Sunday, December 10, 2006

The First Time Buyer as Investor

In olden times, when a glimpse of stocking was looked on as something shocking, First Time Buyers (FTBs) were almost always young couples who were getting married and buying their first home.

Nowadays a high proportion of FTBs are actually young investors who are “getting their foot on the first rung of the property ladder”, rather than buying a home. In other words, they’re actually behaving as investors.

The presence of these FTB-Investors, combined with the traditional investor who is building a property portfolio, has significantly increased demand for new houses which has, in turn, served to push up the rate of increase in housing prices.

This growth in prices, in turn, increases the pressure on such FTB-Investors to get on the housing gravy train - it’s been a safe and “guaranteed” way to make serious money. What differentiates the housing market from all other forms of investment is the ability to borrow almost all of the purchase price. So, even though you only invest 10% of the original purchase price from your own funds, you get to keep all the gain on the 100% of the purchase price.

E.g. You buy a house for €300k, putting up only €30k yourself. After 1 year, the house has increased in value by, say, 15% so it’s now valued at €345k. That’s actually a 150% return on your own €30k in one year - where else would you get it?

The other factor has been the very low cost of Mortgage finance in the past 8 years, since we effectively entered the Eurozone. Prior to that, Irish interest rates were typically at least double those of Germany, indeed they were often 3 or 4 times German rates.

The availability of housing finance at rates as low as 3% - 4%, when house price inflation has been running at 10%-20% per annum, means that borrowing to invest has been a very attractive proposition. In addition, these low interest rates have meant that borrowers can avail of larger mortgages as the bulk of the monthly repayment is actually dictated by the interest rate rather than repayment of the capital sum.

However, the downside is that all this speculative investment in property, fuelled by the easy availability of cheap money, has been to push demand and prices even higher, leaving the unfortunate “Traditional FTB“, who only wants to buy a home, struggling to compete against the tide of these rapacious investors, many of whom are masquerading as FTBs.

In these enlightened times, and because we now live in an economy rather than a society, it is not possible to discriminate in favour of married couples (including allowance for future legal status for same sex couples) over singles. This principle doesn't necessarily apply in reverse - McCreevy's 1999 Tax Individualisation measures effectively discriminated against married couples where the woman chose to stay at home (let's not pretend they all work there!).

Nor is it possible to discriminate in favour of our “Traditional FTBs” and treat the FTB-Investor as a normal property investor. The FTB stamp duty concessions which already exist apply equally to both categories of FTB. The recent budget changes which increase the level of tax relief on mortgage interest will also apply equally to both.

Short of some politically-incorrect measures which favour families over singles, it's hard to see what might work to make life a bit easier for the Traditional FTB - the ones who merit support.

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