Home Truths: Log jam will set us back 20 years
Those who played in rivers and streams as youngsters will know that constructing a dam in a channel of flowing water can cause some unexpected effects.
Your attempt to control the flow might hold the water or channel it where you want it to go for a time, or it might cause an outbreak of flooding in unexpected places. Equally, your dam might hold for a while before a build up causes a sudden collapse, sending a mini tsunami gushing downstream.
Or a small blockage placed in a vital spot can cause an unexpected and sudden build-up of other debris which again can cause water breakouts where you least expect.
Interfering in the natural economic flow of the property market - an addiction of the Irish State since the 1990s - is a bit like tinkering with the flow of a river and such interventions have regularly produced unexpected side effects as past experiences can show.
The latest State intervention comes from the Central Bank's raft of lending restrictions to control inflation.
This inflation in turn has been caused by an artificial blockage of supply - itself a State-caused factor thanks to local authority policies. The latter have ensured that building costs remain above prices achievable by maintaining Par V social housing taxation on construction, by maintaining boom-era per unit levies on construction, by demanding higher spec construction than Department of Environment directives and by insisting on types of housing which are not in high demand (apartments).
For its part, the Central Bank was obliged to fulfil its responsibility to head off unsustainable lending that might have been emerging. With Dublin house prices having been increasing at 20pc per annum - the highest property inflation in Europe - something had to be done. The lending restrictions, which hiked deposits up to 20pc (for non first-time buyers), have now had their intended effect as evidenced by the Irish Independent/REA Average House Price Index, which shows Dublin semis falling in value in most areas by an average of 5pc and as high as 7pc in better locations. But the unexpected side effects are already starting to emerge.
To understand more about what might happen when a spanner is chucked into the mid-range city market, we need to look back two decades ago when stamp duty hikes in the mid to upper range hit middle market buyers as hard as the current lending regime changes have been doing of late.
In the early 1990s, a rainbow coalition Government was looking at ways of raising revenue from property following the abolition of the last property tax regime. At that time, IR£170,000 bought a luxury home at the top middle end of the city market. So the rate for these homes was increased from 6pc to 9pc.
At the time Dublin was experiencing a similar supply issue. This was also planning and local authority driven. Dublin's population had been growing but local authorities had been reluctant to rezone land to provide the necessary homes. At the time, every local authority was striving to maintain a 'green belt' or 'green lung' on its boundaries.
The compound result was that prices began to surge until, by the end of the 1990s, very average city semis were hitting the 170k barrier. Because of the new 'big step up' in stamp duty payable from 6pc to 9pc, those in mid-range houses actually stopped trading up. Instead, there occurred a boom in home extensions and attic conversions as owners in this bracket judged it would be better to make their existing home larger than trade up and get whacked with a much higher rate of duty. The fallout flowed both up and down the property ladder. With not enough new homes being built, those in apartments and smaller houses who wanted to trade up to a three-bed semi found that not enough of them were coming up for sale. So they were forced to stay put. In turn, first-time buyers seeking a starter home found there were none available. They couldn't buy.
At the upper end, there were few trader uppers from mid-range homes. At this point, less and less properties were coming to market, while smaller homes in particular became artificially more expensive as their scarcity for sale increased. Market activity was crippled for years by the resulting effect until stamp duty levels were more evenly stepped and the 'log jam' broken.
The Irish Independent/REA survey shows that unexpected side effects of the bank-lending measures are already beginning to manifest themselves. Family-sized homes in cheaper locations in Dublin, which have been least impacted by the lending regime changes, are still increasing in price while activity and prices have been artificially pumped up in commuter counties where the Central Bank's 3.5 times loan-to-income limit and 20pc deposits will have least effect.
Whether the 'Central Bank Effect' prevents hardest hit mid-range home owners from trading up and reduces market activity overall remains to be seen. But if this happens, in the absence of supply we could be looking at the prospects of yet another 1990s style 'log jammed' market.