Policymakers’ short term principles not addressing risk of new housing bubble

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By Cormac Lucey

House prices will continue to rise for the next five to 10 years unless drastic action is taken, a report released last week warned. Ronan Lyons, an economist with the property website Daft.ie, says we are unlikely to see a stabilisation of prices in Ireland’s property market and prices in Dublin will continue to rise faster than in the rest of the country.

It’s hard to disagree with Lyons’s prediction that Irish house prices are set to drift inexorably upwards. Our population is rising steadily. In 2006, on the eve of the financial crash, there were 4,239,848 people living here. In 2016, following several years of bracing economic adjustment, the country’s population had risen by more than half a million to 4,761,865.

Over the same period, the nation’s housing stock rose by a healthy 234,032. On the face of it, there shouldn’t be a problem. Alas, construction of new dwellings was concentrated in the early part of the previous decade in areas such as the Upper Shannon basin — that’s a posh term for Longford, Roscommon and Leitrim — rather than Dublin.

Only 8,800 dwellings were added in 2011-16 where they were most needed.

Employment and wage rates are rising, tax rates are falling. In 2016, gross disposable income rose 4.4%, reaching a new high. IDA Ireland’s pipeline of job announcements shows no sign of drying up. Indeed, Brexit is leading to additional foreign jobs coming to Ireland.

There is also a lot of pent-up demand among the members of an age cohort, now in their thirties, who were unable to buy over the past decade, because many were priced out of the market before 2008 or were unable to secure mortgage finance after 2008.

This has been a big factor behind large rent hikes in recent years. According to the Central Statistics Office (CSO), the total number of homes nationwide that paid €300 or more in weekly rent to private landlords rose from 18,485 in 2011 to 48,993 in 2016. More than 85% of these households were in the Dublin region.

New mortgage lending is now growing fast. In the first three months of this year, drawdowns grew 27% compared with a year earlier. Mortgage approvals accelerated by 87% year on year in March, suggesting significant pent-up demand for mortgage finance and house purchases.

Reviewing the recent surge in house prices, Lyons observes that, in terms of the underlying market fundamentals of supply and demand, very little has changed, before highlighting last year’s adjustment in the Central Bank of Ireland’s mortgage lending rules.

Instead of a 20% deposit to buy a house costing more than €220,000, first-time buyers now need just a 10% deposit. The conclusion that a relaxation in Central Bank rules triggered a spike in house prices begs the question, in whose interest was that relaxation? It is property owners and sellers who have benefited from the resulting price rise, not new buyers.

While buyers may have felt individually disadvantaged by their inability to get a mortgage under the original rules, they have been collectively disadvantaged by the price rises that followed the relaxation.

Lyons draws comfort from the fact that the restrictions exert such an important influence on house prices. When those rules are relaxed, prices rise as supply is simply not sufficient to meet demand. But if they are maintained in their current form, “the current spike in house price inflation will prove to be just that”.

Goodbody Stockbrokers has reported that, in the most recent six-month period, over 16,000 mortgages were approved for house purchase. More than 12,000 of these are new entrants to the market in the form of first-time buyers and investors. While house completions of 18,000 are expected for 2017, excluding self-builds, the stock that will come to the market is estimated to be about 11,000.

Before we even consider cash purchases, new mortgage approvals are in excess of the new supply expected to come to the market. House price inflation, Goodbody believes, is therefore expected to remain strong over the foreseeable future.

Rising demand is meeting constrained supply and generating ever higher property prices. But the supply crisis has been aggravated by repeated government interventions, aimed ostensibly at fixing the problem. So Enda Kenny’s government presided over the abolition of bedsits and Leo Varadkar’s government contemplates their reintroduction.

In late 2015, then minister Alan Kelly announced a housing plan that won considerable attention. After him came Simon Coveney — with another housing plan that attracted heavy coverage.

Now we have Eoghan Murphy (pictured above). His first act has been to drop the housing targets set by Coveney, amid claims that rushing to meet a deadline in 2021 could “sow the seeds for crises of the future”.

This is hopeless. It is Murphy’s job to put pressure on public servants to deliver for the public, not to deliver for public servants and leave the pressure on the public. And is it not preposterous for the cabinet to sign off on a high-profile housing plan just months ago, only for it now to be announced that such a plan might sow the seeds of crisis?

The challenge is to make changes that will both fix the current problem and endure into the future. I have two ideas that might help at the margins.

First, amend the relief from capital gains tax applying to property acquired between December 7, 2011, and December 31, 2014, which is held for at least seven years. This “incentive” may be encouraging land-hoarding as investors wait for their seven years to elapse. Scrap the seven-year requirement.

Second, increase residential property tax by a factor of four or five and use the proceeds to reduce the higher rate of income tax. This would encourage older homeowners, whose children have flown the nest but who still occupy four- and five-bedroom houses, to downsize and free up some supply.

The deeper problem is hyperactive politicians with the policy attention span of gnats. The consequence is serial initiatives that may win headlines but that don’t solve problems.

Published in the Sunday Times – Irish edition