Thursday 23 October 2014

History could repeat itself if we let property be the dynamo that drives economy again

Published 22/07/2014 | 02:30

NAMA Chairman Frank Daly, left, and Finance Minister Michael Noonan. Tom Burke

Two years ago, being a mortgage broker was a bit like being an umbrella salesman in a drought. Now parts of the country are being treated to the spectacle of queues for house viewings, and the brokers, auctioneers, and solicitors are back. How did this happen, and is it a good thing?

At one stage, not long ago, the national business model was to sell bits of the country to one another using cash our banks borrowed from abroad. The approach essentially transferred an enormous amount of cash from the younger members of Irish society to older members of the rest of the world.

When the business model blew up like a mountain goat on a StairMaster, the taxpayer stepped in to socialise almost all of the losses, bailing out Irish depositors, Irish risk takers and international creditors while keeping the ECB happy. The total cost won't be known for a generation but it is clear Ireland has lost a decade of development at least.

And yet.

House prices are rising. Dublin house and apartment prices are up 22pc so far this year but the rest of the country is pretty flat.

Supply is a key concern and this problem will not change rapidly. Leitrim County Council gave one residential planning permission in the first three months of this year. Longford granted five. Dublin's authorities granted 103 permissions over the same period.

House price appreciation is something that Finance Minister Michael Noonan says he wants to see. Not a bubble, of course, but something bringing house prices 'in line', whatever that means.

The queues are back, and this is down to the chronic undersupply of quality homes and commercial spaces in the capital. Regulatory strictures are probably holding back a lot of supply, as well as credit constraints.

NAMA has recently said it will get involved in the housing market to, as NAMA CEO Brendan McDonagh wrote in this paper, "plan, fund and drive the delivery of housing from NAMA-controlled sites in Dublin". The level of interference in the Irish housing market is a significant feature of the market. NAMA will, in effect, create the supply the market wants to see.

Sir Arthur Conan Doyle gave Sherlock Holmes a sort of scientist's credo when he wrote: "I have no data yet. It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts." Holmes had it about right.

Look at the data: housing is a really strange commodity. Even at the best of times, housing is infrequently traded and trades are subject to search problems and typically large transaction costs.

The dividends that housing provides are unique to housing in the sense that only a structure can provide shelter and in the case of owner-occupancy these are very hard to quantify.

At the level of the macroeconomy, the value of the asset class is enormous, and in Ireland, local and national governments interfere significantly in housing and mortgage markets.

Given the scale of home ownership, we all have a stake in seeing a house price recovery. That is very dangerous, as the Government, now in full re-election mode, will work hard to provide that recovery in prices. The cost may be a return to the kind of bubble economics we so recently left.

We now have a lot of information on the source of property price appreciation, thanks to Trinity College Professor Ronan Lyons.

The data shows us that house prices are procyclical – they move with the economy's upswings and downswings.

There is further international evidence that house price changes cause this upswing and downswing as well. The economy is very fragile, any recovery has to take place over the medium term, and a house price 'bust', even at the low levels of transactions we are seeing, would not help that recovery in any way.

Weak governance, greed and incompetence got us here. Electoral incentives might bring us right back again in a few years. The Irish property market is no longer the economy's determining sector, but it could be again, and those cheerleading any new boom need to explain how they'll cope with the new bust that will inevitably come.

Stephen Kinsella

Stephen Kinsella is Senior Lecturer in Economics at the University of Limerick

Irish Independent

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