Latest 'property bubble' is an opportunity in disguise
Prudent planning will make the most of the housing shortage – which is what this is, writes Marc Coleman
One of the most hilarious images in the history of cartoons is the one of a terrified elephant standing on a three-legged stool in a kitchen and shrieking while pointing at a mouse.
Last week, a proverbial mouse did run out from under the skirting board. Predictably, news that house prices rose in Dublin by 3.9 per cent during September got a few elephants shrieking and jumping up on three-legged stools. At 12.2 per cent annually, house prices in the capital are growing at their fastest rate since the boom.
But that doesn't change the fact that they are still 50 per cent below peak levels. And as this column has always argued, just as those insane highs reflected a credit glut, the dysfunctional lows of recent years reflect an equally abnormal credit famine.
As anyone who gets the basics of economics knows, house price bubbles are caused when credit supply outruns economic growth. And as a casual comparison between what happened between December 2004 and end December 2007 and what is happening now shows, there ain't no bubble now. Between end 2004 and 2007, mortgage credit grew from €73.1bn to €148.6bn, or by a staggering 68 per cent, and twice as fast as nominal GDP. Not only do price levels remain – despite recent increases – 50 per cent below boomtime levels, but mortgage lending is actually falling by 2.3 per cent annually. More importantly, mortgage drawdowns are a small fraction of boomtime levels.
So this is one teeny tiny mouse. But mice can sometimes roar and what this roar is indicating is not a bubble but a housing shortage. Speaking to the Society of Chartered Surveyors of Ireland (SCSI) last week, Minister Jan O'Sullivan was nervous about accepting the idea that this could be so. Understandably, politicians are reluctant to be seen to talk the property market up.
But Jan O'Sullivan could take a leaf out of her fellow Limerick TD Finance Minister Michael Noonan's book. In Limerick two weeks ago, he said that it was dysfunctional to inflict the sins of the past property market on the shoulders of this one. And he is right. Talking sense into the market is not the same as talking it up.
Having risen as this column predicted by a quarter million since 2007, our population now equates to the demand for around 100,000 new dwellings. Personal disposable income, despite falling, remains at 2005 levels and jobs growth means employment is heading towards those levels as well. So although retail mortgage rates aren't as low as during the boom, side factors compensate for this. Only the lack of mortgage lending is holding the market back.
Correct that and recent price hikes will be seen for what they really are. In her salutary caution, Jan O'Sullivan described them as "delayed demand that is expended in a short burst", ie a temporary one-off. But far from being "expended", sales based mostly on cash by definition are the tip of the iceberg. Once credit reappears, a large cohort of families needing to trade up or buy will be evident.
Speaking at the same conference, NAMA's John Mulcahy called for more building land to be rezoned. SCSI President Micheal O'Connor was bolder still, arguing that we need to build up to 20,000 residential units each year to keep pace with demand. John Mulcahy complained that data on the housing market was "still all over the shop".
He is right. In my 2009 book Back from the Brink I called for an in-depth study to assess the state of the market and where prices might reasonably be expected to settle. Nama has now commissioned the ESRI to conduct precisely such a study.
But we need to go further. If fundamentals point to the potential for price rises, whether that process will be smooth and well-managed or a stop-start joyride depends not on fundamentals but on a very different set of influencers: market fundamentals – income and demand – determine where prices should settle. But what policy-makers – the ECB, Government and regulator – all do determines how smoothly we get there. The ECB will raise rates between 2015 and 2020. But this will hopefully have a gentle impact on house prices as rate rises should slope upwards gently (the impact on economic demand won't be gentle, sadly).
The Government's main influence has been to impose a property tax. Imposing this on those already crushed with debts to repay stamp duty will dampen demand. But by just allowing prudent reasonable rates of lending growth – and reasonable loan-to-value ratios and loan-to-income ratios – to prevail, regulator and banks can counter the dampening effects of fiscal policy and let the market breathe. No one wants to see a return to the insane ratios of six to seven times nominal income. But neither do we want to return to archaic Eighties-style ratios. Between the two is a happy medium that should be set. And stuck to.
Mulcahy and O'Connor are also right on zoning. But as the gap between rising urban prices and falling rural prices shows, we need not just to zone more land, but to base this on sound regional and urban spatial planning. The 2002 spatial strategy – which still drives policy! – should be replaced with one focused around building up seven or eight regional capitals to rival Dublin.
Instead of equating Limerick's gain with Ennis's loss, policy should realise that by targeting regional capitals for densification – population growth based on young people in clusters of dense urban economic activity – you reap increased productivity (or the "density dividend", as I call it). Now that we have good infrastructure, far from denuding surrounding towns this will free them up as high-quality living options, enabling a win-win situation. But whatever we do, we need a plan for the property sector. And we need it now.
Marc Coleman presents 'The Marc Coleman Show' tonight at 9pm on Newstalk 106-108fm