Supply, not easier mortgages, is the way to solve our housing crisis
The Government is repeating the same mistakes that led to previous bubbles, writes Colm McCarthy
Published 01/11/2015 | 02:30
At the end of September, Dublin prices for residential properties had increased by just over 5pc on the January figure.
January is the month when the new Central Bank rules on mortgage lending caps were announced. Despite all the wailing, the Central Bank action has not stopped the inflation of prices in Dublin, where a three-bedroom starter home in the less-favoured suburbs can cost up to three times the cost of the same home in large parts of rural Ireland.
The excess cost of accommodation in the capital has been around for so long now that people have begun to see it as part of the natural order.
While there may be a genuine scarcity of trophy homes in the sought-after inner districts, Dublin remains a notably low-density city.
Some of the outer areas at a distance of only eight or 10km from the centre contain rolling prairies of undeveloped land.
There are working farms inside the M50. Young Dublin households have meanwhile re-located 30, 50 and even 100km from the city in search of affordable homes, whence they can commute through the unoccupied prairies.
The Dublin accommodation crisis is the outcome of policy, not some manifestation of historic inevitability. There is no shortage of land for housebuilding within easy distance of the city.
There is a shortage both of residential zoning and of environmental services for land already zoned.
These are man-made shortages, the culmination of decades of political failure in urban planning.
The availability of decent starter homes in most provincial areas at prices that first-time buyers can afford is no tribute to political foresight either.
It reflects the kick in the tail of the Irish housebuilding bubble. When housing output rose to unsustainable levels in the bubble's final years, the houses were built in the wrong places.
There are no ghost estates around Dublin.
Unoccupied homes are freely for sale in many rural counties at prices below the cost of construction. In Dublin, what few are being built are selling for multiples of the construction cost.
Construction costs have, moreover, been increased by new building-control regulations. At the recent conference of the Dublin Economics Workshop in Athlone, architect Maoiliosa Reynolds presented data attributing as much as €30,000 of the cost of a new unit to building regulations introduced since the bubble burst.
Equally effective regulations in the United Kingdom, he argued, add just a couple of thousand to costs. Some local authorities also impose large up-front levies. Meanwhile, the rolling prairies on either side of Dublin's M50 ring road remain the preserve of grazing cattle.
Politicians facing this type of accommodation crisis have essentially two options. The first, and the only durable solution, is to address the issues which constrain housing supply. The second, and apparently irresistible, option is to ignore the excessive prices and find some method to kick the problem into the long grass.
The best way to do this is through the manipulation of the credit system: arrange for banks to lend people enough to pay the excessive prices, at high loan-to-value ratios and dangerous income multiples, and then hope that interest rates stay low.
In the rental sector, the temptation is to restrict rents or to provide state rental subsidies; meanwhile doing nothing to address cost and supply issues.
Any policy which sustains high prices or even increases them further will be popular with the large majority who already own their homes and will please those who were sucked into negative equity during the bubble.
It will also, temporarily, make the residential loan books of the banks look healthier. Down the road, some future government might face another crisis when the chickens come home to roost - a straightforward assignment for the chickens, since they have travelled this route before.
A Government expecting to be re-elected should, however, pause for thought. At the current rate of increase, Dublin house prices will be back in high bubble territory before the end of the next five-year Dail term.
The rate of increase in 2015 to date, even with the dampening effect of the Central Bank's mortgage lending caps, works out at about 7pc per annum. Prices are already back to about 65pc of the bubble peak.
If the Government sincerely believes that today's prices in Dublin are high enough, it should have the courage to say so and proceed to take the actions needed to prevent any further increase.
The press reported Minister for Finance Michael Noonan, on September 18 last, as pressuring the Central Bank to review (he meant relax) the mortgage lending caps.
He told RTE's Today with Sean O'Rourke that there are no starter homes being built in the capital at the moment.
He said that was because young couples couldn't raise the money for the homes.
"Anybody who goes around Dublin knows that any house building that goes on is middle-price houses; the starter homes are not being built.
"It's not because (starter homes) are not needed, it's because young couples can't raise the money to fund it," Mr Noonan said.
He acknowledged that the bank had been right to set the caps at current levels - in January - saying house prices were going up quickly and there was a risk that the market could overheat.
Prices are still going up quickly and will go up faster if the Central Bank is unwise enough to expand the availability of mortgage credit.
Mr Noonan's colleague, Environment minister Alan Kelly, is directly responsible for housing policy.
In this newspaper last Sunday, he ramped up the pressure for a relaxation of credit availability.
Speaking in the wake of Philip Lane's appointment as the new governor of the Central Bank, Mr Kelly insisted that something must be done to address the "number one" problem in the country.
He said that while he welcomed intervention in order to prevent another bubble, the bank's new rules had "absolutely hammered" house building in the capital.
"What that means is we need to ensure that developers, builders, are going to build houses in Dublin that my generation and those younger than me can actually afford, in the €300,000 bracket, because the largest amount of development that's going on in Dublin is at a scale that's beyond that," he said.
Under the Central Bank rules, first-time buyers of a €300,000 home can be granted a mortgage at a loan-to-value ratio of no less than 87.3pc.
One bank offers a 2pc cashback deal, borrowed from the car showrooms, which makes the LTV effectively 89.3pc. Does Mr Kelly think the figure should be 95pc, or 100pc?
There is also a loan-to-income requirement, which constrains the mortgage loan to no more than 3.5 times gross income.
On a loan of €262,000 (allowable on a €300,000 home) this corresponds to a gross income of €75,000.
Does the minister think it would be prudent to lend such large amounts to people on significantly lower incomes?
Bank crashes through history have most often had their origins in lax lending on property, including residential property, as was clearly the case in Ireland.
The only safe way to make housing affordable in the capital is to expand supply, without loosening mortgage credit.