New homes market autumn review.
As Ireland comes out of the Covid pandemic and returns to the new normality, there have been a lot of changes to the new homes market.
Let’s look first at what goes into making up the cost of a new home.
State Costs;
Social housing– the Developer allocates part of its site to social housing- this cost is included in the new home cost.
VAT– the new home buyer pays 13.5% on top of the cost of the house in VAT
Stamp Duty on the purchase price this is charged on the price of the house (ex Vat)
Build and material costs.
Building and material costs include all of the materials and labour. In the past year, most if not all of the material costs have increased by between 50% and 100%. The rate of increase is changing prices of materials so quickly that some builders suppliers material quotes are only valid for seven days. Labour costs are also up due to a lack of labour supply and increased regulation due to Covid.
Site Costs.
As there is no cost in supplying the site other than the initial acquisition, the price which developers will pay for sites is likely to stagnate or go down because the Developer cannot make a profit at the current sales price (see sales price below)
The interesting part of the State cost in a new home is that the more expensive the new home becomes, the more the State collects. The State is collecting a percentage of the price. The higher the price, the more the State collects. That is why I am putting the State costs at the top of the list.
Other factors are pushing the costs of housing higher. The planning process is both expensive and slow. The cost of a planning application may be near 10% of the site costs on smaller developments. Other forces are pushing the prices further. Ever-increasing regulation and specification of new builds are pressing the specification of new houses. The standards are getting higher, creating a house specification that is way dearer to build than even 15 years ago. Does that mean those houses built 15 years ago which would not pass present-day regulations are defective? Not at all, today’s homes must be built to the newer and more expensive design. Why must all new homes be built to these very high designs and specifications?
What is happening in the new homes market?
There is a significant pent up demand from buyers that have been ready to buy for some time but could not go ahead due to the temporary collapse in supply due to Covid. Those buyers have not gone away. They may even have more deposits saved than when they were ready to buy in the first place. To add to the demand side, new buyers have now come along and are prepared to join the market. There are now past and present buyers bidding for the limited available supply. To counter this mismatch Developers are selling new homes forward longer than ever before. The housing crisis is being stretched.
There are other issues to be considered. The mismatch between supply and demand is putting pressure on prices. The Developers would welcome prices increased as they could recover the costs increases which have invaded the development from when the site was cleared. However, the Central Bank lending rules are limiting the amount that buyers can borrow. This is placing a cap on the price of a new home. So the equilibrium of supply and demand is not taking place. We now have a situation like a build-up to an earthquake. There are great forces pressing against each other and a build-up of pressure. This pressure will leak out into the Political arena, it already has to some extent. Something has to give before the new home market gets out of control.
What is likely to happen?
Either the Central Bank allows bigger loans based on repayment criteria instead of multiples of salary, or, the costs come down. Some of the costs are directly related to state intervention. There is nothing anyone can do to reduce the costs of materials that are coming from abroad. The State can take some of the pressure off by reducing its share of a new home price. New homeowners will be paying tax for a long time before their loan is repaid. The Central Bank will be reluctant to increase in multiples of salary for calculation of loans as this would risk increasing the rate of price inflation.
Another outcome may be that the State will step in and increase the supply of new homes in its housing program. This would partly satisfy the demand for new homes and take some pressure off the price of new homes by lowering the demand for new homes. The need to ensure that there is an adequate housing market that is fit for purpose will become very political. There may have to be a big shift in public attitudes to ensure that this current problem is resolved both in the near term with long-term solutions.
The most likely outcome is that there will be an increased supply of new homes through both private Developers and the State housing scheme. This will reduce the housing shortage and take some pressure out of the market. The prices are unlikely to reduce and will continue to increase but at a much lower rate. There will be continued pressure on profitability in the near term unless the price of materials reduces.
Dermot P Coyne
Coyne New Homes
October 2021
