Brendan Keenan: Pub talk about property rings true
Our love affair with houses may not be over just yet as the Government seeks to re-ignite a depressed market
IF memory serves me right, there is a scene in McCarthy's Bar -- that hilarious, astute observation of modern Ireland -- involving a traditional music session where the Europeans are paying rapt attention to the music, the Americans are taking pictures, and the Irish are talking about property prices.
Since the book was published in 2008, the comments of the sadly missed Pete McCarthy endorse the much duller conclusions of several economists, that the property bubble began before the credit explosion of 2003. That would help explain the size of the burst.
The market may be shattered, but is the love affair with property over? Quite possibly not. Last week, Klaus Regling, the German official who helped prepare one of the three reports on the banking crash, was in town. Mr Regling now runs the bailout fund, officially known as the EFSF, but he has earlier form than that where Ireland is concerned.
He was the senior bureaucrat to the EU Economic and Monetary Affairs Commissioner at the time of the Irish bubble. He was gracious enough to accept some blame for not doing more to try to deflate the bubble -- which is more than most of the Irish participants have been willing to do.
He said, jokingly, that it was difficult for a German to grasp the Irish fondness for property. Or maybe half jokingly. The German approach is to deter investment in non-productive property; especially with borrowed money. It can be hard to get a mortgage worth more than 60 per cent of the purchase price.
The Germans have better things to do with their savings, such as ploughing them back into productive business. Unfortunately, their businesses were so productive in the 2000s (still are), that the surplus earnings were lent to the Irish, Americans and Spanish to buy property.
Mr Regling echoed a point made some time ago at the same Institute for International and European Affairs (IIEA) in Dublin by Axel Weber; then president of the Bundesbank. It would appear, he said to have been so easy to stop the runaway Irish market in its tracks.
Under the new rules coming into force in the EU, the European regulator could have told the Irish regulator to put a stop to the 100 per cent plus mortgages and confine future home loans to 80 per cent of the purchase prices. That would indeed have halted the housing market in its tracks, but it would have been anything but easy to do.
Imagine the furore if eager buyers were required to cough up €80k in folding money to buy in that lovely new estate; a snip at €400,000. The fact that it could now be purchased for €200,000, and only €40,000 deposit would be required, would have been no consolation then.
I don't think I'll be around long enough to see the day when the new EU regulator has to order a halt to an Irish property boom. Even so, re-igniting the property market seems to be the area of economic stimulus where most of the action under the new government is taking place.
One of the original criticisms of Nama (National Asset Management Agency) was that it was a Fianna Fail wheeze to support property prices. Now that it appears to be doing exactly that, and now that the crash is all too real, supporting the property market seems to many to be a good idea.
One would like to think some lessons had been learned, though. It is true that activity in the market is far below normal and there must be pent-up demand for homes. A lot of jobs would be saved or regained if buying and selling were more vigorous, whatever the prices involved.
It is clear from auctions there is a price at which property will shift. It is just that it seems to be more than 60 per cent below previous peaks. The trouble is that, the cheaper the prices, the bigger the losses for the banks and Nama.
A choice may have to be made between encouraging purchases and limiting losses. The choice should be in favour of purchases. Finding the price at which people will buy, whether it be houses or office blocks, is the best way to finally determine what those losses are -- and perhaps start a process which reduces future losses.
For house-buyers, the challenge is finding the cash. The banks may have to be leaned on to provide more mortgages, but there is a great deal to be said for house-buyers having to put 20 per cent of their own money into the purchase.
But with taxes rising and incomes stagnating, it will be some years before any significant number of purchasers have that kind of equity. Until then, bank credit and Nama cash may have to be wastefully allocated to the housing market. It will be more McCarthy's Bar than the Bundesbank for a good while yet.
