Sunday 18 March 2018

Home truths: Getting a proper grip on the crisis

A scene from the cult classic, Withnail and I, starring Paul McGann and Richard E Grant.
A scene from the cult classic, Withnail and I, starring Paul McGann and Richard E Grant.
Mark Keenan

Mark Keenan

In the cult comedy classic Withnail And I, there's a scene in a London flat in which the lead character - an out of work actor - has taken far too many recreational drugs and has begun to lose control of his head.

In a panic he turns to the sinister drug dealer who has sold him the substances and demands to know what to do. The dealer tells him to take even more drugs. The actor baulks at this 'solution' and the dealer ruefully notes his refusal to act as being "an unfortunate political decision reflecting these times".

Our by now apoplectic actor demands that the dealer explain himself. To which the dealer proffers: "Politics man - if you're holding on to a rising balloon, you're presented with a difficult decision. Let go before it's too late? Or hang on and keep on rising? Posing the question, how long can you keep a grip on the rope?"

Lack of action of any sort can only allow certain problems to get worse. The analogy could easily describe the last Government's inexplicable term-long paralysis in response to the burgeoning housing crisis - a problem which, having been ignored for so long, has now taken off with a life of its own and become a far more difficult animal to bring to heel.

It means the new Government's strategy will require far more thought and resources than when the crisis first fledged in the early years of the last regime.

One of the biggest hurdles today that didn't exist formerly is the great unknown long term effects that might stem from the Central Bank restrictions on mortgage lending. These were introduced at the beginning of last year and have been running for 18 months as a blunt instrument response to spiralling prices in Dublin, Cork and Galway cities.

So instead of pulling out all the stops to increase the supply of housing, the State ultimately reacted to escalating city prices by preventing people from buying homes in the first place. It was always a strange solution to prevent a bubble - simply take everyone's money off them for homes of a certain value. However, given the lack of supply and a one year lead-in to remedy that, it was probably the only solution available when Dublin inflation was inching above 20pc per annum.

In these pages, I predicted that these measures could only ever be a short term response to buy the Government a 'breather' in which to get to grips with the real problem of supply. That use of an artificially harsh lending regime to prevent people buying would simply (a) tip multitudes into the rental market who had no business being there in the first place - and cause other problems there. The resulting increased competition for accommodation in that market would cause rents to soar. Finally continued tight supply, soaring rents and yields would ensure prices would eventually began rising again.

I predicted that (b) home ownership in the cities would become the reserve of the rich and the funds - being the only ones financially able to acquire property.

Much of this has already come to pass - certainly rents are higher now than they ever have been and funds have been voracious in acquiring ordinary residential homes amidst soar-away yields. Prices have not commenced rising in earnest again but they will eventually pick up in the cities if nothing is done to remedy supply.

There is now an added complication afoot - we have a year and a half's worth of 'postponed' home buyers - people who would have been able to buy if the lending restrictions had not been introduced.

It is a fair assumption that these people are still earning much the same and that they will opt to buy in the future if the lending regime is relaxed again. We also have the more dogged among the 'newly postponed' who have been saving as much as they can over the last while to get a deposit together, even though that might be now the price of a luxury saloon car. It is fair to suggest that these will eventually start to push through.

Among proposed solutions mentioned of late has been talk of the State providing a "help to buy" scheme like in the UK, but anything that puts more cash in buyers' pockets when supply remains at an all-time low, causes inflation.

To complicate matters further, there's also a catch 22 problem regarding any future effect of the relaxation of the Central Bank lending restrictions. We need the lending regime relaxed to enable the building of more houses (to enable buyers) but we need the houses in place before we can relax the regime (or we get inflation).

The longer time goes on, the more 'pent-up buyers' will build up in the wings. It's just like holding on to the balloon. The longer we postpone relaxing the lending regime, the more pent-up demand we stash away for the future. At this point, we must either (a) incentivise building temporarily, (b) the State must turn developer temporarily or (c) both. Without supply, any solutions are hallucinogenic.

Indo Property

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