The collapse in house prices after 2008 imposed massive pain on many people; it did serious damage to the stability and resilience of the banking system; and it imposed considerable pain on the overall economy.
Between the peak of the national residential market in September 2007 and the bottom in March 2013, national average residential property prices declined by 50.9%; outside of Dublin they declined by 48.7% and in Dublin between the peak of the market in February 2007 and the bottom of the market in August 2012, average prices declined by a massive 57.4%.
These are phenomenal price declines by any historical or international standards. The downward adjustment has been very painful on many fronts and the legacy will take a long time to work through.
The escalation in house prices seen in the decade up to 2008 was dramatic but was not particularly desirable. Prices were driven higher on the back of a very buoyant economy and the availability of vast quantities of cheap mortgage credit.
Of course there was also a strong element of irrational euphoria, which is always a key attribute of an emerging bubble. Rapidly rising house prices are not economically desirable because as house prices rise, larger mortgages have to be taken out, and this in turn fuels wage demands as mortgage holders seek to sustain the affordability of the mortgage. This has the effect of undermining the cost competitiveness of the economy; it undermines internal mobility; and undermines migration into the country.
It also creates serious financial exposures and vulnerabilities both for those who borrow and for those who lend. We are now left with the legacy of considerably negative equity for many people; over 90,000 private residential mortgage holders are in an arrears situation with badly damaged bank balance sheets.
Having collapsed so dramatically, the market is now starting to pick up again. The latest housing market data from the CSO this week show that national average property prices increased by a further 1.8% during September and are 15% higher than a year ago and are now 22.3% off the low point seen in March 2013; Dublin prices increased by 2.5% in September and are 23.4% up on a year ago and are now 41.9% off the low point in September 2012. Outside of Dublin, property prices increased by 1.1% during September and are 7.3% higher than a year ago and are now 9.5% off the low point in March 2013.
These are strong price rises and really reflect pent-up demand coming back into the market on the back of improved economic confidence, a lot of cash buyers and some improvement in the availability of credit. After years of under-investment in house building, supply is limited, although there are indications that second-hand supply is coming forth as prices rise.
Anecdotally there is some evidence in Dublin that the market may be showing some signs of cooling, but it is too early to be definitive. There is a clear requirement to increase supply where required, but demand also needs to be influenced.
The Central Bank has recently published proposals for consultative purposes that would limit the bulk of mortgages to a loan to value (LTV) of 80% and tighten loan to income ratios. Under such lending criteria, many first-time buyers will struggle to get a sufficient deposit together to get on the housing ladder.
Despite recent criticisms, it is not the role of the Central Bank to worry about whether first-time buyers can get on the housing ladder or not. Its role is to control the risks in the mortgage market with the aim of bolstering the stability and resilience of the banking system. It failed to do this in the past and attracted justifiable criticism and it is now moving to make sure the same mistakes are not made again.
The new lending proposals are designed to strengthen the resilience and stability of the financial system and as such are sensible.
It is up to Government to decide if they want to and how they might help first-time buyers get on the housing ladder. It is not the Central Bank’s job to worry about that.
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