The Central Bank has raised serious concerns about the Government's new shared equity loan scheme, suggesting it could saddle potential participants with big debts while inflating house prices generally.
The scheme, which involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property, is part of the Government's Affordable Housing Bill and is intended to drive home ownership.
However, in a submission to the Oireachtas Joint Committee on Housing, the regulator said there was, as yet, "little detail around the contractual obligations on those that might receive this financing."
If the additional financing is “debt-like” this could pose a risk to participating households, potentially limiting their ability to withstand income shocks and avoid “excessive indebtedness”, it said. A more “equity-like” financing structure would limit this risk.
The Government is proposing to anchor the scheme with an equity pot of €150 million with the State and the banks divvying up €75 million each. It is currently in negotiations with banks regarding their participation.
Another concern raised by the regulator is whether such an initiative would be inflationary. It noted that the scheme would operate by increasing the purchasing power of households but that the supply response to increasing house prices has, to date, been sluggish, not just here but in other countries as well.
“If there are structural reasons, such as labour skill shortages in the construction sector, tighter land-use regulation or insufficient incentives to guard against land hoarding, which impede this supply response, a scheme that results in higher levels of demand – depending on its size – could result in upward pressure on house prices,” the Central Bank warned.
Such schemes
The international evidence also suggested that such schemes can end up benefitting those “who had no need for them”, it said, enabling a certain cohort of buyers to purchase “more expensive housing”.
Minister for Housing Darragh O'Brien has insisted his share equity scheme is just one measure in a suite of measures designed to tackle the current housing crisis and that it would be targeted, affecting approximately 4,000 potential buyers.
Nonetheless Opposition parties have criticised it, with Sinn Féin tagging it a "Fianna Fáil developer scheme".
In its submission, the Central Bank also warned that participating lenders could find themselves in breach of the regulator’s existing mortgage lending rules, which limit how much banks can lend to home buyers.
It also suggested the scheme would not fall under any of the current regulatory frameworks with potential implications for the protections afforded to consumers.
“Overall, taking a broader housing market perspective, the proposed scheme – in isolation – is likely to have a limited impact on the ultimate supply-side problem in the Irish housing market,” the Central Bank said in its submission.
“ We would, therefore, encourage a continued effort to focus on policies on the supply side of the market – including, but not limited to, some of the other elements of the Affordable Housing Bill,” it said.
