David McWilliams: The great property scam is back to rip us off again
They're back! The creeps, the snake-oil salesmen and spoofers who condemned a generation to negative equity are cheerleading again.
The advertisers are salivating too because the "property porn" industry sees a chance to sell its fantasy again. The papers are once more displaying "dream homes" replete with doctored photographs and Mediterranean blue skies -- all at "knock down" prices. It's time to buy again, or so I'm reliably told by those who were so reliable last time that they gave us NAMA!
I am not saying that property won't recover ever, of course it will; but not from here. Irish property is still extortionately expensive. It is expensive not just on a comparative basis but, more crucially, it is expensive on the basis of what is happening in the economy. Any government that is urging people to buy houses right now clearly has no intention of learning anything from the mistakes of the past few years and therefore is condemned to repeat them -- with catastrophic results.
If you were a Martian economist and were asked to put together a blueprint for how Ireland can learn from this boom/bust travesty, the first point on the list would be that Ireland should try to 'lock in' the competitive gain that cheap property gives a country.
We should let property fall to a level that we can all afford and then start again. As well as a labour force that is willing and educated, low taxes and cheap land should be part of our competitive offering. In that way, we can afford to pay our workers more, because we are paying our landlords less.
But that isn't happening. And worse still, the property hoodlums are back on the street again. To have been ripped off by the property scamsters once is bad enough, to be ripped off twice is a travesty.
Buying a house now makes absolutely no economic, financial or social sense because prices are condemned to fall much further and anyone who buys now will be suckered into the false rally, known as a 'dead cat bounce'. Given what we now know about the boom, it's hard to feel sorry for someone who believes the hype-property brigade. But even a cursory glance at the financial numbers today -- just a little bit of due diligence -- suggests that we have a long, long way to go before house prices reach the bottom. So beware, see through the glossy brochures and don't say you weren't warned . . . again.
Here is the nub of the issue. The reason the property merchants are back is because over the past 24 months, Ireland has been turned from a democracy to a 'bankocracy'. A bankocracy is a country in which every major decision is taken to bolster the interests of the banks.
A democracy was one of those quaint ideas, like the notion that a state would be governed according to the interests of the citizens. In this 'bankocracy', because Irish banks can only be saved if the property market rises, the State will do everything in its power to extort cash from the citizen to give it to the banks via the property market one more time.
Everything the State has done so far has been to promote a bankocracy over democracy. It is far from clear why it is doing this. What is obvious is that the politicians who presided over this mess have no intention of learning from it. Initially, the guarantee -- which I was a supporter of -- was about containing the crisis. If you see a contagious bank crisis as a forest fire, doing nothing in the chaos of September 2008 and allowing the banks to go under would have been like a firefighter letting a forest fire blaze out of control, irrespective of what was burned in its wake. The State had to do something at the time.
However, the initial advice was to limit the guarantee to two years and then let it lapse. In this way, you could contain the crisis, see how bad the banks were and step back, giving the problem back to the banks and their creditors who had (a) caused it in the first place but also (b) are best placed to unravel it.
We are now being told that if we were to take the guarantee away now, the banks would collapse because of their funding difficulties. Well if a bank, as a business, can't survive without government support, then it ceases to be a proper business and should be given to a liquidator to get the best price for any assets it has. The deposits can be guaranteed, transferred and form the capital base of a new or existing bank and away we go. No old bank, no old problem.
But that is how a capitalist democracy works. However, Ireland is not a capitalist democracy; it is a cronyist bankocracy where the government has tied the interests of the citizen to the interests of the bankers with calamitous results.
The government believed the banks' hostage-taking stance. The banks claimed that they had a hostage called 'the economy' and that if the government didn't give them the cash they would pull the trigger and sink everything. Now that the hostage-takers have been rewarded with a huge ransom, we face a concerted effort to inflate the property market again. Having given 'cash for trash' via NAMA, the only way that the ransom can be validated is through inflating the market again. But it won't work. Prices will keep falling.
Look at the chart to see why. For the market in Ireland to clear, investors have to take up most of the slack. This means in people's heads they need to have a profit model, which validates why they are buying property. In the commercial world, the yield -- which is how much rent the property makes -- is the crucial barometer.
Let's say the yield on property has to be 7pc at least to make it worthwhile investing in property, then we can see with some clarity how much prices are still overvalued. The average cost of a house in Ireland is €250,000. The average rent per month is €863. This gives a paltry yield of 3.48pc per year. Now to get the yield up to 7pc, either rents have to double -- which is not going to happen because wages are falling, taxes rising, unemployment rising and emigration is back -- or prices have to fall. So average house prices must fall by another 45pc to reach fair value of €135,620. Unless prices fall back dramatically, you would be mad to buy because you would simply be paying the banks a subsidy on top of the tax you are going to pay to bail them out!
Another way of looking at how overvalued houses are is to examine the chart. The chart shows how much out-of-whack houses prices still are with respect to the average wage. Up until 1996, house prices and wages moved in tandem. After that, house prices moved out of synch. By 1999/2000 there was a clear bubble emerging and the rest is history. But as you can see, if rises in house prices are to get back to where they bear some relation to rises in wages, house prices have to fall back dramatically. In fact, to get back to a proper yield, house prices must tumble.
Anyone tempted to buy now should try to see through the spin that says: "Now is time to buy". But this shouldn't be that difficult. After all, who is saying that now is the time to buy? The sellers! Enough said.