Government tax incentives adding fuel to house price inflation, warns ESRI

'Schemes are adding to demand pressures'

The help to buy scheme and the shared equity scheme are adding to demand pressures, says the ESRI. 

Concerns that Government tax policies are fuelling house price inflation at a time of acute shortages has been spelt out by the Economic and Social Research Institute (ESRI), as it warns price hikes will continue into next year.

Kieran McQuinn, professor at the ESRI, told the Irish Examiner that the existing help to buy scheme available for most home buyers and which has been extended into next year, as well as the shared equity scheme which is due to come into place for first-time buyers next year, are "unfortunately" adding to demand pressures. 

Separately, the Central Bank is reviewing its so-called macroprudential rules that, among other things, limit the amount home buyers can borrow from their mortgage lenders. CSO figures show home price hikes are running at 11%, while Goodbody chief economist Dermot O'Leary last week said he expects price increases to be running at 12.5% by the end of the year.    

Mr McQuinn said heightened levels of demand amid pent-up savings from the Covid crisis and the economy performing well are pushing up prices. Curtailed house buildings and the effect of global increases in building materials costs have made matters worse, he said. 

"Unfortunately, supply has been affected, and demand has not been, by Covid," said Mr McQuinn, adding that supply of social and affordable housing will take time to kick in. 

And, unfortunately, you will see continued house price inflation well into 2022." 

Mr McQuinn said easing of the mortgage rules at this stage "would be very dangerous" and "under no circumstances should they be eased". In particular, the loan-to-income ratio of 3.5 times, although set at a conservative level in 2015, was the "key" lever, and the Central Bank will leave well alone, said Mr McQuinn. 

"The Central Bank certainly can't ease them because easing them would just fuel house price inflation," he said. 

"There is nothing quicker to fuel prices than by tinkering with the loan-to-income ratio. Even if you were to move that to 3.75, or even up to four, it would add a considerable amount of inflation as far as house price inflation is concerned.