Get housing in order before interest rate hikes strike
As the population grows, we need to start building houses again – but this time in the right places
Published 30/03/2014 | 02:30
'Are we witnessing another property boom?" That question has been on the lips of many who witnessed the spurt in house prices during the autumn. The answer to their question is 'No'. So far.
Yes, house prices can and should be growing not back to 2007 levels but back to levels prevailing around late 2004. But that process should be steady and managed. And it should result from a combination of a planned increase in bank credit, housing supply and home-buyer purchasing power. And all three of these must be co-ordinated. Or else, in a different way to before, the housing market could once more become a national headache.
To use some folk wisdom, the latest property market data is a case of "in like a lion and out like a lamb". From the lion's roar last autumn, price trends in February sound more like a lamb's bleat: nationally, prices are up by just 0.1 per cent. In Dublin they are down 0.6 per cent.
A fortnight ago we were worried about stalling exports: as the pharma patent cliff came to an end, GDP fell by 0.3 per cent in the last quarter of 2013. Thankfully, Intel has this week put the Viagra back into our export outlook. But a stalling housing market is less easily corrected. As well as affecting financial perceptions, it could harm consumer-confidence spending and ultimately jobs. Already there is a sign of retail sales spending falling by 1.5 per cent in February when motor sales are stripped out. And with European Central Bank rate rises due from 2015, the headwinds will be turning against the consumer in the coming 12 months. Restoring confidence and purchasing power to consumers and homeowners has to be done. And it needs to start this year.
By any metric the housing market remains on the floor. At half of peak 2007 levels, prices are one-third lower than they should be: with retail interest rates, nominal incomes and employment at late 2004/early 2005 levels, that is broadly where house prices need to be as well. With the population up 400,000 on 2005 (and employment at the same level) prices could, bank conditions permitting, conceivably outstrip 2005 levels and anecdotal evidence from some transactions in Dublin tally with this. The challenge for government will be to ensure that house price growth is not excessive but controlled and driven by healthy fundamentals. Not by an unhealthy combination of growing credit chasing constrained supply.
First let's look at where we are on the credit front and then let's examine supply.
Compared to a year before, mortgage approvals are, according to Irish Banking Federation data, 32.6 per cent up. But compared to January, they are more lamb-like, down 5.6 per cent. The double digit growth looks like the bad old days. But given the market's very, very low base, it isn't. In fact, if you annualise February's mortgage approval and total it for 2014 then you get the lowest level since 1972, a year when our population was two-thirds what it is now. Hardly a boom, you'll agree. In a normal market around 5,000 mortgage approvals would occur each month. The current rate is less than a third of this.
So even if they are higher than last year, mortgage approvals need to keep rising. But approvals is one thing, affordability another. The "we all partied" narrative of collective guilt developed during the crisis was an understandable but typically groupthink reaction to the crash. And like all groupthink it was wrong.
If you want to understand the eagerness of most of those who bought houses just look at the plight of those who didn't and who now face eviction because of insolvent landlords or because their rents have become unaffordable. Who would want to rear a family in these conditions? Until a better regime of rental accommodation is developed we have to stop judging and punishing those who buy. Instead we should be helping them.
From a purely macroeconomic point of view, the likelihood of an ECB rate-hiking phase from next year should focus the Government's minds on the need to preserve the purchasing power of middle Ireland by using mortgage interest relief as an effective instrument to protect indebted homeowners from unbearable strain.
This will also prevent an artificial cause of house price trends – interest rate rises and falls – from distorting a market that should be driven by healthy fundamentals.
Which brings us to the final piece of the jigsaw: supply. Much of the dysfunction during the boom era was due to the stop/start nature of housing construction. From under-supply we went to over-supply. Now we are back in an era of dysfunctional under-supply.
Until recently the narrative was that after the last coffin ships sailed for Americay and the last citizen had turned out the lights there would never again be another house built. How wrong this was.
Far from the market being haunted by "100,000 empty properties" it is now bursting at the seams due to a population increase that was correctly predicted by this economist. Even if there were a "100,000 vacant properties" the 330,000 rise in population that this economist predicted in 2007 – and which has occurred – creates huge latent demand. Demand which government should be spreading around Ireland by realigning spatial transport and foreign investment strategies.
And by reaping what I call the density dividend: building higher density but well-designed apartments for singles and young couples in urban centres while confining low-density housing estates to outer suburbs (not to mention fast-tracking planning permission for land tracts in Dublin, some of them the size of the Russian Steppe). The housing market should never again drive economic growth. But nor can it be allowed to languish. Economically – and politically – this is one market that government needs to get right.
Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm
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