Hard choices must be made to cope with housing crisis
Published 26/05/2016 | 02:30
If economics is the science of choices, politics may be said to be the science (or art) of making choices. In which case, the housing crisis poses the ultimate political challenge.
It might be better to say "housing crises". Several are occurring simultaneously. All are connected but all involve choices as between different interests and objectives.
There is the debt crisis, where so many home loans are in arrears. Lenders - especially, it is claimed, the new purchasers of loans, are seeking to seize their collateral and evict the mortgagees.
There is the payment crisis, where many families who are meeting their mortgage costs find they absorb so much of disposable income that they are unable to maintain acceptable standards of living. Bad for the economy, and even worse for them.
There is the tenancy crisis, when rising market rents get beyond the ability of previously solvent tenants and lead to evictions and homelessness. Then there is the current issue of the month - variable mortgage rates, which are high by European comparisons.
Such rates add to the hardship of those whose mortgages are close to, or beyond, what they can afford. It is not at all clear that it creates any great hardship in general, and may well be preventing another bubble, but it affects more people than any other of the crises, which gives it political traction.
Above all this, and the root cause of most of it, is the supply crisis. As I mentioned last week, the 2013 medium-term forecast from the ESRI assumed that around 25,000 dwellings per year would be built by now. Instead, the figure is less than half that.
This was more of an assumption than a forecast but, as we see, the striking difference between was assumed would be normality and actual reality has had grave consequences. It is also the case that, had the building industry recovered in line with that assumption, the economic recovery would have begun earlier and employment would have grown even more strongly than it did.
One of many curiosities of construction is that it can shut down almost completely very quickly. Even those who read the property cycle correctly can finish projects, lay off staff, stop buying and hiring equipment and material, and wait for better times.
In theory, it ought to be possible to revive construction quicker and more easily than bust banks or exchequers.
Sometimes it has been, and the results can be dramatic. Any traveller in England must have noticed the endless suburban houses built between the wars. Around three million were put up, largely in response to incentives for developers.
Ah, incentives. They were rare things in the 1930s, and were seized upon eagerly. Now, everything is loaded down with incentives and it is a question of haggling over how much government should pony up.
In this case, though, there is also an argument about disincentives, where the State tries to raise badly-needed revenues with one hand, while offering money with another.
Various figures from bodies such as Chartered Surveyors Ireland say development levies and VAT contribute to building costs which are more than twice the actual price of bricks, mortar and labour. Here is one of many tricky choices: should central government compensate local government for loss of such levies, rather than keeping levies in place and paying subsidies to builder?
A basic principle, albeit more honoured in the breach than the observance, is that government should intervene only when there is market failure. At present, there is catastrophic market failure in house-building. It may well correct itself in time, as analysts at Davy Stockbrokers have said, but we do not have much time.
This is one of those moments for government to take over the market and apply all the powers of the State to build dwellings at a faster rate than even its present plans.
This could require overturning existing zonings, tearing up planning legislation for a period, applying punitive taxes or compulsory purchases on undeveloped land and awarding big contracts to foreign builders.
The reason for such extreme measures is that, without something like them, all the other problems are incapable of solution and there are no good choices to be made.
But even with better supply, the choices will remain difficult and a severe test of political skill.
The basic one is the choice between how much to help the banks, and how much to help the borrowers, both present and future.
There is no doubt the banks have had the best of it so far, which caused the last government a lot of harm but was done for understandable reasons.
Perhaps it was overdone, though. There was little choice under the troika, whose bailout was intended primarily to refinance the banks.
Choices have remained limited since; having to balance the fact that the banks are still not in good shape and that further state financing is problematic against the human and economic cost of large mortgage arrears and evictions, threatened or actual.
The choices which have been made continue to favour the banks.
The favour shown to those willing to buy distressed bank debt - the so-called vultures - has, if anything, been even greater.
Again, one can understand the rush to get debt off the State books. The success in doing so undoubtedly gave further lift to the economic recovery. But the unseemly hurry also carried costs. These are impossible to quantify but they must be considerable.
More than one observer has pointed out that, when a landlord replaces a tenant or owner with a better paying one, the gain is to the landlord and the cost may fall on the State. Until supply improves, the alternative choice is rationing in favour of the less well-off, whether by subsidy or legal protection. That too would have consequences which need careful analysis.
When any choice is made, some gain more than others; some may even lose. The Government's response is to include every choice on offer.
Reasons of space prevent me going beyond a new "Help to Buy" scheme, extension of mortgage interest relief, a possible VAT reduction and a "root-and-branch review" of the planning system - but there are more.
Any meaningful choices will involve state spending. Those at the wrong end of the debt and housing crises have had little from such spending to date.
As the cries mount for income restoration, it is worth considering that this too involves choices from which some will gain and others lose. But consideration (in both senses) is hard when no such choices are presented.