Comments by Taoiseach Leo Varadkar at the McGill summer schoolregarding the prospect of the Central Bank changing rules on mortgage lending has again brought into focus the impact of the lending rules on the affordability of housing and the viability of constructing housing at this price point.
Given, as Mr Varadkar noted ,there are “a lot of people who are now paying more in rent than they would pay for their mortgage” with “many people stuck in a rent trap” – it would seem that some change in the Central Bank rules or level of VAT charged on new home sales might assist affordability of house purchase. In addition, with the upcoming expiration of the help-to-buy scheme (31/12/2019) questions are being asked whether it will continue given its positive impact on housing affordability.
Keogh Consulting have examined current affordability levels and calculated what value of loan a typical FTB can obtain and how much they can possibly save to accumulate a deposit. Given these estimates an affordability level for each household income level was calculated based on the household income distribution published by Ireland’s CSO – i.e. the price target that must be met by a housebuilder to enable a purchaser with a given income level buy a home.
We then examined the current makeup of the components of sales price of houses and apartments in Q3 2019 to discuss the feasibility of constructing homes for this market given the estimated affordability limits (updating previous work). The impact of increasing the CB loan income multipliers and reducing the level of VAT charged on the sale of new homes on overall affordability and viability of development was estimated for house and apartment developments. A comparison is then made of the cost of a 30-year mortgage v monthly rental payments to examine whether the monthly housing cost can be reduced below average rental levels for similar properties.
The analysis determined (full report downloadable here) the following:
Thus, through a combination of a decrease in the VAT rate on new homes and an increase in the CB income multiplier an improvement in affordability could be achieved for differing accommodation types. These measures could partly offset some of the decreases in affordability being experienced on account of the increase in cost of delivery outpacing household income growth.
The economic benefit of future ownership versus the cost of the VAT reduction to exchequer should be evaluated in support of this measure to improve current housing affordability.
Irish Times, July 27th, 2019.
Loan 30 years, 2.75% interest p.a. 1 year of saving.
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