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New Irish leader's opposition to 'help to buy' loans threatens mortgage growth

Ireland's incoming leader has indicated that he intends to abolish the country's Help to Buy house purchasing scheme — just as growth in new mortgage lending begins to buoy Irish banks' loan books and asset quality.

Leo Varadkar, a 38-year-old doctor, was voted leader of Ireland's governing Fine Gael party June 2. He takes over as Taoiseach, or Prime Minister, on June 13, when Ireland's lower house, the Dáil, next sits.

The Help to Buy scheme he has targeted was introduced by Housing Minister Simon Coveney, his opponent in the leadership contest, on Jan. 3. It offers first-time buyers tax rebates up to €20,000.

SNL Image

Ireland's new Taoiseach, or prime minister, Leo Varadkar.

Source: Wikipedia

Varadkar has called the scheme inflationary and has blamed it for driving up house prices for first-time buyers, telling the Irish Independent on May 23, "I want to use that money for something very particular which is to provide step-down housing for older people," referring to smaller retirement-style developments.

The Irish Department of Finance had already commissioned Indecon Economic Consultants, an independent research firm, to review the scheme. Varadkar said he wishes to "bring forward" the review, and phase out the scheme if the study confirms that it has driven up prices.

Average listed house prices in the first quarter of 2017 rose to €230,000, an increase of 9.4% from the first quarter of 2016, according to Trinity College, Dublin, economist Ronan Lyons. This was the largest quarterly increase in two years.

Bank analysts say ending the Help to Buy scheme would hurt Irish banks' loan books, which have benefited from this year's resurgent mortgage growth.

Mortgage approvals were up 62% in the first quarter of 2017 compared to the first quarter of 2016, with 3,218 mortgages approved, on average, each month, according to the Banking & Payments Federation Ireland, or BPFI. Half these approvals were for first-time buyers. Total loan value increased by 77.5% in the first quarter of 2017 compared to the same period in 2016. Overall, residential market transactions increased 20% compared to the year-ago period.

Owen Callan, a Dublin-based analyst at the specialist bank and asset manager Investec, called the resurgence in new mortgage lending "a key support for our positive Irish bank earnings outlook."

Darren McKinley, an equity analyst at Dublin-based Merrion Capital, warned removing the scheme could affect growth momentum in real estate, therefore delaying banks' ability to write back provisions on impaired housing loans.

Policy discontinuity will also discourage builders from beginning new developments, with residential property already in limited supply, said Martha O'Hagan, assistant professor of finance at Trinity College, Dublin. "I think the chopping and changing by successive governments is a significant factor in the lack of supply."

Developers will be more likely to prefer commercial projects "as there is a lower risk of tax and regulation changing mid-project," O'Hagan added. "In general, the constant changes in the taxation and regulation of the residential property market in Ireland is very disruptive."

Major increases in mortgage lending

Irish banks have seen major increases in lending since the Help to Buy scheme was introduced in January.

New mortgage lending by Bank of Ireland, which owns 26% of the market, increased by 30% in the first quarter of 2017 over the first quarter of 2016. Permanent TSB Group Holdings Plc, with 10.4% of the market, saw its new mortgage lending increase 63% in the first quarter of 2016.

Allied Irish Banks Plc has the largest mortgage market share at 38% and is likely to be most affected by any change in new mortgage lending.

A policy shift in Ireland will be an additional blow to the Bank of Ireland, which, with two-fifths of its loan book in the U.K., is exposed to a post-Brexit British market where house prices have declined each month since March.

The Help to Buy scheme has attracted criticism from opposition parties, with Fianna Fáil's housing spokesman Barry Cowen calling it an "off-the-wall mansion grant" and Sinn Féin's housing spokesman Eoin Ó Broin also arguing the scheme should be suspended for driving prices upward. Cowen argued in the Dáil that "first time buyers a few years into their careers ... will be not be served by further spiking prices on homes that will never be within their reach."

Varadkar's moves to abolish the scheme would remove a key source of ammunition from political opponents at the beginning of his tenure.

Conall Mac Coille, a Dublin-based economist with Davy Stockbrokers, said in a research note that removing the scheme would cause a spike in demand as buyers rush to purchase houses before the rebate scheme ends.

O'Hagan said developers had told her they plan to pause new construction until the policy environment becomes more certain.