Tuesday 16 July 2019

Home truths: State fights itself on property prices

The Central Bank
The Central Bank
Mark Keenan

Mark Keenan

Smouldering ill feeling between the Central Bank and the current Government on housing policy appeared to streak into the open at a conference held by the Society of Chartered Surveyors. Deputy Governor at the Central Bank, Stefan Gerlach, claimed controversial lending controls introduced by the bank at the start of the year have worked by "reducing the speculative element of housing dynamics".

Gerlach went on to elaborate on the thinking behind the Central Bank's move to restrict non first-time buyers to 80pc loans and cut loan to income levels to 3.5 times. First because lending was showing signs of heating up as property prices were rising. Rising prices induce false confidence to buyers and cause them to take out the largest loans possible.

At the same time, Irish property market history shows that any house purchased has a 30pc chance of losing value in real terms in the five years following. So risk from over confident borrowers playing with too much available credit was emerging.

Next comes the banks themselves - big, dangerous, unlovable eejits that they are. Gerlach said banks are commercially bound to maintain market share, so they continue to lend at high levels when they shouldn't - so long as everyone else is doing it.

Gerlach maintains that for this reason, banks will keep lending until too much damage has been done. The combined behaviour of banks and buyers in a rising property market will cause a bubble. Gerlach then pointedly went on to suggest the problems we are having in the market at the moment "are better addressed by policies in other areas". This is a snipe at Government. He specifically talked about looking at unnecessary constraints to supply such as costly building regulations and a failing rental market.

The Central Banking arm of the State under Honohan and Gerlach therefore seeks a "non bubbling" property market controlled by lending restriction, in which prices don't increase very much year on year, perhaps by a couple of per cent or not at all. It links price to earnings, which may actually fall going forward in many aspects of the economy.

The Swiss national is in the departure lounge, stepping down shortly, along with his boss 'Governator' Patrick Honohan, which may account for the frankness and elaboration. Gerlach might also be festering because Finance Minister Michael Noonan recently turned up the heat on the Central Bank by suggesting it should review these very lending rules, adding to the flak it has already been receiving from many (but not all) quarters of the property sector. Suggestions the lending regime is in some way contributing to the housing crisis certainly takes the heat off Noonan following a budget which introduced no aggressive measures to increase supply - the real problem.

Also in the news this week was an unseemly split between Ministers Noonan and Brendan Howlin over the appointment of Mr Honohan's replacement. The new governor is to be TCD academic Professor Philip Lane, who is believed to be Noonan's favoured option. Minister Howlin made his views known he was not in favour.

Some have expressed worry that as an academic, Professor Lane won't have a hard edge of real commercial experience under his belt. If he is the Finance Minister's supported option, that carries its own concerns for obvious reasons.

Many in the property sector (and perhaps in Government) will be hoping a change of the guard at the top will lead to a relaxing in the restrictions.

So why is Minister Noonan poking at the lending measures rather than addressing measures which might stimulate supply?

Well yet another story which ran this week is that Nama has written up the value of its assets for the first time since it was set up. Rising prices have benefited Nama and therefore the exchequer (Mr Noonan's end of things).

Nama raised €3.4bn in disposals in the first half of the year, making a profit of €473m (it made €458m in all of last year). Much of it is based on deals conducted late last year amid soaraway property inflation and before the Central Bank arrived to spoil the party.

Of course Nama makes its money on behalf of the taxpayer. But the taxpayer is also paying at the moment thanks to the increased cost of housing (or lack of thereof) and the same rental sector inflation which is enabling Nama to make so much cash.

The simple truth is that the Central Bank's vision of curtailed inflation is in direct conflict with the goals of Nama and, therefore, the Department of Finance, which needs to milk the Nama portfolio to its optimum - on behalf of the taxpayer.

It amounts to a conflict between the goals of the Central Bank (acting for all of us), and Nama/Department of Finance (again acting for all of us). It's in the State's interest to increase property prices... but also to control them. You couldn't make it up.

Indo Property

Editors Choice

Also in Life