Tuesday 26 March 2019

Strict mortgage lending rules will lead to more anger

Policy makers need to rapidly reconnect with citizens or instability will result. Mortgage lending rules are a case in point.

KEEPING ORDER: The water charges led to resentment among the public and widespread protests, and the impending new rules on mortgage lending have the potential to do the same. Collins Photos.
KEEPING ORDER: The water charges led to resentment among the public and widespread protests, and the impending new rules on mortgage lending have the potential to do the same. Collins Photos.

Marc Coleman

Normally the gap between the governed and the Government is a matter for political correspondents and commentators. And, normally, that's as it should be. And ask most economists what they see as the big risk for the year ahead and they talk about the Eurozone economy, a possible financial crisis starting in Russia or, possibly, a slowdown in China. But if it undermines confidence in the stability of economic policy, political fragmentation at home could be a far more mortal danger to us than any risk from the global economy.

There are external threats to our recovery. But we have shown we can weather them well. Like a bicycle in a traffic jam, we can weave in and out of stalled economic traffic to beat the herd. But that is because we have had stable governments, like them or loathe them (most don't like them). Sure, the microeconomic side of policy - too much tax and too little real reform or cost saving - is open to criticism. But macroeconomic policy has, whether you feel it yet or not, turned this country around and left us in a far better condition than other countries like Greece, Italy, Portugal or Spain. There is far more hope in Ireland now than there is in Greece.

For those who would take this for granted, or say it is small comfort to those struggling to get by, believe me when I say that I understand. But if that macroeconomic stability is taken away, the adverse consequences will become very clear very quickly. Wish for an overthrow of the current system all you want. But remember that until a viable alternative to current policies exist, we should be very careful what we wish for.

Note here that I am not "blaming" Independents or opposition parties for possible instability. The stability of the political system is the responsibility of a wide range of actors, including government, media and opposition. But, as many readers will remember, Ireland experienced three general elections in less than two years during the early 1980s. The rising government spending, debt and taxes - which resulted as each government frantically offered goodies to Independent TDs to stay in office - were a disaster. The binge spending we saw in the 2004-2007 period was little better. But at least in the seven years that followed we have managed to pull back from the brink.

Between 1960 and 1990 Italy's party political system fragmented in the way that ours appears likely to do over the coming year and a half. The frequent unstable governments, each beholden to regional or sectional interests, pushed up Italy's public spending, and debt went from around one third of GDP in 1960 to over one half (Spending) and nearly 100pc (debt) respectively by 1990.

If we follow Italy down that path, we will be starting at a higher debt level than they were when they ended it.

The water charge issue shows just how the public can become disaffected. But it also shows how the political system can recover lost ground if it responds quickly. Pandering to public opinion might be seen as populism. And when public opinion is demanding lower taxes when consumer spending is booming, this would be fair comment. But when consumers are expressing outrage over perceived waste and over-taxation at a time when they are seriously squeezed, then what we are listening to is not populism. It is a cry for help. And it is a foolish government that does not listen.

Having been dealt a bad hand, Environment Minister Alan Kelly has done just that, and while he won't have pleased everyone (in politics, you never can) he may have ensured the water charges issue will be less of a headache in 2015 than it was this year.

Unfortunately, a bigger headache looms. And it is one that could alienate a voter base just as large and equally critical - current and prospective homeowners. If credit was booming and house prices were close to boom levels, restrictive mortgage lending rules would be justified. But they aren't.

For decades, a lack of secure rental accommodation has forced existing homeowners to buy rather than rent (a choice seemingly vindicated by the sight of those losing their home due to unaffordable rent increases). Thanks to a lack of spatial and urban planning and a failure of financial regulation, they paid more than they should have. High levels of taxation on housing, VAT levies and corporation tax contributed to this. Then came the tens of thousands they paid in stamp duty. Then came the abolition of mortgage interest relief. Then the imposition, without rebate for stamp duty, of a household charge.

Now a new blow is on the horizon. Having since had children (or more children), these families now need to trade up. But from January they may be shut out of the housing market permanently. So may prospective buyers who are desperate to avoid a lifetime of reliance on the perils of the rental market and the goodwill of a landlord.

As both NESC and the ESRI have correctly pointed out, the requirement to stump up a fifth of the price of the house for a mortgage could lead to huge social divisions. It would also be, as the ESRI stress, pro-cyclical - imposing restrictions that are too tight before the market has barely started breathing. Regulation is most needed when property prices are overvalued.

Despite "boom-time" rates of house-price increases, the levels of house prices are nowhere near boom-time levels. Rises in house prices are not, in fact, a sign of an overheating market. What they are is what the Central Bank itself predicted in a paper published back in May 2012 ("Why are Irish House prices still falling" by Gerard Kennedy and Kieran McQuinn): restoring normality to a situation where prices had "fallen somewhat below the level prevailing market fundamentals would suggest". That paper cited the gap as being up to 26pc. When and only when that gap is closed should restrictions be introduced, and then only gradually.

Imposing overly strict requirements now could, by contrast, be hugely adverse - can you just imagine a young couple earning €40,000 between them, attempting to save €35,400 between them before their first child turns 6, while simultaneously grappling with rising rents, a high cost of living and high taxes. This €35,400, by the way, is 20pc of the national average house price of €177,000. On top of the burden of taxation - which, at this income level has risen by over one third since the crisis began - this additional savings requirement would have the same effect on family purchasing power as all those tax increases put together. Those who tried to meet this requirement would be consigned to a decade of de facto poverty.

This is at a time when CSO data tells us up to 27pc of the population endures some form of "enforced deprivation". Those who tried to meet these criteria and failed - or those who could not even attempt to meet it - would end up simmering with resentment at those with wealthy parents and/or a highly-paid stable job. Pressure on social housing would become intense. The prospect for deep social divisions - at a time when they are already widening - is very great.

Anger at a policy-making elite, which is considered to be protected from economic reality, could also intensify. Given how these rules are perceived to come from the EU, this wouldn't help the European cause in Ireland much either.

So far, Ireland has escaped most of the strong anti-EU sentiment that is rising in Britain, France, and now even in that bastion of pro-EU opinion, Germany.

But if the Troika is seen to be shutting us out of the housing market, that could all change very quickly. And compared to the anger aroused by water charges, the anger and emotion at being denied a home would be even stronger.

Most of all, such a move could also deeply and permanently alienate from mainstream politics a huge cohort of voters whose patience has already been tested to the limit.

Given the fragile state of the party political system, that could be the most dangerous impact of all.

Marc Coleman presents 'The Marc Coleman Show' every Sunday from 9pm on Newstalk 106-108fm.

Sunday Independent

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