Ireland's banking collapse was mainly due to excessive lending against property assets, including residential property. The Irish banks became the principal mortgage lenders, inflating a price bubble with 100pc loans and careless inattention to borrowers' capacity to repay. They also made extravagant loans, without adequate collateral, against land and commercial property.
Why did the Irish banks became so dangerously exposed to residential property? This did not happen in most other European countries. A part of the explanation is that the Irish political system had managed, over the preceding decades, to create a highly dysfunctional housing market, notably in the form of supply restrictions in the areas of highest demand. The resultant upward pressure on prices in Dublin and other urban areas needed camouflage and it came in the form of no-money-down access to mortgage credit at low interest rates. Entry to the Eurozone in 1999 delivered both low interest rates and an enhanced ability by the banks to borrow wholesale funds abroad. A decade of rising house prices followed, which kept everyone happy: first-time buyers could 'get on the housing ladder' despite the unreal level of prices, and existing home-owners could enjoy the illusion of unearned increases in wealth. The lucky owners of land that might qualify for residential zoning could trust to good fortune, or to the favour of pliable politicians.
Mistakes in economic policy sometimes beget further mistakes that cover them up, at least for a while. The Irish story, in substantial part, is a story of a faulty housing policy whose weaknesses were not corrected but were concealed through a disastrous policy on housing finance. The message was 'OK, we have screwed up housing policy and prices are too high. But hey, not to worry, you can still afford these silly prices, because you can borrow 100pc at low cost'.
Policy mistakes that cannot be financed do not endure: they correct themselves quickly and at modest cost. But the damage can escalate out of control when the credit system is subverted to the financing of unsustainable policies.The mortgage market in Ireland, as in other developed countries, is the biggest component of the overall credit market. The Irish banks were used to finance a very large mistake, which they were enabled to do for an extended period because of Eurozone membership. To finance a mistake on this scale is a bigger mistake, is not sustainable and was not sustained.
The unwillingness to face the music in housing supply is about to spawn further policy evasions. This time round the palliative of cheap and plentiful 100pc mortgages to buy houses at crazy prices is not realistically available. The Central Bank has finally imposed a cap on loan-to-value ratios in the face of populist opposition, and the surviving Irish banks have thankfully lost the capacity to borrow wholesale funds at will. But the population continues to rise, particularly in the cities and in the age groups that wish to form households. The prime age-group that aspires to home ownership is in the late 20s and 30s. In all Irish regions, except Dublin, the Central Statistics Office figures for April 2014 show that around 20pc of the population was in this age bracket. In Dublin it was 28pc, and it is hardly a surprise that pressure on house prices, and rents, is greatest in Dublin. Put another way, of all the people in Ireland aged 25 to 39, about 45pc live in Dublin and the three surrounding mid-east counties. In Dublin county alone, 34pc of all the country's 25-to-39-year-olds are resident.
It would have been sensible to have built fewer homes nationally during the bubble. But in addition to over-building, the construction boom was in the wrong places. There are none of the ghost estates that disfigure the provinces in Dublin. The Irish housing boom began in earnest in 1998 when output exceeded 40,000 for the first time. The figures collapsed from the peak of 93,000 in 2006 but did not fall below the 1998 level until 2009. In the 11 years in which output exceeded 40,000, almost 700,000 new homes were constructed in Ireland. Only 22pc were built in Dublin. Had the number reflected the capital's one-in-three share in the home-buying age-groups, an extra 85,000 would have been built in Dublin city and county.
According to the website daft.ie, a three-bed semi in most parts of Dublin averages around €300,000, with the figure over €400,000 in the south county area. The same house costs less than a third of this figure in other parts of the country. There are several rural counties where three-bedroomed semis in good condition can be acquired for not much over €100,000. A two-bed terraced home in south county Dublin costs as much as a detached five-bedroom property in Cork city. There are many parts of rural Ireland where it would be difficult to find any home on the market costing much over €300,000. These price differentials would be closed very rapidly if builders were free to meet demand with supply. Bricks, mortar, glass and slates do not cost extra in Dublin, nor should building labour. The differential is the product of the shortage of zoned and serviced land in Dublin, a self-inflicted policy mistake.
Until the mid-1970s, when the restrictions of the 1963 Planning Act began to bite, the price of comparable new homes in various parts of the country did not differ very much. The premium over construction costs, representing the scarcity value of zoned and serviced land, was low in all areas. In a country with abundant land, this is precisely as it should be. But over the next few decades an enormous gap has opened up between house prices in Dublin and in the rest of the country. This gap has been around so long now that people have begun to regard it as part of the natural order.
Dublin is a small city by European standards. One of the most destructive features of the Bubble was the dispersion of the Dublin population north, south and particularly west, to towns and villages 60, 70 and 80 kilometres from the capital, from which the displaced Dubs could commute through the unzoned prairies closer to the city. There is enough unzoned land within 20 or 30 kilometres of Dublin to accommodate a megacity at modest densities. To this day, there are farms inside the M50, that is to say, within eight or nine kilometres of the city centre.
The Government's latest wheeze is rent control. Housing is too expensive, so the politicians gallop to the rescue with price controls. This cannot work, since it leaves the artificial supply restriction untouched. The solution, namely increased supply in the areas of the country where there is growing demand, involves political decisions which might offend somebody, for example existing homeowners or those banks with borrowers in negative equity. Rent control is a perfect extend-and-pretend policy in the circumstances. Since local councillors have not, under pressure from residents' associations, zoned underutilised land for housing where it is needed, the zoning power should simply be removed from local government and centralised. Organs of state which misuse their powers deserve to lose them.