As we move towards the end of the pandemic, there is real momentum in the newly built homes market. Building sites are opening up across the country, and employees are coming off the Covid subsidies. This will allow loans to be drawn down as homes are completed. There is little doubt that the cost of building new homes has increased both as a direct and an indirect consequence of Covid. Both increases will press prices of new homes higher. These increases will spread between all the players in the new home market, builders, professionals, buyers, lenders and the State (more later below). From the buyers perspective, there is only so far they can go.
The maximum budget of a new home buyer is a combination of their salary multiplied by a set formula (set by the Central Bank) plus their savings and discretion on the lender’s part to exceed the salary multiple set by the Central Bank. This week sees KBC bank announce that it is quitting the Irish mortgage market after 40 years. This departure by KBC reduces the no of lenders in the market for the near future. The KBC market share will be divided between the remaining three lenders (BOI, AIB and PTSB). However, it is likely that a new lender will come into the new home market based on a fintech model rather than a traditional bank. The new lender will have savings and will be able to specialise in its area of lending. This new lender may bring a new pricing model for home loans.
Presently new home prices carry a premium to second-hand homes. One of the big reasons for this is the Help To Buy scheme, which sees the State contribute (gift with clawback strings which are not adverse if you stay) up to near 10% of the price. The Help To Buy scheme is the State giving back approximately a quarter of the taxes thrown off by a new home (vat on sale, local authority contributions, income tax on labour and corporation tax on land sale). In return for this Help To Buy scheme, everyone wins a little. The private housing stock of the country increases. A stable, settled community is established, with new homeowners becoming long term members of their community. Employment is created for all those involved, and each new home built generates considerable tax.
Back to the premium price that attaches to a new home over a second hand. Is this premium justified? It is neither justified nor the main point. The premium is a symptom of all the elements comprised in a new home. As more new homes come onto the market, there will be more choice, but the price is not likely to collapse as long as there is a body of buyers in paid employment that meet the lender’s criteria. Will the current prices of new homes slip back as today’s new homes become second-hand homes the day they are bought? Not really because all buyers of new homes that avail of the Help To Buy scheme face a clawback if they sell within 5 years. Given the criteria of the Help To Buy scheme, those who qualify are unlikely to be able to afford to buy a secondhand home within the 5 years after purchase.
So the big question, as always, is whether now is a good time to buy a new home or not. This decision must take into account the alternative- renting. With the present level of rent, for those fortunate enough to be in a position to buy, it is a good time to buy. Though a new home purchase is an “investment”, it’s not really. It’s much more than that. it’s all about putting a roof over your head and the price you pay for that, allied to the element of risk (getting your money back).
Dermot P Coyne
Coyne New Homes