Five important lessons that we must all take on board if we are to ever create a prudent national housing policy
Do we want mortgages for all - or do we want to reduce the risk of another boom-bust cycle, asks Stefan Gerlach
There is plenty of blame to go around for the devastating financial crisis that Ireland endured. The banks, the regulators, the builders and the politicians have all come in for criticism - and rightfully so. Most observers now accept that while the global financial crisis played a role, allowing Ireland's home-grown property bubble to inflate uncontrollably was the main mistake.
But while there is broad agreement of what caused the crisis, few - if any - commentators have asked what the broader lessons for the property market are. Instead, the debate has immediately reverted back to what needs to be done for people to be able to purchase a property in much the same way as before the crisis.
Given the catastrophe that befell Ireland when the bubble burst, it is astounding that there has been so little public debate on whether the structure of the property market and the mortgage finance system is at all appropriate.
One lesson that has been drawn is that banks should not be allowed to lend freely to borrowers that are likely to fall into arrears if an economic downturn hits. The Central Bank's macro prudential measures address this issue. The aim of the measures is to ensure the stability of the banks. There has been little or no argument about the desirability of this objective.
Instead, the argument against the measures has focussed on mortgage access. Commentators seem not to have understood that if everybody could borrow more, house prices would just rise commensurately. The net effect would just be more indebtedness, not more housing.
Furthermore, it has not been recognised that there is a fundamental question of whether easy access for all to mortgage credit can be combined with a stable banking system. The fact that countries with high home ownership rates - such as Ireland - generally suffered worst in the recent crisis suggests that there is a tension between these objectives.
The reason is that the burden of unemployment, which is a main driver of mortgage arrears, is not shared evenly in society. In particular, younger and less experienced workers - who might also have had little time to build up a record of servicing debts on time - are disproportionately likely to lose their jobs if a downturn occurs. They are therefore risky borrowers for banks.
That raises the question of what Ireland prefers as a nation:
Do we want mortgages for all, at the cost of running the risk of another property bubble with massive social and economic costs?
Or do we reduce risks to the banking sector and that of another boom-bust cycle, at the cost of restrictions on risky mortgage lending?
The latter seems like the least-bad solution - but it requires the adoption of supporting policies that promote a stable property market. This means acknowledging that more indebtedness is not the solution. It means finding ways to ensure quality housing can be built at affordable prices. And it means providing good alternatives to those who do not want to, or can't, buy their housing.
That is, the focus of the debate should shift from ensuring credit availability to housing policy.
Five objectives of housing policy seem clear.
First, Ireland needs a large and professional rental market where households do not run the risk of having to move. Landlords that seek an income stream from the rent on the property - for instance, institutional investors such as insurance companies and pension funds - want tenants to stay a long time, since finding a new tenant is costly. Landlords seeking a capital gain only need tenants for the short-term.
Second, large rental properties, including those with three or more bedrooms that are suitable for families, must be available for rent. Otherwise families will continue to be compelled to buy their housing - irrespectively of whether they want to run the unavoidable financial risk associated with doing so.
Third, long-term rental contracts that provide predictability to renters and landlords alike are necessary. It is not possible for families to run the risk of having to leave their homes with a few months' notice.
Fourth, rents must be allowed to move, but only gradually, in response to market forces (even during the rental contract) to ensure that landlords have an incentive to maintain rental properties. A housing market that steps on landlords' property rights will never function well. While rents are likely to increase only gradually in a stable property market, as in other countries rules that prevent large and abrupt rent increases may be necessary.
Fifth, a more flexible supply of quality housing would be beneficial. The building of social housing, currently being rolled out, can help. Planning rules and cost-benefit analysis of building regulations can ensure quality housing without unnecessary additional costs. This would help prevent bottle necks such as the one now occurring.
So Ireland needs to decide: mortgages for everyone is likely to be difficult to combine with a stable housing market and banking system. If a repeat of the crisis is to be avoided, then a fundamental rethink of housing policy is required.
The Central Bank has taken the first step to ensuring a banking crisis does not re-occur. While the Government has recently announced a plan for "Rebuilding Ireland", the devil is in the detail and whether it will be enough is too early to tell.
Stefan Gerlach is a former Central Bank deputy governor
Sunday Indo Business