Tuesday 20 February 2018

New housing crisis shows politicians still haven't learned lessons from pain of crash

The New Central Bank Building on Dublin’s North Wall Quay
The New Central Bank Building on Dublin’s North Wall Quay
Richard Curran

Richard Curran

Ten years ago, Ireland was on the cusp of a massive economic disaster. House prices this month in 2007 were about to fall from meteoric heights. The freefall would later spread to commercial property values and massive job losses across the economy would follow.

The collapse was truly frightening. Around half a million people lost their jobs. One-third of a million households would be in negative equity by 2012. The banks would collapse at a cost of €62bn (net cost around €32bn, still one of the most expensive in the world for our size). The country would need a €60bn Troika bailout within four years.

With so many people having gone through so much pain, you would think this society had really learned the lessons of those cataclysmic mistakes. In some areas, important lessons have been learned - but when you look at the scale of the housing and rental crisis that has steadily evolved right under the noses of our politicians in the last five years, you have to wonder what has really changed.

Recent figures published in this newspaper show that the price of a semi-detached house in Dublin is rising at a rate similar to the boom era.

House prices in parts of north County and south County Dublin rose by 5.6pc in the last three months, according to the figures compiled by the Irish Independent and Real Estate Alliance. The survey found that a typical semi-detached house in Dublin went up in value by €15,000 in the last three months, or €1,250 per week.

A loosening up of bank lending limits, the Government's Help-to-Buy scheme and a fear of further rises have contributed to an acceleration in house price rises.

It is deeply ironic that rents in Dublin City are now 15pc higher than they were at the peak of the boom a decade ago, while house prices remain around 30pc cheaper. Someone who bought a house in Dublin in 2013 to rent it out has seen it rise in value by an average of 65pc. Meanwhile, Dublin rents are 65pc higher than in 2010.

There is an obvious human and social cost to this. It depicts a society that is failing, not prospering. People are handing over massive percentages of their income in rents or racking up significant mortgage debt to get on a property ladder, which increasingly feels like it will continue to go up.

The State is also just adding to the €500m per year it pays out in rent supplements.

And there are economic costs and dangers too. The housing crisis is a significant threat to our genuine prosperity. It is about quality-of-life issues as much as headline wage figures.

There are stories now of people paying €400 per month for a bed in a room in Dublin. This will undermine our economy's ability to attract inward investment. It will deter some people from going to university. The lost time that people spend commuting will affect their productivity. Ultimately, wage demands will increase, and the economy will become more expensive and less competitive.

Comparisons to the mistakes of the boom/bust a decade ago are useful, as we can see what is different this time round and what is actually just the same.

The brakes have been put on excessive bank borrowing firstly by the banks themselves and also by the Central Bank. For example, 10 years ago, private sector credit was growing at close to 30pc per year.

Today, net credit has been shrinking as Irish people pay down more debt than they take out. There are early signs of that changing now, but it is nowhere near where it was. Ten years ago, the banks were using money borrowed on the wholesale international markets to fund this consumer splurge. Traditionally, banks used their deposit base to fund lending but in the noughties, that all spiralled out of control.

Ten years ago, banks had customer deposits worth less than 60pc of the loans they had issued. In some cases, like PTSB, banks had lent out three times what they held in deposits. Today, across the banking network, deposits held in the banks are equal to around 80pc of the loans issued. This is a much safer model but is still below the 82pc figure of 17 years ago.

There are still genuine risks in the system. For example, a decade ago, property-related loans accounted for around 64pc of outstanding loans. That figure is still roughly the same today.

This is because the banks still have many of those legacy property loans, some of which are still underperforming, and they haven't lent out all that much money for other purposes in the last decade.

So, Irish banks are still heavily involved in property, but much of it is from the past. They are much better capitalised to protect themselves from any future big shock, but the wounds of the past remain in the form of a relatively high level of underperforming loans.

The banks will no longer do large-scale 100pc mortgages or even lash out consumer loans of tens of thousands to practically anybody.

However, there are real factors which will continue to drive up house prices and rents unless active measures are taken to counter them. Population growth is one. By 2030, 65pc of the population will live within 25 miles of the east coast. By 2040, there are expected to be an extra one million people living in Ireland.

More immediately, rising house values are taking large numbers of people out of negative equity. This is a very positive development for many struggling families who got caught up in the buying frenzy of the last boom. They have either been stuck in starter homes, or ended up becoming reluctant landlords as they tried to move on from the mistakes of the boom.

Those people are now looking at finally getting out of their small apartments and trading up to bigger properties to cater perhaps for changed family circumstances. They are now becoming buyers again, for the first time in perhaps 11 or 12 years. At the end of 2012 there were around 314,000 households in negative equity, according to the ESRI. Now, accelerating house prices may eliminate negative equity entirely by next year.

Lessons have been learned in relation to banking and regulation. Lessons have been learned by many consumers who were scarred by excessive borrowing in the past.

But what lessons have been learned by politicians? The enormous human, social and economic value of having relatively cheap housing, whether rented or acquired, has not been grasped.

The solutions are actually obvious. Implementing those solutions involves making some tough decisions, but not impossible ones.

The Central Bank may have to row back on the looser mortgage cap criteria it allowed for. The Government needs to get builders building in more cost-effective ways. High-rise should be considered, especially for Dublin.

There should be more brownfield sites used for building houses in cities. The State is likely to make a profit of around €2.3bn on the wind-up of Nama. As a taxpayer, I think it would be better for Nama to break even, and that €2.3bn be used to roll out large numbers of affordable properties.

According to some estimates, there are close to 6,000 Airbnb properties up for short-term rent in the Dublin area. The Government needs to clamp down on professional landlords using apartments for short overnight Airbnb stays, as it would free up properties for renting. A review has been promised on building costs. It needs to be speeded up and its recommendations implemented quickly.

Real international risks abound that could threaten our economic future. Equally, it is fair to say we are not sitting on the edge of an obvious precipice as we were this month 10 years ago.

However, the failure to sort out the housing crisis shows how little has been learned.

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