OUR housing market will never, please God, drive our economy again. But neither can we take the Oliver Cromwell approach to it. Whether proverbially for the market as a whole, or literally for those trapped in so-called ghost estates west of the Shannon, the refrain of "To Hell or to Connacht" is not an option.
Last week the UK announced that its recession was coming to an end. Our economy may follow in a few months. Whether or not a double dip comes (it might, and for reasons that are nothing to fear), one difference between here and the UK will continue to stand out until we change our thinking about the housing market.
In the UK, where stamp duty was suspended for 16 months for a large section of the market, prices have started rising again. Here, where it remains chronically high, prices have fallen back to 2003 levels -- and continue to fall. Some say this is necessary. But is it? Or is the market swinging to the opposite extreme before settling back at a stable equilibrium?
The latest affordability index from EBS and DKM consultants suggests the latter is the case. As a share of after-tax income, the amount spent on mortgages by first-time buyers has fallen by 50 per cent in the last three years. By December last, this category was spending just 13 per cent of net income on their mortgage -- less than some of them spend on beer and cigarettes.
Of course, first-time buyers don't pay stamp duty. If they did, and could spread payments over the mortgage period by borrowing, it wouldn't block activity in the first-time market. But who in their right mind would borrow tens of thousands of euro to give to the State? What bank would lend it?
For second-time buyers, the stamp duty regime means that to trade up you need to have a few tens of thousands of euro stashed away somewhere, or be ruthless enough to spend your childrens' education fund. Were it not for that problem, house prices are now so affordable that negative equity would actually enhance trading.
In a young country like Ireland, where most people trade up, the gain from the drop in the purchase price exceeds the fall in the price of the house sold. As Fergus Murphy of EBS has pointed out, negative equity needn't be a barrier to activity in the market resuming, provided we are clever.
But stamp duty is stalling traffic on the market. Before it even thinks about knocking down so-called ghost-town estates, the Government should instead knock down stamp duty. Then, and only then, will it be able to judge how many of the houses built in recent years are beyond redemption. Even then, it should be careful. Having creamed it in VAT, income taxes, local authority builder levies and stamp duty, the State has a huge moral obligation. Brian Lenihan's decision to extend mortgage relief for seven years to boom-time buyers is a welcome first step in acknowledging the State's obligation here. But it must go further.
As well as abolishing stamp duty -- a tax for which the State clearly failed to provide corresponding services of planning, efficient zoning and local government, not to mention financial regulation -- the National Development Plan must be extended to make as many of these estates as possible habitable and accessible.
But stamp duty is more of a block to recovery than the main reason that recovery is not happening. The fear that prices would continue falling over these past three years was even more powerful. For the first two years it was justified. Three years ago, Bertie Ahern went out of his way to convince us that property prices would keep rising. But our economy and housing market lost their senses in 2005 and needed to return to levels of activity seen in that year before a recovery could occur.
That -- as all indicators and forecasts published to date show clearly -- is exactly what is happening now, with GDP, GNP, employment and incomes falling to where they were somewhere between 2005 and 2006. But, sometime last summer, the pendulum swung past this equilibrium point and house prices have fallen back to 2003 levels despite their unprecedented affordability. Despite a drop in employment, it is forecast to settle back to 2005 levels. And despite this week's hikes, interest rates are at or below 2005 levels.
With the economy hopefully turning, why are further falls predicted? On the face of it, pessimism is justified. According to the National Institute of Spatial and Regional Planning (NISRP), there are 302,000 empty houses in the State. And, as a paper from Morgan Kelly pointed out before Christmas, the ratio of house prices to incomes rose substantially in the decade up to 2007.
But look a little closer at these facts and the implications for the housing market aren't what they seem. Even at the height of the boom, there were 200,000 vacant properties. The rise since then certainly reflects the failure of the Government to provide the roads and facilities that property taxes were supposed to fund. Let's hope that omission is made good in future years. A housing scrappage scheme would be unnecessarily destructive when the provision of basic transport and good planning could make many such estates more desirable by shortening their commuting distances to major towns. And, with our population forecast to rise to close to five million in this decade, it's not as if we won't need more housing. But until than happens, the rest of the housing market should not be frozen.
The NISRP study shows that there are about 100,000 homes on the market. This equates roughly to the rise in vacant housing between 2006 and 2009. When you take the staggering population increase during that period -- more than a quarter of a million -- and divide by the average headship rate (punters per dwelling), you get an increased demand for housing of (you guessed it) about 100,000.
As for house price/income ratios rising over the last decade, this point ignores the rise in double-income families, the fall (since the Nineties at least) in the tax burden, and the increasing willingness of buyers to spend more money on that dream home.
Of course, pushing housing to the opposite extreme of undervaluation will help to shift those houses that are on the market. It will also greatly help the banks and Nama. But we are left with one unresolved mystery: why, when the UK acted on stamp duty, has our Government -- in spite of a recommendation by the Commission on Taxation to do so -- not done the same? The UK election takes place in about four months. Ours is at least two years away. Eaten bread is soon forgotten. Mystery solved.
Marc Coleman is Economics Editor of Newstalk 106FM -108FM and presents 'Coleman at Large' each Wednesday at 10pm