Housing market must obey laws of gravity – and fall
It is foolhardy to suggest there is no need to fear another property bubble.
When house prices rise and fall by as much as they have in recent years, the prospect of another property bubble is real. But while the State's only hope of recovery depends on upside market volatility, the disastrous strategies of the past will bring the system crashing down again, and sooner than we think. Light-touch regulation combined with reckless lending destroyed the global economy and plunged the Irish economy into recession. Those who benefited least from the Celtic Tiger are paying the highest price from the austerity it imposed.
It is foolhardy and just plain stupid to suggest, as the Minister for Finance Michael Noonan has done, that there is no need to fear another property bubble. If the Government's only interaction in the property market is to drive prices higher, the market will eventually crash. Greed, panic and unchecked speculation will inflate the bubble until it bursts.
We are in recovery, but the powers that be don't know what to do. The Housing Agency that advises the Government claims we need 80,000 new homes over the next five years to cope with demand and nearly half are needed in Dublin. Without responding to demand, prices will be driven higher. There were about 9,000 units completed last year. Ten times more were built in 2006 and look what happened prices then. Prices can only go one way and that may be out of control.
Only cash-rich speculators can buy the cheap properties that are out there right now. Mothers with young children have to sleep in their cars if they can't find somewhere to stay, and rent prices are rising too. There are plenty of ghost estates and derelict sites awaiting development to satisfy demand at a reasonable price. But politicians are more interested in the seats they can win in Europe, than the crisis we are in back home.
We've reached the bottom, and even if it could go lower, prices are rising and panic has set in. If the banks were lending the problem would be more acute. Meanwhile, the Government dithers without a housing strategy, or a solution to the mortgage crisis.
Promises of tax cuts have already been mooted in spite of the fact that more austerity is on the cards. Hairbrained tax-based property schemes benefit a few but are bankrolled by everyone else. They can work, but not without carefully planned controls, and then only in a stable market, which we don't have. When the Government pays experts to justify their actions, they get what experts want, which is not what we need.
When the majority are dependent on tax relief and grants to get their foot in the door, prices are too high and tax relief will only drive them higher. At one time there was no limit on the amount of tax relief you could claim for interest on loans to buy a home. Now the relief is almost gone. How long do you think that will last when votes are needed? It's easy to bring in tax relief to help those in need, but it takes skill to control it and make it work as planned. They didn't have the skill before and they don't have it now.
They pander to the needs of those who shout the loudest, but they don't calculate the cost until it is too late. There is unlimited tax relief for those who borrow to buy commercial property. Speculators who invest in residential property can even claim 75 per cent on everything they pay. Homeowners are at a disadvantage and the system continues to work against them. Misplaced tax relief drives prices higher and dispossessed homeowners are left with the bill.
Senseless tax relief and subsidies make it attractive for speculators, but even they were burned in the end. The system doesn't work and the problem is 10 times worse than it was.
It's bad enough to be out of work, but it's worse still if you lose the roof over your head. While government policy leaves it for the market to correct itself, the bubble grows. We have a banking crisis because the banks won't lend to the people who need it. We have a property crisis that is getting worse because the Government won't help those in trouble. It's hell-bent on bailing out the banks at all costs, even if it makes the property market inefficient.
More than 50 per cent of distressed borrowers face losing their homes because it's up to banks to offer alternatives. Cash-rich speculators will drive property prices higher, and by the time banks start lending, those waiting to buy homes will have been priced out of the market. Eventually they will be forced to borrow more. This increases the risk of default and fuelling the bubble. If the Government can't help create the jobs people need to pay for their homes, the EU needs to divvy-up. We bailed them out once, they should return the favour.
It was crazy to save bondholders who could afford to take a hit. We didn't have to do it and everyone knows that now.
The system has only survived because of the terrible austerity the Government imposed. Just about everyone contributes something whether they can afford to or not. It might only be the Universal Social Charge, but for some even that's too much.
Until banks step back from the mortgage crisis and accept their part in creating it, it won't get better. We were told the Central Bank would make them do it, but it didn't. It would be contrary to EU policy. Now they would have us believe we don't have a problem at all. But we do, it's getting worse and it requires the Government to face the facts before we are plunged right back into it.
Forget tax incentives to solve the problem. If they took back the relief that's already there, the market would collapse even further. The price might be right, but the economy could collapse.
There is a bubble forming. Government policy is inflating it and reckless banking will make it burst. It's the Government's job to make the system work. It screwed up any chance of a solution, by leaving it for banks to fix, when their goals created the problem. Must there be another change of government before we get things back on track? The ingredients are all there. All we need is the right cook.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning