How you can stop a property bubble from bursting
Bad planning and over-building in the wrong places are how we got into mess before
In the bad old days, before banking crashes, it was difficult to get a mortgage even if you had managed to put together a deposit equal to 15 per cent, or even 20 per cent, of the purchase price.
And it even mattered if you had a steady job into the bargain. Then along came 100 per cent mortgages, parental guarantees, fictional income statements and, hey presto, everyone with a pulse became a plausible credit risk. The banks lent into both sides of the market, financing both the no-money-down purchasers and, it now appears, developers, many of whom had little or no skin in the game either.
There was then, as there is now, excess demand in Dublin and a shortage of zoned and serviced land in the right areas. Builders decamped for the midlands, many of whose towns and villages are now disfigured with vandalised and unsaleable ghost estates. The builders chose these locations not to meet local demand but because they could get planning permission in these areas. The demand was expected to come from Dubliners expected to commute.
It is clear that, especially in Dublin, there is now a shortage of certain types of accommodation and prices have begun to increase, from admittedly lower, pre-bubble, levels. Precisely why this should be seen as a problem is not entirely clear but the Government has nonetheless decided to come up with a solution.
The banks' balance sheets are already stuffed with mortgages and other property-based loans, many of them non-performing, and bank regulators ought to be cautious about permitting banks to increase their exposure to this volatile line of business.
The Government's solution, revealed in the Construction 2020 document, is a series of reasonable measures designed to free up supply, particularly in the Dublin area where prices have been rising most rapidly. But ministers have also been hinting at providing State guarantees which would result in 95 per cent loan-to-value ratios on new mortgages. The bank would extend perhaps 80 per cent or so, secured on the property and the loan repayment capability of the borrower. The State would take the risk on a further 15 per cent, leaving the buyer with just 5 per cent to find in money upfront.
At one time, mortgage lenders used to insure the top slice of mortgage credit risk in the commercial market, an option which is presumably still open at a price, so the Government would appear to be toying with the idea of offering this top-slice insurance at a price the insurance market will not match. Perhaps there is no price at which the insurers will take on the top-slice risk on 95 per cent loan-to-value mortgages, and perhaps they are correct.
Offering a demand-boosting initiative nationally in the face of a local supply constriction looks like a thoroughly bad idea. The Irish banks have become more and more like building societies, already heavily exposed to a residential housing market which is recovering only in Dublin and a few other urban areas.
In most of the provinces, houses are still affordable, without excessively generous loan-to-value mortgages. The problem in Dublin is a supply problem, not a shortage of people willing to take a punt on house prices without having to put serious money down. If anything has been learned, it is surely that the combination of restricted supply and no-money-down mortgages does not lead to good outcomes for anyone.
There is supposedly adequate zoned (but not necessarily serviced) land in the Dublin area and the four Dublin local authorities appear willing to take what measures are open to them to get supply going again. One of the lessons of the boom and bust is that there are no ghost estates in the Dublin area.
Not merely were far too many houses built nationally, many of them were built in the wrong places. Far from being developer-led, as is so often alleged, the pattern of over-building in the wrong places was planning-led.
The best inoculation against another price bubble in Dublin is credible policy commitment, from central government and from the local planning authorities that shortages of zoned and serviced land will never again be allowed to emerge in the Dublin area, or in any other area where price bubbles appear to be emerging.
One of the components in the price explosion during the last bubble, not the most important but a revealing factor nonetheless, was the escalation of development levies, especially in Dublin. The overdue return of residential property taxes and the imminent introduction of water charges should see these levies reduced sharply and this process has already commenced in Dublin.
The British government reaction, faced with a resumption of residential price growth especially in the south- east of England, was the introduction of the so-called Help to Buy scheme, a set of financial incentives for would-be purchasers likely to be priced out of the market. The scheme has been widely criticised and represents an elementary confusion about the source of the high-priced housing in London and surrounding counties. The problem is one of supply deliberately constrained by green belts and density limits. The problem in the Dublin area has similar origins and will not be addressed by an Irish variant of the British government's mistake.
A pressing issue, assuming that the 95 per cent mortgage plan is abandoned and the local supply problem recognised for what it is, will be the supply of finance for developers. Many are bust, struggling with insolvency procedures or have done a runner. Some mechanism needs to be found to separate historic debts still to be resolved from the ability of honest-but-bust developers to get back into business on a commercially prudent basis.
There are, believe it or not, some developers who went bust without chicanery, and they deserve a shot at getting back to work.
The banks still have loan books, even after the hospital pass of the larger developer loans to NAMA, excessively concentrated in property-related lending, and some thought needs to be given to more creative financing mechanisms. One of the ingredients in the last bubble was the pressure on first-time buyers to buy now, since prices will be completely unaffordable a few years hence. Add in low interest rates, 100 per cent mortgages and careless certification of claimed incomes, and you know what happened next. If loan-to-value ratios are constrained by the regulator to 80 per cent or so, and they certainly should be, a scheme is needed which encourages would-be buyers to accumulate the required deposits as easily as possible. This could take the form of a first-time buyer's deposit account. Those who agree to save exclusively for the purpose of putting a deposit down, say within the next five years, could be offered exemption from DIRT tax, now at punitive levels given the miserable deposit rates on offer. The banks could chip in with some modest improvement in the deposit rates too. If the funds are not drawn down for house purchase within the stated period, the account reverts to a normal savings account with both benefits deducted.
Finance Minister Michael Noonan said last week that it was difficult to expect young people to accumulate 15 per cent or 20 per cent of the price of a house deposit. If they are unable to manage this level of deposit over a period of four or five years, they are unlikely to be a good credit risk for the mortgage itself.
Until about 15 years ago, this country's housing finance market seemed to work reasonably well, without crashes and without excessive loan-to-value ratios.