Sunday 28 December 2014

Armoured cars for politicians who don't change tack

We are heading for another property bubble because there is no control over the market.

James Fitzsimons

Published 13/04/2014 | 02:30

Activity in the property market has ramped up
Activity in the property market has ramped up

The property market is returning to normality, but normal back then was mayhem and that's where things are heading again. Last year prices in Dublin started to rise, even though they were still falling outside the capital. That is changing and most places nationwide are experiencing growth. We are heading for another bubble because there is no control over what is happening and the Government is fanning the flames.

The Minister for Finance, Michael Noonan, has trashed the idea of another property bubble. It's easy for him to say. He and the cushioned elite may have no worries about where the money comes from to pay the bills. But many private sector workers and the self-employed have carried this burden for far too long.

Frontline and middle-ranking public servants are suffering too. It's high time the minister faced the facts. Things have got to change, or the frenzy will start all over again.

There is no shortage of young first-time buyers waiting to get on the property ladder. In Ireland we have a strong desire to own our homes. If you can buy at affordable prices, all you need is sustainable income to pay back what you owe. If prices go up, it gets easier over time, especially if what you earn rises too. Then you can start to save, invest and plan your financial independence for when you retire. The financial crisis changed all that.

There are many thirty-somethings waiting to get on the ladder too. Dysfunctional banks destroyed the mortgage market for them, but it's time to make a move before prices spiral out of control.

Average prices had fallen by more than 50 per cent around the country. So it's no wonder they have risen by up to 20 per cent. This might only be in the most sought after areas and the capital, but it will bring the rest up too.

The banks are not lending in spite of what they say, at least not like they were before the recession. Two out of three houses sold last year were to cash buyers. The Government is relying on the fact that money is in short supply to stop the property market from overheating. But hard as it is to get a loan, that will change as banks fight for market share as consumers try to get a foot on the ladder.

Tens of thousands of homes are lined up to be repossessed and sold. This will help build up bank reserves again even if they incur some losses in the process. Cash buyers and those who are looking for a better return on their investments will have the best bargains. By the time the banks start lending again it will already be too late for those who are struggling to get on the ladder. Whatever they eventually pay for their first property, it will be a lot more than it should be and the whole cycle will start again.

Single people will be hit hardest, as they try to satisfy the banks' conditions about sustainable income and deposits. Based on CSO statistics, an average worker might only be able to borrow between €90,000 and €110,000. Even in the current market that won't buy much and prospective buyers need to save at least a full year's pay to have as a deposit. For couple it is easier. Rent a room relief is a tax incentive that could help single people. Mammies and daddies can expect to have their little pets around as they scrimp and save for the deposit.

Public servants, on average, earn 50 per cent more than their private sector counterparts. So they can expect to borrow more. Let's say they get €140,000 to €160,000. They too need to be thinking of squirreling away at least one year's salary to have as a deposit. But what they have going for them most of all is certainty and sustainability of income which the private sector does not have.

Prices are still half what they were at their peak and we are told there is a shortage of supply. House completions are down to about 8,000 annually. At their peak in 2006 they were more than 10 times that.

There was a certain amount of public outrage last week when it emerged that the best know bailed-out developers were back in the market. Maybe we need them to satisfy our impending needs. Knowing what we do and if they've learnt from past mistakes, it could work.

There are still 300,000 unemployed, or underem-

ployed construction workers that need to get back to work. When they do, we may have turned the corner. Consumer spending needs to go up, but not property prices. Nama tried to keep property prices artificially high, just as Michael Noonan wants to see them continue to rise. It would be a disaster for the country if the Government let prices spiral out of control again.

The Government is responsible for many of the problems we have. It fuelled property prices when it gave grants to first-time buyers. Rich developers paid only 20 per cent tax on their profits when workers in the private sector and the public sector paid tax of more than 50 per cent on what little they earned.

Speculators got unlimited tax relief for interest they paid on loans that helped them drive up property prices. Even now residential landlords can claim tax relief on 75 per cent of what they pay at the highest rate of tax. But families get nothing and tens of thousands will be evicted because they can't pay back what they owe. Tax relief is fuelling property price inflation to the detriment of homeownership.

This Government is making the same mistakes that the last one did. It could have learned from their mistakes, but it didn't. The rich get richer and the rest get nothing. Many families in negative equity paid stamp duty of 9 per cent on overvalued houses that they stand to lose. They still have to pay property tax and water charges are coming soon. To make it even worse speculators who had the cash to buy up to now, are tax-exempt if they keep the property for seven years, placing an even greater tax burden on the most vulnerable.

The bubble is definitely coming. By the time the cash runs out the banks will be lending again to keep inflating it. They will fund it from the families they dispossess. Little has changed, and it's no better than it was. Canvassing politicians should consider travelling in armoured cars if they don't change their strategy. If they can't see where they are going wrong, the electorate soon will.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

Sunday Independent

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