Monday 16 January 2017

Cabinet brief for Housing could be the new 'Angola'

Published 13/03/2016 | 02:30

As Brian Cowen once said of Health, a Department of Housing could become 'the new Angola'
As Brian Cowen once said of Health, a Department of Housing could become 'the new Angola'

Whenever we in Ireland have a specific problem, we seem to think that having a dedicated minister will fix everything. As the political parties weigh up their options in forming some kind of new government, the housing crisis continues to rage.

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New families are being made homeless. Not enough houses are being built in Dublin, in particular. Rents remain stubbornly high. House-hunters with jobs in the capital have to purchase cheaper houses in commuter counties, which in turn drives up prices there. The whole thing is a mess.

An ESRI report on Irish housing supply, commissioned by the banks and Nama, found some obvious patterns in the housing sector. Not enough houses are being built in Dublin. Bizarrely, increased demand is not leading to increased supply.

Why not and what are the constraints?

Disappointingly, the report doesn't tell us why. "The analysis here does not shed any light on the causes," is how the ESRI report put it. It merely states what the causes might be, rather than nailing any of them.

The possible list includes: developers in Dublin sitting on land banks to get a higher price (developers are the bad guys); building costs remaining so high that it isn't profitable to build (developers are not the bad guys); lack of finance (banks are the bad guys); or developers needing the receipts from some developments to come in before they commence planning something new (too many developers are cash-strapped and the banks won't take a punt on them).

We don't really understand why it is happening. A new dedicated housing minister is being called for to give the issue proper attention and find a solution.

The problem is that to get results quickly (i.e. more houses built in the right places), the new minister could end up storing up trouble for the longer term.

A minister could cut Vat on houses, which would boost builders' margins (a transfer from all citizens to developers). A minister could further water down planning restrictions to speed up building (a measure that could lead to more houses but worse ones). A minister could put pressure on the Central Bank to ease up on mortgage caps and/or give state subsidies to first-time buyers (this would encourage people to build up more debt and also subsidise the entire residential construction industry).

The new minister would be under enormous pressure to deliver on all aspects of housing. It actually sounds like an impossible job. Giving the construction industry what it wants would get more houses built more quickly - but would that be the best long-term fix?

No is the answer.

Backing the builders and the banks would have to be off-set by measures such as strong rent controls to make rents more affordable.

This was already tried by Labour's Alan Kelly, but heavily watered down by Michael Noonan.

It would also have to consider a 'use it or lose it' mechanism, whereby developers are forced to build or pay to hold on to unused land.

Perhaps not enough Irish developers with land banks are financially strong enough to progress. They are cash-strapped and stuck in Nama or a private sector paymaster. They need to sell up to institutions with money or form joint ventures with big international players who have the funding and are interested in building in Dublin.

A Department of Housing could become "the new Angola" (what Brian Cowen once called the Department of Health) - in short, the job ministers want least.

A health insurance price war? That'll be the day

Sometimes things can be very strange in the economics of post-crash Ireland.

In the housing market, greater demand is not leading to greater supply. And in health insurance, the removal of one of the players in the market has been welcomed as leading to more competition - not less.

Irish Life, owned by US giant Great-West Lifeco, has bought the number three player, Aviva Health. It has also bought the 51pc shareholding in GloHealth (the number four player) it didn't already own. This gives Irish Life access to around 400,000 customers, or 21pc of the market.

The price paid has not been disclosed but it puts Irish Life firmly in third spot in a market of three, behind Laya Healthcare with 30pc share, and Vhi, which has 50pc of the market.

So four players had 100pc - and now it is three.

Irish Life is expected to take the battle to Laya and Vhi and is targeting a market share of 30pc. The view in the industry is that it will try to do that through a price war and greater innovation in product offering, which might be good for consumers.

I have yet to see what a price war in Irish health insurance looks like. With too many complicated product offerings from too few players, it is hard to know what you are paying for.

If the mooted price war actually does come, I wonder will we recognise it when it happens.

Mario Draghi is running out of cards to play

Mario Draghi took out what some described as the "big bazooka" on Thursday when he increased quantitative easing, cut interest rates to zero and opened up the bank's bond buying to new corporate debt.

Markets were initially a bit mixed after the move. One of the measures means that the more banks lend to the real economy, the more they can borrow from the ECB and the lower the cost.

Is it pure genius or sheer desperation? The eurozone has serious problems to contend with and it is clear that Draghi's 0.05pc interest rates and €60bn per month of quantitative easing haven't worked.

So he has gone for 0pc rates and €80bn per month. It is a big gamble to pump that much new money into the banking and European corporate bond market and then think that there won't be some negative consequences further down the road.

The good news is that Irish banks might be encouraged to lend out more and cut lending rates. Negative rates can hurt banks.

But to offset some of the pain to banks, the ECB will provide cheap loans through specific longer-term refinancing operations, starting in June.

These loans could potentially be provided at rates as low as minus 0.4pc, in effect paying banks to borrow money.

Big business will definitely benefit through ECB corporate bond purchases - but will Irish small firms see an upside through lower borrowing costs from banks?

We shall see.

The bad news is that Mario's bazooka might not work, because the eurozone has too many structural problems. Whatever about Brexit, serious questions remain about the viability of the single currency and the EU project.

If economic union cannot work without political union, the EU is surely moving further apart in recent months, rather than closer together.

Other countries will want similar opt-out deals to the UK, while the migration crisis is raising new fault lines.

Meanwhile, markets will make the most of the cheap money party.

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