Business Irish

Saturday 7 December 2019

Why six chairs in a queue isn't a new property bubble

HOUSE-HUNTING: From left, Megan O’Shaughnessy (23) Thomas Beveridge (22) Lisa Stacey (27) and Shantelle Farrell (20) queueing to buy a house at Millers Glen estate in Swords. The houses were due to go on sale yesterday at 2pm. Photo: Damien Eagers
HOUSE-HUNTING: From left, Megan O’Shaughnessy (23) Thomas Beveridge (22) Lisa Stacey (27) and Shantelle Farrell (20) queueing to buy a house at Millers Glen estate in Swords. The houses were due to go on sale yesterday at 2pm. Photo: Damien Eagers
Richard Curran

Richard Curran

Six people queueing overnight for a small number of fixed-price houses in Swords does not constitute a property bubble. The furore over the idea that people were once again queueing up during the week to buy houses at a new development in north county Dublin is a lot more worrying than the queue itself.

Some coverage of the "event" gave the impression that the housing shortage in Dublin had turned into a full-scale boom-time bubble. The truth is that by Friday morning, a small queue of three or four locals from Swords, had "mushroomed" into six chairs. Journalists even had to form a queue to interview those in the queue.

The fact there were 60 houses going on the market might have given the impression there were close to 60 people queueing. It is important to point out that the houses they were queueing for were fixed price. It was perfectly understandable that people from the area would endure a couple of nights sleeping in their car, to ensure they got one of a small number of properties at a fixed price.

During the boom, people queued up in very large numbers to buy apartments that hadn't even been built. In some cases they wanted to buy two or three as investors, and sell them on at a profit - also before they had even been built.

The houses that hit the headlines last week are in Millers Glen. A two bed-townhouse will go on sale for around €240,000. Three-beds will go on offer at between €280,000 to €290,000. A quick check of new housing developments in Swords back in 2006 at the height of the boom, shows that a two-bed townhouse would have set you back €394,000, while a three-bed end-of- terrace house was €449,000. This isn't 2006.

However, house prices are shooting up, particularly in Dublin, at an alarming rate. This reflects a shortage of houses, investor subsidies and a latent build-up of people who have held off buying. Many of these people are cash-buyer investors. They can buy a house to rent out before December 2014 without having to pay any Capital Gains Tax on it when they sell it. They just need to keep the property for seven years.

Combine this with rising rents, mortgage interest subsidies and the fact that Michael Noonan is about to end that CGT tax break in four months' time, and investors are piling in.

People are not taking out mortgages in worrying amounts, which would also have pointed to a bubble. Between April and June of this year, Irish banks lent out 4,803 mortgages with a total value of €820m. During the same three months in 2006, they gave out 53,000 mortgages with a value of €10.1bn.

There are only a finite number of cash buyers with finite resources. During the boom, banks had access to virtually unlimited amounts of cash to lend out to borrowers.

If house prices continued to rise at current rates for another few years, it would constitute a very worrying development. And appropriate measures should be taken to fast-track house completions in the right areas to help build up supply.

But the Government has to be very careful about how it uses taxation policy to achieve its aims here. The real crisis and the real queues in the housing sector are for properties to rent. A queue of 40 people formed to look at renting a single one-bed apartment in Dublin 1 in June.

More family homes might be needed in the capital, but so too are more rented properties. That being the case, why are investors being subsidised through mortgage interest relief and Capital Gains Tax exemptions to buy?

It is highly questionable whether Finance Minister Michael Noonan should have continued his Capital Gains Tax exemption into a second year (2014) but at least he has said he won't be renewing it for next year.

The truth is that just two years ago, the Government couldn't get anybody to buy property at any price. Now investors are piling in. Once again, as in the boom years, families looking to buy a home are competing against cash-buying landlords.

Deliberately pushing investors out of the market will help affordability for young couples but it will do virtually nothing to help ease the problems in the rental market. Discourage investors from buying too much, and you won't solve the problem of the 40 people queueing up to rent an apartment.

Other factors are at play in the residential property market. During the boom, too many apartments were built. One reason was that as houses became too expensive people used apartments as starter homes, with a view to flipping them at a profit after a few years. That has left lots of apartments and too few houses.

Another factor is the negative equity generation. Many of these were people who bought apartments, got stuck in negative equity and found they couldn't trade up to a house. Others may have bought a house at the edge of a village 60 miles away from where they work. As property prices start to rise, tens of thousands of people are getting out of the negative equity trap. They can sell.

That should free up the number of properties that come on the market. They might not suit everybody but bumper size property sections in newspapers reflect a growing number of sellers.

If the banks hold the line on lending criteria, and do not open up the floodgates, we will see a greater turnover of properties changing hands. That would be good for the market and possibly help to slow down rapid house price growth. Combine those market forces with a review of tax breaks, fast-track building of specific property types in specific areas and a rebalancing of the homebuyer/investor incentives, and house price rises should be mitigated.

It is very important that the Government confines any financial incentives in the property sector to very specific purposes. Encourage people to build but not anything anywhere. Similarly, every taxation measure related to property should be subject to cost/benefit assessment. Back in 1999, the Bertie Ahern-led government decided that houses were becoming unaffordable for the typical nurse married to the typical garda. They believed this was a bad thing.

They commissioned economist Peter Bacon to write a number of reports on fixing the problem. They lacked the courage to implement the recommendations and instead decided to pay the nurse and the garda more money so they could afford to buy a house. The result was disastrous.

The current Government has lots of reasons to welcome sizeable house price rises. They take people out of negative equity; improve Nama's chances of making a profit; contribute to a feel-good factor among many people and lift the value of bank shares held by the State in Bank of Ireland and AIB.

But the Government must hold the view that rapidly rising house prices are actually not a good thing. They encourage excessive risk, undermine competitiveness, drive up wage inflation and cause enormous social problems.

And unlike the boom/bust government of the past, once it decides that rapid house price inflation is not good, it must have the political guts to ensure it doesn't get out of hand.

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