Monday 23 July 2018

Richard Curran: Central Bank boss gives politicians 'crash course' for slow learners

Central Bank Governor Philip Lane’s warning on house prices is timely. Photo: Aidan Crawley
Central Bank Governor Philip Lane’s warning on house prices is timely. Photo: Aidan Crawley
Richard Curran

Richard Curran

Central Bank Governor Philip Lane has delivered a very stark warning about the possibility that house prices might fall in the next two to three years. It will have come as a bit of surprise to many people for lots of reasons.

House prices are rising rapidly. There aren't enough houses being built. The increase in house prices is driven by a shortage of supply rather than a mad borrowing frenzy.

So why would this very astute and cautious man, in such an important role, warn of such a risk? I doubt very much Governor Lane believes house prices are going to fall in the next two to three years, but he is right nonetheless to warn that something like this is a possibility.

Warning about house prices heading south is the only way to get the attention of a political class that has yet to show it has really learned the lessons of the crash.

The public has learned a lot from the last crash. The Central Bank has learned a lot. Even the banks may have learned something. But our politicians are still short-term thinkers who rarely see beyond the next election.

And that election could come very soon.

Governor Lane's warning was based on the idea that housing supply is likely to increase in the coming years and could in turn not only curtail house price rises but actually send prices into reverse.

Bear in mind, he never talked about a crash, just possible price drops.

The real focus of his analysis, I believe, was the comment he made about the importance of running up an exchequer surplus. The house-price warning was a mechanism to make his audience at the Oireachtas Finance Committee sit up and take notice.

He told TDs and Senators he believed budget policy should move beyond simply achieving a budget balance, but must look at running a budget surplus. He said this was necessary to build up the country's resilience to the next economic downturn.

As the two main political parties prepare to start deliberations over October's budget, pressures are mounting in the system - pressures to spend more, cut taxes, build more infrastructure, hike wages etc.

Lane knows when it comes to prudent exchequer management, now is the time to run a budget surplus.

But when things are going well, Irish politicians don't have the best track record of listening to warnings about external risks, Brexit, Trump, Iran and oil prices etc.

One thing they do understand is house prices. Suggest that house prices might fall and they get palpations.

Lane's comments are very welcome and eminently sensible. He is contributing to dampening expectations among the public while getting his sober message about fiscal responsibility across to politicians.

The economic crash didn't just happen because of housing and the banks. A sizeable part of it came from fiscal irresponsibility and crazy increases in current spending sanctioned by government.

Lane's warning is really a 'crash course' for slow learners.

Insurers just think of a number when it comes to premiums

The problem of exorbitant motor insurance premiums has not gone away. But it does seem to have fallen down the political agenda. That is a view shared by many in a survey published during the week by AA Car Insurance.

If found that of over 4,000 motorists surveyed, 42pc of respondents said that they strongly believe the issue of insurance prices is no longer as important to Government as it was 12 months ago. Premiums have come down, but only a little and they remain very high. This week I was looking to renew my motor insurance. I received a renewal notice which was looking for the same enormous premium as I paid last year.

I decided to try one of the big brokers. The nice woman down the phone wanted to know what price I had been quoted. I declined to tell her. I didn't want to give her something to aim just below.

I was then asked a very long series of questions about how long I had lived in Ireland, how many points I had on my licence, for what and when I had got them.

She told me some insurance companies will weight your policy if you have points in the last four years. This is despite the fact that penalty points are expunged from your licence after three years.

She wanted to know if I had any claims in the last year - including windscreen replacement. But windscreen replacement isn't supposed to affect your no claims bonus.

Incredibly, I was on the phone for a very long time answering all of these questions before I was even asked what type of car I was driving, what value it was, etc. I told the nice woman the car type and what I had paid for it, and she put down the value for roughly what I had paid.

You think that is doing you a favour, but it isn't. Because policies always state you will only get the market value anyway.

For the record, I have 27 years of driving with no accidents and no claims - except a windscreen replacement last year because of a flyaway stone. She came back with a quote that was €265 cheaper than my renewal notice. And with which company I asked? It was the same one I was with last year. When it comes to motor premiums, as a consumer, it always feels like they just think of a number.

A Liechtenstein-style Brexit

British prime minister Theresa May has been accused of magical thinking when it comes to some of her proposed Brexit customs union solutions. It appears the hunt for a new approach has brought civil servants to the fairy tale land of castles and princes.

Liechtenstein, the tiny independent principality in the Alps is in the European Economic Area, while also being part of the Swiss customs union. So it operates in two distinct economic partnerships, while not being part of Switzerland or part of the EU.

One Whitehall official told the Financial Times last week, it was an extremely interesting idea that could be explored as a possible solution to questions of the customs union and a hard Brexit.

However, a legal position for a place with a population of 38,000 isn't an obvious model for a country with a population of 65 million. Liechtenstein's exports last year amounted to just €900m. Not bad for a tiny principality with some extraordinary banking secrecy laws, but a long way off the UK.

Bizarrely, the Liechtenstein national anthem has the same tune as God Save The Queen. So there might be something to work with there.

Reading the property tea leaves

Sherry Fitzgerald founder Mark Fitzgerald gave an engaging interview in The Irish Times during the week on the estate agency and especially how it came through the property crash.

Fitzgerald always had a good sense of timing when it came to selling things. Not only did Sherry Fitzgerald and other estate agents sell online property portal MyHome.ie to the Irish Times for €40m but they did it in 2006, just before the peak of the boom.

Then in 2012 Sherry Fitzgerald sold its London business, Marsh & Parsons, for €45m, which enabled the Irish company to invest more at home and eventually rebuild.

Marsh & Parsons caught the high-end property frenzy very well after acquiring the business, but its accounts show that profits fell from £6.8m in 2015 to £4.2m in 2016, in what it described as a tough market.

The owners of Marsh & Parsons decided in 2016 to take some money off the table as it were and the company paid its first dividend since it was bought from Sherry Fitzgerald - a whopping £24.7m.

Any reason to think the London housing market might be in trouble?

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