This is nuts. We have not yet recovered, as a society nor as an economy from the last property apocalypse, before the Government starts to tinker with the market again.
We are as a state incapable of learning. Literally, incapable. A martian wanting to know how Irish economic (mis)management works need look no further than the property market.
Somewhere in Government Buildings there is a man who has a black sense of humour. There we were thinking the spirit of Flann O’Brien was dead and then we get the conjoined announcements this week. On the same day as the Government finally gets around, a mere three years in office, to setting up an inquiry into the property-led banking crash, it also announces what can only be seen as a set of measures to reinflate the property sector.
Let’s leave the inquiry aside — although it is, I’m sure, a mere coincidence that it will report just before the next general election and that will be bad news for FF. The property bubbleers are back.
The plan is, in essence, for the taxpayer to underwrite the bad property debts of the banks. Where have we heard that before? This time is of course, different. This time the plan is not banker- led but government-led. This time it happens not in the semi-excusable white heat of a global crisis but as a deliberate and thoughtful government decision. This time instead of a (apparently) functioning vibrant banking system we have a dyad of deadheads. This time, instead of a debt/GDP ratio among the lowest in Europe we have the highest after Greece. This time instead of a global crisis unfolding we have a global recovery stuttering along. This time is different.
Property affordability remains, in reality, low — 20% of disposable income for a couple on average earnings is required nationally, nearly 25% in Dublin. That is tight. While both earn the average wage it is affordable at present interest rates. That we are at historically low rates is also a fact. Rates will rise. And couples tend to have children, who tend to be either minded at home (reducing family income) or in monstrously expensive creches (reducing family income). So purchasing now may be affordable but a house is a 25-30 year commitment. The Government has done little to create a stable market for long-term fixed rate mortgages. A proposal to create a Danish-style system was voted down.
The proposal is to ineffect introduce a government, read taxpayer, guarantee for first-time purchasers to enhance their loan to value ratio from 80% to 95%. This is a bad idea on several levels. First, a high LTV ratio is indicative of poorer quality loans. While banks can and should lend to poorer quality lenders they must price those correctly. The mispricing of subprime loans is one of the key issues which drove the crisis. Here the market will be distorted as the quality borrower (80% LTV) will be treated the same as the lower quality one (95% LTV). There is a vast literature on the effects of these kinds of distortions.
Second, what this does is pit borrowers against each other. Lower and higher quality borrowers are now bidding competitively, as are first-time buyers and others. Increased competition in the face of scarce supply drives up prices.
A third issue is that this generates an unquantified state contingent exposure. This will likely rise over time. If this programme is a success the pressure will be significant for a relaxation of the terms, to higher loan levels and to other classes of mortgage borrowers. We have seen how badly underestimated the bank guarantee was. Are we to think of this as being the “cheapest mortgage subsidy ever”?
Fourth, we face a market in which supply, of those homes in locations where people wish to live, is constrained. That is the main constraint. A supply side initiative seems lacking here. What is happening to free-up serviced land that is zoned? What is happening to allow zoning changes in terms of density and mix? What is happening in relation to increasing the supply of services to unserviced but zoned land? The Construction 2020 strategy is vague and aspirational on this.
With short-term fixed supply and a rising demand basic economics tell us prices will rise. We know that expectations of future house prices play a major part in the dynamics of Irish house prices. Even anecdotally we are aware of the “get on the property ladder” meme. We also know credit leads house prices at least in the short term. We know that persistent behavioural biases in policymaking exist. All of these issues we know. And we know that the result of this policy will be to make houses more expensive. So the issue is why is the Government doing this?
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