Zoning power is key to solving housing crisis
Politicans are unwilling to face the music on housing supply and are instead papering over the cracks with rent control, says Colm McCarthy
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'.