Friday 9 December 2016

Property bubble? There's none. We are too laden with debt to have one

What's happening is more likely early-stage recovery from the PTSD associated with the implosion of middle-class wealth, writes Eddie Hobbs

Eddie Hobbs

Published 06/07/2014 | 02:30

Needed: A steady market where house prices don't ever run away again from wage growth.
Needed: A steady market where house prices don't ever run away again from wage growth.

London's residential property prices, now averaging £400,000, are up nearly 26pc over the past year - that's 30pc above their 2007 levels compared to national price rises of nearly 12pc, prompting the Bank of England to restrict banks from forking out more than 15pc of new loans to those borrowing over 4.5 times income. But just because Dublin prices have advanced at a similar rate to London over the past year doesn't make this a bubble. What's happening is more likely early-stage recovery from the Post-Traumatic Stress Disorder (PTSD) associated with the implosion of middle class wealth.

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Back in the day you could rely on economist Hyman Minsky's narrative on the behaviour of bubbles to overlay on to the Irish property market, although written decades before, it proved uncannily accurate in the run up to Ireland's property implosion.

First, there's a positive rumble in an out-of-favour asset class. The old hands make some loot, causing the Great Eye, the credit market, to sit up and take notice. Ever eager to make a buck for themselves, banks decide to support the sector with some extra credit. Prices rise higher. Mavericks next arrive in ever increasing numbers, attracted by the lift, the credit and the easy killing. More credit is pumped in. Prices rise further. It becomes a self-fulfilling prophesy as bigger numbers chasing smaller supply bid up prices to speculative levels beyond fundamental values.

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