House price drops and first-time buyers

Bank of Ireland is to launch a €1 billion “mortgage fund” for first-time buyers, which will have an interest rate .04 per cent lower than the current rate of 2.49 per cent. It seems that the Government's recapitalisation of the banks has come with a proviso for them to “increase new lending to first-time buyers by 30 per cent this year”, according to the Irish Times.

At the same time, property website Daft.ie, has revealed that rents are expected to fall by a further 20 per cent this year, having dropped by 12 per cent in 2008. This is due - according to Ronan Lyons, an economist with Daft.ie - to the market having become “flooded” with rental properties, and the fact that many people have opted to leave the country in the face of increasing unemployment.

The reasons for investor over-activity in the market have been discussed on Gombeen Nation many times - suffice to say Government interference in the form of tax distortions played a big part.

Given that falling prices, with falling rents, and an increase in empty investor properties that can't be let out means that more properties - suitable for first-time buyers - will inevitably come onto the market, leading to further price drops: why is the Government continuing to interfere with special treatment for targeted sectors? Haven't they made a big enough mess of things as it is? And is is not obvious that interest rates - which are very low, anyhow - are not the problem?

The best way the Government, and the banks, could help first-time buyers (and buyers in general), is to let prices drop to a level where your average Padraig and Mary can afford a mortgage that bears some relation to their salaries.

Such an approach might be a bitter pill for investors and the developers, but it would be sweet medicine for the rest of us.

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