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Colm McCarthy: Land zoning helped the 'bubble' form


Rising prices: Whatever increase in property prices is under way in Dublin – they seem to be up about 10 per cent from the bottom – is happening in the middle of a mortgage famine

Rising prices: Whatever increase in property prices is under way in Dublin – they seem to be up about 10 per cent from the bottom – is happening in the middle of a mortgage famine

Rising prices: Whatever increase in property prices is under way in Dublin – they seem to be up about 10 per cent from the bottom – is happening in the middle of a mortgage famine

Ireland passed its first major piece of land-use planning legislation in 1963, modelled on the UK's Town and Country Planning Act of 1947. The intentions were laudable, to restrict the construction of unwelcome developments and to empower local authorities to take a more active role in shaping the built environment. There was no desire to screw up the residential housing market, but that is eventually what happened.

Our old friend, the Law of Unintended Consequences, began to impact from the mid-Seventies onwards as house prices in Dublin began to diverge from the national average. It now seems so natural that houses in Dublin should cost more than comparable dwellings elsewhere in the country that few people realise that, up to about 1975, there was little or no premium on house prices in the Dublin suburbs relative to provincial towns and cities.

Nor should there be: there was and still is no shortage of land in the greater Dublin area, one of the lowest-density urban areas in Europe. There is, however, a shortage of planning permission – an entirely man-made creature of the planning legislation and its restrictive implementation by the Dublin-area councillors and planning officials.

Before land-use zoning came along, house-builders extended the city by buying up farms on the city's edge and building at whatever densities the market would support. But as more and more lands were withdrawn from the buildable stock by the planners, prices began to rise and the house-builders moved further away from the city proper.

They eventually washed up, courtesy of the bankers' credit bubble, offering homes for commuters all over the midlands, in North Wexford and even in the southeast of Co Cavan. In the principal resi-

dential suburbs of Dublin an artificial scarcity (of planning permission, not of buildable land) was allowed to develop and prices rose, from the mid-Seventies onwards, to a 50 per cent or 60 per cent premium over comparable homes outside Dublin.

The losers from this policy failure are prospective home purchasers. Existing home-owners are winners, since they enjoy an unearned (and untaxed) capital gain, at least on paper. As voters, they have every incentive to punish candidates who promote a more rational housing policy. The result is expensive houses in Dublin, urban sprawl, long commuting distances and serious problems of housing affordability.

What has happened in Dublin has also happened in London. Politicians and planners used the 1947 legislation to designate vast swathes on the outskirts of London as 'green belts', creating some of the world's most unaffordable urban housing in Britain's capital. Homes in the London suburbs can cost double the price of similar properties in the north of England.

Economists in the US and in the UK have studied the formation of house prices over the long-term. They have concluded, unsurprisingly, that restrictive planning and zoning policies have a big impact on relative house prices across the US and the UK. There can be no doubt that the high relative prices in the Dublin area have the same origin.

Since the bubble began to deflate towards the end of 2007, house prices generally in Ireland are down to about half the bubble peak. The availability of mortgage credit has of course dried up dramatically. Some banks have withdrawn entirely from the market, while those still active have reduced mortgage credit supply substantially. In the peak mortgage lending year of 2006, Irish banks extended €27.8bn to 111,000 borrowers. Last year they extended €2.5bn to just 14,000 borrowers. The value of mortgage credit extended in 2012 was down over 90 per cent from peak. Most of the credit extended is for the purchase of (new and second-hand) homes, with a small portion for top-up loans.

In a normal market the availability of mortgage credit in Ireland would be well below the peak bubble figure but well above the depressed 2012 figure.

Estimates vary but some economists reckon that 'normality' would correspond to perhaps 30,000 or 40,000 mortgages granted per annum to the value of €8bn-€10bn. Figures for 2013 up to September are available from the Irish Banking Federation and they suggest a small increase in the value of mortgage credit extended for the year as a whole, perhaps to about €3bn – that is, to about one-third of what would be a 'normal' figure.

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Against this background the recent rise in Dublin house prices is worrying. Prices seem to be up about 10 per cent from the bottom, with larger increases in some areas. There is no evidence of any similar increase in the rest of the country. Whatever increase is under way in Dublin, to be clear, is happening in the middle of a mortgage famine. An unusual portion of total purchases is going to cash buyers. If mortgage availability was back even to 'normal' levels, it is a fair guess that Dublin would now be in the middle of a renewed bubble in house prices. There is nothing to celebrate here.

If every black cloud has a silver lining, the return of affordable housing was one of the few upsides from the Irish financial crash. That competitive advantage is already being eroded in Dublin, the main engine of the national economy, and in the middle of a mortgage famine. Both central government and the local authorities in the Dublin area need to get a grip on this situation before it gets out of hand.

The key policy measure required is the zoning for residential development of the very large volume of derelict and undeveloped land in the Dublin area. It is quite remarkable that the contribution of restrictive zoning to the house price bubble has been so little acknowledged. Builders chose to depart the city precincts for the midlands not because there was strong natural demand locally but because that was where they could get planning permission. Ireland built too many houses during the bubble but also contrived to build them in the wrong places.

One of the many oddities in the Irish tax system is the exemption of the principal private residence from capital gains tax. An overdue reform is to end this incentive to house price speculation. The government should announce that capital gains tax will apply, from today's valuations, to any future house price appreciation in excess of consumer price inflation.

These two measures should be enough to forestall the incipient Bubble Mark II.

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