Monday 11 December 2017

Coalition must clarify property goals

EVERYBODY is having a pop at the banks this week but our leaders are still shy about telling us what the game plan is when it comes to property.

It is no good having Taoiseach Enda Kenny standing up in the Dail, as he did yesterday, and telling the world that banks will be forced to lend to home buyers when nobody knows what he wants. Mr Kenny needs to spell out clearly what the Government wants when it comes to house prices.

This is simple enough: house prices can only rise, fall or remain stable.

There would be benefits and disadvantages to each of these eventualities. Rising prices would take some of the pressure off the banks and reduce negative equity which might encourage people to start repaying their mortgages in the hope that their house will one day be worth something.

Stable house prices could also help consumer confidence to recover and allow people to begin planning for the future.

Falling prices would restore the country's competitiveness, reduce wage pressures and reward those who held off from buying. It would, in other words, restore moral hazard rather than the existing system which does almost the exact opposite. At present it is difficult to work out what the Government is playing at, but on balance it seems likely the Government is trying to inflate prices. The last Budget introduced generous tax incentives for first-time buyers despite the fact that almost every report into the collapse of the economy criticised the tax reliefs available to home buyers.

Those reliefs will allegedly end in December, but history suggests that governments of all political hues cannot resist tampering with the market and some other scheme will emerge.

The other sign that the Government wants property prices to rise was yesterday's curious pledge by Mr Kenny to force the state-owned banks to lend to people who want mortgages. This is not a wise use of the banks' scarce capital unless it is official policy to jack up prices.

There is, after all, no real need for mortgage lending per se. It is not a productive way to use money which could instead be lent to businesses for investment in plant and machinery that would create real jobs.

In fact, there is a good argument to be made for banning mortgages completely when cash is so scarce. To be sure, house prices would fall, but the houses themselves would not disappear.

The obvious snag to banning, or more realistically curtailing, mortgages would be the wave of defaults that would follow.

The Government does not face an easy choice. Every decision it makes carries grave consequences but it would be useful for Mr Kenny to make his preferred outcome clear. After all, a simple announcement that he wants prices to rise would probably ensure that that happens. That sounds like a much cheaper way of tinkering with the market than forcing banks to lend to people who may not be able to afford the repayments.

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