details of this scheme are still being debated, many commentators have signalled that this initiative could offer a fillip to new housing in Ireland equivalent to that enjoyed by UK house builders.

The UK’s “Help to Buy” scheme was launched in April 2013 and comprised two main components; an equity loan and a mortgage guarantee. While the latter will finish at the end of 2016, the former has been extended to the life of the current Parliament. According to the Department of Communities and Local Government (DCLG), the equity loan scheme has supported the purchase of 81,000 homes with a combined sales value of c. £18.0bn. The total value of the loans is £3.6bn out of a potential total of £9.7bn. The average price of the homes acquired was over £220,000; broadly consistent with the current national average for the UK (source: Nationwide and Halifax).

House builders have undeniably benefited from this support. While some parts of the UK housing market have been volatile over the last 12 months, reflecting changes to stamp duty and lending criteria, the market for new homes has been robust. Since 2013, most major house builders have reported strong growth in volumes and average selling prices. On average, over a third of new homes purchased in the UK have been supported by the equity loan which, given its terms in England and Wales, has also allowed buyers to “trade up” in terms of price points. As a result, it is estimated that c.40% of the last 12 months revenue from house builders has been impacted positively by the scheme.

While it is too early to predict whether Irish developers will experience similar benefits, the fundamentals are positive. Ireland’s population is younger than that in the UK. They are less likely to own a home given the country’s macro-prudential lending rules since the crisis. As a result, Irish FTBs are less indebted than their UK counterparts but have similarly positive employment prospects; particularly in the Greater Dublin Area (GDA). The “Help to Buy” scheme may be the prompt that this demographic requires enter the housing market.

Ireland’s housing market appears to be recovering in any event. Recent mortgage data from the Banking and Payments Federation Ireland (BPFI) shows momentum. Drawdowns for house purchase increased by 12% in Q3 2016 (year-on-year) after growing by 14% in Q2. Demand from FTBs showed the greatest increase in the quarter, up 15% in the quarter after 11.0% in Q2. Mortgage approvals, a key indicator of future demand for homes, are also showing positive growth. In September 2016, approvals for house purchases increased by 35% year on year and were up 51% in August.

While there are few signs of an adverse impact from Brexit at the moment, if the EU Referendum decision does eventually lead to a slowdown in the UK housing market, the Irish housing market may offer a sensible alternative. There remains a way to go but most, if not all, of the signs are positive.