The government’s Help to Buy scheme failed to stimulate housebuilding but increased demand from buyers and contributed to the fastest house price increases in Europe, according to Standard & Poor’s.
The ratings agency said that house prices would increase by 8.5 per cent in Ireland this year, the fastest rate of increase of any European country.
Analysts said that the growing economy coupled with a likely influx of foreign workers because of Brexit and an undersupply of new homes would drive up prices across the country.
Residential property prices rose by 11.9 per cent in the year to May. The average cost of a home nationally stood just short of €250,000 and the average property price in Dublin was €401,600, although prices are about 30 per cent below their pre-crisis peak.
“We expect Ireland’s housing market to experience the strongest year-on-year nominal house price rises of 8.5 per cent this year and 7 per cent in 2018, underpinned by supply shortages and a continuing economic recovery,” the analysts said in a report.
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“The Brexit-related relocation to Ireland of some of London’s financial sector workers should also support the market.
“Conversely, we expect price rises to slow in the UK to 2.5 per cent overall this year, and to decline by 1 per cent in 2018 on Brexit uncertainties, although still supported by pent-up demand and favourable financing conditions.”
The ratings agency took aim at the Help to Buy mortgage rebate scheme, which it said appeared to have failed in its goal of increasing supply.
The scheme, introduced as part of last year’s budget, offers first-time buyers a 5 per cent income-tax rebate on the first €400,000 of a new home worth up to €500,000. The government launched a review of the scheme after it was criticised for contributing to the rise in house prices.
“Help to Buy is stimulating demand and prices, but the scheme is now under review, as supply seems not to be responding as intended,” S&P said.
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“It will take time before the construction sector has recovered sufficiently from the crisis, and before other structural obstacles, such as high construction costs, have been overcome, to be able to meet demand. In the meantime, shortages will remain a key challenge, and will underpin price increases.”
S&P said that 15,000 housing units were constructed last year, similar to completion figures provided by the Department of Housing. The Local Government Management Agency has suggested the figure was closer to 2,100.
S&P said that even a 50 per cent increase in new homes this year, which would equate to about 22,500 units being built, would still fall well below the number needed.
It warned that the Central Bank should not adjust the 3.5 times loan-to-income ratio when it reviewed its macroprudential rules later this year, which it said was helping to contain inflation in Ireland.
Analysts said banks had “far to go in working off crisis legacy issues” particularly non-performing loans that accounted for 13.4 per cent of their total mortgage books at the end of last year.