Tuesday 22 October 2019

Our economy needs a confident and functioning property market

The artificial depressant of stamp duty must be abolished if we're to come out off a vicious spiral, writes Marc Coleman

To be or not to be. To buy or not to buy. Hamlet was a bit of a head-case and prone to extreme swings of emotion, from elation to despair.

The extreme swings of emotion were part of the tragedy of that play. They're also part of a tragedy that could unfold if we don't get a grip on ourselves. For every stupid consensus, there is an equally stupid opposing consensus and if the consensus zombies were wrong in 2007 when they told us the economy and housing market would never stop growing, they are now equally wrong to tell us they will never grow again.

A fortnight ago the IMF upgraded its forecast for Ireland's growth, while Finland's prime minister Mari Kiviniemi told us we would be back on our feet in a few years. She ought to know: Finland's small open economy recovered from a recession equally as savaging as ours. Last week Standard & Poor's said we were turning the corner. On Wednesday, leading bond market player Dan Fuss started buying Irish bonds, saying they were undervalued. Another consensus -- a euphoric one about recovery -- is the last thing we need. But competently and calmly, we realise that our economy and residential property market will recover as they have done before. And if we know that, we can start spending and buying houses at reasonable levels of activity and prices, somewhere between the highs of 2007 and lows of today.

The Finns got out of their recession because they understand the importance of long-term thinking. Long-term residential property purchase is a long-term commitment based on personal planning and strategy. The ups and downs of a financial crisis should never determine whether you buy. In 2006, I put my money where my mouth was on this topic and bought a house to live in. The negative equity I am in is notional and unimportant and is already exceeded by what I would have spent on the dead money that is rent.

Some commentators disagree. People who don't mind paying rent for years, changing their kids' schools and moving house every few years disagree and treat residential house purchase as if it were playing the stock market. But a majority of us who want the stability and security that comes from property ownership look beyond the ups and downs of any given year in the housing market when making residential purchases.

We also need to look beyond the current year to anchor confidence in the future. In the dark years of 1957 and 1987, the idea that the economy would recover and reach new undreamed-of prosperity was laughed at. So was a book I wrote in 2007 entitled The Best is Yet to Come. Far from denying that a downturn was coming, it spent several chapters explaining why one was inevitable. But it also pointed out that in 1967 and 1997 -- 10 years after 1957 and 1987 respectively -- Ireland had bounced back. By 2020, it argued, we would do so again.

As also forecast in that book, GDP and employment are now settling back at 2005 levels. The forecast made -- to derision -- that the State's

population would rise from 4.2 million in 2006 to 5 million by 2020 is also being borne out. At 4.5 million and still growing last April, our State's population is up a staggering quarter million in just three years (to read some newspapers, you'd think the last person left Ireland on a famine ship to Americay last year). Employment is at around 1.9 million, meaning we have one worker for every 2.5 persons. That compares to the one-to-3.3 ratio in the Eighties. Headship ratio trends have been steadily falling and this is also good from the market. Back in the Eighties, the average number of people in a dwelling was four. That figure is now 2.6 persons.

Our population is also younger and healthier. And better off. GDP per capita was 40 per cent below the EU average in the Eighties. It is now 30 per cent above it. Which is why comparisons of the ratio of house prices to average incomes -- comparisons being used to suggest prices are overvalued -- are too crude: the Eighties was an era of single-income households. Now double or treble income households are the norm. Provided that banks and the Regulator avoid going from one extreme -- the excessive income multiples applied in the boom -- to another, healthy demographics and economic growth will create strong potential demand.

I say potential demand because several factors prevent that potential from becoming reality. But if the narrative on the economy remains dire and depressing, they will come under pressure to be tougher than they need to be and that could strangle growth.

Despite most real economy metrics settling back to 2004/2005 levels, there are several reasons why the housing market is stuck in the late Nineties. Sensationalist negativity -- as distinct from balanced coverage of negative news -- is hugely influential. The notion, for instance, that there are 300,000 vacant properties out there waiting to be sold is a misquotation -- deliberate or incompetent -- of a report by the National Institute for Regional and Spatial Analysis (NISRA). The true figure is between 50,000 and 100,000 -- that is, not more than the potential extra demand created by the past three years of population growth.

Residential property purchase demands confidence in the future. Undermine that confidence and the property market dies. The lack of multiple bidding is a major reason why -- as the suspension of the permanent tsb/ESRI monthly house price index proves -- the market has stopped working.

The second obstacle is stamp duty. The DKM/EBS Affordability index shows young, first-time buyers are now spending just 13 per cent of their after-tax income on servicing their mortgages, half of what they were spending in 2007 and less than they currently spend on food and drink. Here, property oversupply is certainly a factor in keeping prices low. But in the second-hand market, stamp duty is a ratchet screwdriver that only works in one direction when prices are going up. When prices fall, it acts as a barrier to trading, depressing activity across the buying chain and driving prices down further in a vicious spiral.

The artificial stimulants of tax reliefs have been abolished. So must the artificial depressant of stamp duty. The Government's only role in the market is to ensure the right amount of regulation in lending, neither too tight nor too loose.

Finally, just as he did a decade ago, the metrics need to be analysed by Peter Bacon to give a transparent vision for a stable and functioning property market in the coming decade. We must never again rely on that market for growth. But imagining that we can have a functioning economy without a functioning property market is equally stupid.

Marc Coleman is Economics Editor of Newstalk 106-108fm and presenter of Coleman at Large on Newstalk 106-108fm.

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