Past housing mistakes must not be repeated

This week saw the release of the latest figures on residential house prices from the Central Statistics Office.

This has become one of the most eagerly awaited pieces of official data for many people given how preoccupied we still are in this country with bricks and mortar.

The CSO figures are based on returns from eight mortgage lenders and are based on sales for which a mortgage has been granted and records the price when the transaction is completed. As such the index fails to measure house sales that are not based on a mortgage transaction and we know that over the past couple of years over half of housing transactions have been cash based.

Despite this caveat, the CSO series does give a very good insight into what is happening in the market and indeed anecdotal evidence is totally consistent with what the CSO series is telling us, or at least that is my experience.

The latest figures show that national average property prices have increased by 14.9% in the year to August and are now 20.1% off the low point in March 2013; Dublin prices have increased by 25.1% and are now 38.4% off the low point in August 2012; and outside of Dublin, property prices have increased by 5.6% and are now 7.9% off the low point in March 2013.

These are very strong numbers, but of course they are coming off a very low base. Some would argue that rising house prices in the current Irish context represent good news. This is based on the fact that rising prices will take thousands out of a negative equity situation; rising housing wealth has a positive wealth effect on consumer behaviour; and of course the fact that demand for housing is picking up is indicative of greater confidence about the economy and stronger belief about a positive future.

On the other hand, rapidly escalating house prices make it much more difficult for first time buyers in particular to get on the housing ladder; and those that do are being forced to take on a larger mortgage commitment, which has the effect of undermining the cost competitiveness of the economy.

Different people will have different views on the desirability of rising house prices. It is clear that there is a lot of pent-up demand now emerging in the market after a period of stagnation, but adequate supply in the required areas simply does not exist to satisfy that demand.

Between January 2010 and July 2014, a period of over four and a half years, 47,695 houses were completed nationally. The figure is 6,311 in Cork and just 7,700 in Dublin. Granted there was excess supply coming into 2010, but that low level of house building in vibrant cities such as Dublin and Cork does seem inordinately low. It is a particular issue in the rapidly growing economy of the Greater Dublin area.

House building activity needs to pick up to satisfy emerging demand in a growing economy, from both a demographic and activity perspective. There have been suggestions from some quarters that incentives should be given to encourage house building. I do not believe that it would be sensible to go down that route, but for developers to build houses, a functioning credit market is essential.

Nama can certainly continue to help in that regard, but we do need to be careful about where we build. Every local authority should sensibly identify future likely demand and make sure that nothing is built without putting adequate services in place. A proper assessment of the types of property required should be carried out and the planning system needs to be flexible enough to cope with changing circumstances.

As a country we made massive mistakes in relation to the housing market, there is no better time to get it right than when emerging from a massive crisis.

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