SOONER or later this Government will have to make up its mind about the housing market. Does it or doesn't it want it to recover? Everyone agrees that the housing market will never return to the insanity of 2006. But if by 2016 house prices remain stuck at present levels, then the economy will be in trouble. So, one suspects, will the Government. In January, Fitch ratings agency said that despite halving since the boom, house prices had another 20 per cent to fall. Other respected commentators agreed.
his economist always believed that if only government would stop interfering in the market with dysfunctional pro-cyclical regulation and overtaxation, house price levels can and should settle back to 2004 levels, ie levels that are prudently and sensibly located between the extreme highs of 2006 and current dysfunctional lows.
Data published last week bears this out: In the capital, which tends to lead the market, second-hand house prices are 7.7 per cent up on the start of the year. That is according to a property price gauge calculated by Douglas Newman Good. Anecdotally there is also clear evidence that where multiple bidding is healthy, 2004 price levels are now being secured for some properties. And this despite a bad start to the year: in the first quarter of 2013, mortgage drawdowns were down a fifth on the year before. Irish Bankers Federation data points, however, to strong recovery in April and May.
There is a caveat to this, but one that supports the idea of a stable middle ground for prices to settle at: of the transactions covered in the DNG survey, three-fifths were cash purchases.
In other words normal mortgage buyers – who usually make up over 90 per cent of purchases – are being stopped from entering the market by pro-cyclical mortgage lending. And by excessive taxation. Instead of being pro-cyclical – pushing lending higher in good times and choking it back in bad times – a good regulatory regime should swim against the tide.
Irish Banking Federation data shows that in the last decade mortgage lending was massively pro-cyclical. On the back of loan to value and income ratios up to 100 per cent and sometimes higher – and loan to income ratios often as high as six or seven – a whopping 48,637 mortgages were issued in the last three quarters of 2006 alone.
Six years later, the pendulum has swung to an equally ridiculous opposite extreme with barely 6,000 mortgages drawn down in the final quarter of last year.
Good regulation is about moderation. And with gross incomes, employment levels and interest rates being now broadly where they were in 2004 – a moderate regulatory policy would allow these fundamentals to drive the market.
With our banks' tier one capital ratios now at 10 per cent or higher, mortgage issuance remains far, far lower than it should be in a normal healthy market. And this is why the caveat above is supportive of further growth: if price growth can be achieved in a very thin market dominated by cash buyers, then it can in all likelihood be sustained if lending is normalised.
At the moment, the market is a very shallow one with very limited mortgage approval and, as a result, limited multiple bidding. No one wants the craziness of 2006. But it is in no one's interest to preserve the present situation either. Between the 2006 madhouse and the 2012 morgue exists a happy medium that – if it can be attained by 2016 – will be good for us all: between a third and a half a million of homeowners will be freed from negative equity. Not because house prices will go back to 2006 levels – they won't. Rather because by 2016 boom-time buyers will have paid off enough of their mortgage to allow a partial price recovery to wipe out or reduce to manageable levels their negative equity.
That in turn will boost financial morale, consumer confidence and spending. It won't do the Government's ratings any harm either. This will also bring us to the point where house building can recommence and construction jobs can start growing again. Again, not back to the crazy levels of one-in-seven workers working in construction as in 2006. But to prudent sensible norms.
The housing market should never again drive growth. But nor can the economy recover while it remains depressed below fundamentals. With employment, incomes and retail mortgage interest rates broadly where they were a decade ago – and with the population since then higher by nearly half a million – prudent sensible policies ought, give or take, to bring house prices back to levels prevailing at that time.
That prices remain well below that equilibrium does not disprove those of us who believe in that equilibrium and this is because current house prices do not reflect economic fundamentals but rather intervention by the State (pro-cyclical lending and overtaxation).
And no one is arguing for the State to kickstart the market, just to take its foot off the market's throat. Instead of defending and implementing the policies of the previous government, the current Government should put its own stamp on the market by honouring a promise made in April 2012 by Brian Hayes – to compensate those fleeced by the last government on stamp duty. Despite high compliance on the new property tax (nearly 90 per cent) it remains economically destructive, fiscally counterproductive (short-term revenue gain will be offset by longer term loss) and politically toxic.
Substituting it with alternative cuts to hugely wasteful local government spending would be economically and politically smart. Failing that, sensible tax allowances for mortgages on the family home would counteract the grossly unjust interventionist distortion of stamp duty which remains a huge burden on families that borrowed money to pay it. Last but not least, bank regulation must be steered away from pro-cyclical boom/bust extremes and towards a prudent middle path that supports growth and stability.
Marc Coleman is Economics Editor of Newstalk 106-108fm and presents 'Coleman At Large' each Tuesday and Wednesday from 10pm @marcpcoleman