Sunday 23 November 2014

First-time buyers must resist the lure of risky loans despite the soaring prices

Published 25/07/2014 | 02:30

The Central Bank is considering putting limits on the size of mortgages banks can give out
The Central Bank is considering putting limits on the size of mortgages banks can give out
The cost of buying a house in Dublin has surged almost 25% over the past year

House prices are rising again. Residential Property Prices rose by 12.5pc in the year to June, while in Dublin houses rose 24.4pc. Should we all be delighted? It depends what side of the market you're on, and where you live.

Buyers, specifically first-time buyers, are getting shafted, as tighter credit conditions and 2005-level house prices push them out in favour of the cash buyer, the institutional investor, or the punter from the rest of the world looking for a decent rental yield in this low inflation, low interest rate, low yield world we now inhabit on this side of Europe.

Those on the sell side of the property market outside of Dublin also fare badly, as house price inflation is a mere 3.5pc there.

The increases are coming from a lack of supply. Standard economics tell you that these price increases will encourage more people to come back into the market, getting their house on the line so they can trade up, trade down, pay off debts, and so forth, and this increase in supply should help to moderate any further price increases. But this standard view ignores just how indebted many households are – the prices being talked about are still not high enough to repair the damage done to balance sheets by the global financial crisis. The view also ignores how strained credit conditions are in the economy at the moment. Only €539m of new mortgage lending took place from January to March of 2014. The prices are driven by a market lacking the key ingredient for adequate price discovery – liquidity.

Without liquidity, prices 'jump' around a lot, meaning it is much harder to see trends, or to get a sense of what the 'average' price is for a given asset. As an example, go to propertypriceregister.ie and search for the sales from January to June of this year. I chose Limerick, but any county would do. I found 488 sales in Limerick. The lowest sale price in Limerick was €8,000, the highest sale price was €1.1 million. These properties are not the same in quality, locations obviously differ substantially, but the large variation is there.

By location, just picking the village of Murroe at random, only 11 sales were made over a six-month period. Can you use 11 prices to get a really good sense of what a similar property in that area would likely sell for? Probably not. This illiquidity is driving an undersupply of future houses.

Expect prices to rise further if the cash buyers still want more of the Dublin residential action. It is their market, with 50pc of all transactions taking place in cash. Quite honestly I've never met a cash buyer. I'd like to understand more about them, and what the circumstances are for their cash purchase. Is it saving for a place over the past six years, or bequests from wealthy relatives, or something else that is providing all of this cash for these sales? I must say I'm deeply curious to understand their motivation and their stories.

The clear threat of further price appreciation may drive more first-time buyers to engage in the kinds of risky borrowing which we now know took place during the boom – two car loans and a mortgage plus a loan from mum and dad – and this threat might also cause our pre-election, vote-hungry politicians to want to change the rules banks work under to allow the first-time buyers a shot at getting on the ladder. This impulse should be fought at every turn. Yes, voters will reward the politicians, but they will also sow the seeds of the next unsustainable house price bubble. And not many of us want to see that.

Notice I didn't write 'None of us want to see that'. The truth is, quite simply, that some people make fortunes from bubbles, and bubbly economic systems often represent vast transfers of economic wealth from one section of society to another. That transfer has been from the young to the old, in the last boom. It would be a shame to see the same transfer again in the same generation. We should have learned our lesson. But nothing is learned for long.

Irish Independent

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