Saturday 24 August 2019

No easy answers for the housing market as supply crunch looms

Silicon Docks
Silicon Docks

Conall Mac Coille

Ireland's housing market has long been a game of snakes and ladders. Those who purchased homes during the Celtic Tiger era have been the losers in this perennial game of boom to bust, stuck in negative equity, or with mortgage payments they cannot afford.

Too often, simple, seductive measures have been promoted that offer the Government the illusion of action, but without any real prospect of solving the problems in the housing market.

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There has been no shortage of bad ideas: mortgage interest relief, Section 23 tax allowances, and 100pc loan-to-value mortgages.

At best, these initiatives can be described as a naive attempt to make housing more affordable, bridging the gap between incomes and the current level of property prices.

However, history has taught us any initiative that gives home buyers or builders more money will always be inflationary, with little long-lasting impact on housing supply.

So it was disappointing to see Taoiseach Leo Varadkar, speaking at the MacGill Summer School in Glenties, adding to the chorus of voices criticising the Central Bank's lending rules. According to reports, he said "one aspect of the mortgage rules that is very tough is the fact that you are expected to show you are saving at the same time that you are renting".

I can't imagine how any well-run banking system can give out mortgages to those with no history of saving.

One popular anecdote in recent years was that 15-20 workers from one of the well-known tech firms in Dublin's 'silicon docks' found themselves viewing a house for sale close to their office.

I can well imagine them angrily gesturing across the river at the Central Bank, muttering that were it not for the nasty lending rules, they could all buy the same house.

Too many people still fall victim to the contradiction in this argument. The common critique of the lending rules is that the 3.5x loan-to-income threshold stops would-be buyers from affording a home.

I have sympathy with those who find themselves outbid by €10,000 or €20,000 for a property, but they need to remember if the rules were relaxed, their competitors in the queue would also be able to borrow more, merely pushing prices higher.

Rent controls are not the answer

Thankfully, coming so soon after the last crash, there is broad acceptance the mortgage lending rules are a good thing and should be a permanent feature. A more constructive debate is now emerging on reducing build costs, either through relaxing overly zealous building standards (particularly on apartments), or via smaller homes that buyers can afford.

However, the public is still susceptible to other easy answers to fix the housing crisis.

Earlier this month, the Residential Tenancies Board (RTB) drew attention to the fact rental inflation had slowed to 6.4pc in 'rent pressure zones', as evidence the measures are working, despite this rate of increase being considerably faster than the 4pc limit the zones were intended to impose. The RTB's latest data shows rent price inflation in Dublin accelerated to 8.5pc in March, double the 4pc limit.

Clearly, landlords are circumventing rent controls by taking advantage of the exemption for renovated properties, or by simply ignoring the 4pc limit. The response from the RTB has been to tighten up on qualifying renovations and on powers of enforcement.

It's even possible the RTB might be successful in preventing some landlords circumventing the rules and upping rents, but it won't cure the underlying problem. Earlier this month, the RTB revealed the number of houses rented out to tenants fell by almost 2pc, or by just under 6,000, to 307,348, in 2018. Faced with rent controls, small landlords have decided to exit the market, reducing the supply of accommodation.

The same trend is evident in mortgage lending data. The first half of 2019 was the weakest for buy-to-let mortgage lending in five years, with just 303 new loans through April-June.

The RTB also cited a survey indicating half of all tenants suggested they felt "fairly secure" in their tenancy, with 28pc "very secure". They really shouldn't.

Like it or not, if landlords are prevented from upping rents towards the market price, they will be more likely to sell up.

This was all very predictable. The experience in US cities has been that rent controls have led to a limited, dilapidated stock of rental accommodation. The same experience is now happening in Ireland. The stricter criteria on renovations will also reduce the incentive for small landlords to invest in properties.

The solution to the lack of rental accommodation must involve a more professional sector, with increased institutional investment compensating for small landlords exiting.

However, with the opposition keen to place the Government under pressure ahead of the next election, so-called 'cuckoo funds' are an easy target.

Is Ireland overheating?

The Central Bank delivered its latest warning this week that the economy is in danger of overheating, raising its forecast for GDP growth in 2019 to 4.9pc, followed by a respectable 4.1pc in 2020, albeit on the provison of a smooth Brexit. In this context, many politicians may see these concerns on overheating as quaint.

Instead, the realpolitik for a giveaway election Budget may soon be felt, potentially adding fuel to an already rapidly expanding economy. The Fiscal Advisory Council has argued for a more sedate rise in Government spending for 2020, and Paschal Donohoe seemed to agree as much in his comments following the Summer Economic Statement.

Nonetheless, with so many problems facing the Government (health, housing etc), a strategy of bribing the electorate with their own money may still win out.

The evidence that Ireland's economy is overheating is mixed. True, the unemployment rate has fallen to 4.6pc, but inward migration, often returning Irish emigrants with third-level education, could help sustain jobs growth. For now, CPI inflation remains relatively muted at 1.1pc. Wage growth may be above 3pc but that is well short of levels of 4-5pc the last time unemployment was 4pc during the 2000s.

It's worth considering the performance of multinational companies set against indigenous sectors. The latest CSO data shows the multinational sector grew 10pc in 2017, but the rest of the economy by only 4pc.

So inflationary pressure largely reflects buoyant conditions in the technology and pharmaceutical sectors.

However, the threat of overheating also reflects the lingering effects of the last crisis on small and medium-sized firms. Last year's OECD survey on Ireland made for worrying reading, pointing out that most companies have seen declining productivity.

This lack of dynamism has reflected a lack of investment, perhaps in part because many 'zombie' firms are kept on life support by bank forbearance.

However, the OECD also noted barriers to entrepreneurship in Ireland are high, preventing new firms from entering uncompetitive markets.

Specifically, the OECD highlighted costly regulations on commercial property, legal services and, of course, insurance costs.

So while the controversy around Maria Bailey will fill news pages during the summer 'silly season', it may also highlight structural problems impeding small firms from responding to emerging bottlenecks in the economy.

The impact of capacity constraints and skills shortages is most keenly felt in construction, expected to build additional houses, commercial property and fulfil the Government's capital programme.

However, high childcare costs may also be in part due to high insurance and regulatory costs.

Indeed, the OECD review noted labour force participation is low in Ireland, with childcare fees potentially holding back women who would prefer to take up employment.

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