Building plan solid but must avoid new boom
The mortgage insurance scheme proposal is far less distortionary than stamp duty or property tax, writes Marc Coleman
In an article on the property and construction sectors on January 14 last I wrote the following: "2014 is the ideal year to design and implement a thorough seven-year plan to get them back to normal."
Exactly four months later – last Wednesday – the Government came out with a seven-year plan entitled Construction 2020. Its timing (before an election) and content (back to boom/bust?) has been criticised. Certainly the plan isn't perfect. Few are. But a step in the right direction it definitely is. And as for arguments that it could stoke another boom, they are totally wrong.
To see why, think of someone on a crowded escalator in a shopping mall. To get more comfortable they might adjust their posture by taking a single step up or down. But they can't control the speed of the escalator. Likewise governments can change the market with a tax relief or, as proposed now, a mortgage deposit insurance.
But house price momentum is driven by monetary trends (credit growth) and not taxation or schemes and nothing the Government can do can alter the fact that this particular escalator is banjaxed. So banjaxed that guys in blue overalls with spanners from the European Central Bank and regulators are currently trying to get it going again.
When they do the speed of price momentum will be nothing like the 2004 to 2008 boom. Between March 2004 and its peak in March 2008 residential mortgage credit rose from €57.9bn to €124.4bn. On Morning Ireland one presenter inferred that mortgage interest relief had "led" to the property bubble. Others have claimed that mortgage interest relief, speculation about abolishing stamp duty or the failure to impose a second property tax were all factors in fuelling the boom.
This is plain wrong: compared with the €66bn in credit pumped into the market in four short years, all tax changes combined – plus any property tax that might have been levied – were diddly squat in terms of market impact. A mere shuffling of feet on the escalator. And despite a huge rise in population in recent years, mortgage credit collapsed by a third (down to €82.8bn last March) and keeps falling.
Now property prices should not go back to boom levels but were the credit escalator working properly they would be higher than they are, at barely half boom levels. Somewhere roughly halfway between current lows and 2007 peak is sustainable and if Construction 2020 drives them up a bit, as some claim, this will result in less overvaluation and more likely in partly reversing current undervaluation.
The idea that demand is anywhere near boom levels is ludicrous. The last time mortgage drawdowns were this low was 1972 when our State's population was three million. Having risen a third of a million since 2006 the fact that compared with the 93,419 houses built in that year, a pathetic 8,301 were built last year, is also instructive.
The construction job count reinforces this. With an EU norm of 7 per cent of the workforce in construction and our growing population we should have roughly 9 per cent, about 160,000, in this sector. In boomtime employment was too high at 288,000. But at 103,600 it is too low and the Government's target of 60,000 jobs by 2020 seems right.
As for suggestions of "interfering" in the market, this is coming from those who advocated a much greater interference: the imposition on top of stamp duty of yet another property tax on homes, many of which are in negative equity. The Government's proposals for a mortgage insurance scheme are far less distortionary and more benign than this tax on negative wealth.
Another "interference" is in the form of countercyclical deposit requirements. Asking new homeowners to stump up 20 per cent of a house price would have been a good idea in the boom. It is when prices are overvalued that higher security against a possible fall is needed. Now that house prices are too low and likely to rise, requirements should be lower. But financial regulators are famous for locking the stable door after the horse has bolted. In this respect the idea of insuring mortgage deposits is far less the creation of a market distortion than an attempt to remedy one.
The plan's shortcomings lie in its lack of completeness. Where, for instance, is the assistance for second-time buyers in negative equity? And where is the connection with planning and spatial strategies? By planning higher density in urban areas and targeting population in a more clustered way towards cities via a new spatial strategy we could solve the housing shortage and do more besides.
Reaping the "density dividend" we could create viable alternatives to Dublin for attracting investment and jobs, cluster people together more closely (Berlin rather than New York) create more cost-effective urban spaces where younger people live in the centre and families live in the suburbs, making public transport more accessible (more people means more usage and less state subsidy), lower the carbon footprint (close together means you can bus/train/cycle/walk to work) and lower prices (putting more people in walking distance of more shops means price competition).
And if we went further and controlled land prices, introduced better security and quality for rented accommodation and fixed-interest mortgages we could banish any chance of boom/bust forever. Now that would be a plan for the property market.
Marc Coleman is co-author of 'Ireland and Germany Partners in European Recovery' and presenter of 'The Marc Coleman Show', Sundays from 9pm on Newstalk 106-108fm.