Thursday 23 May 2019

There is no question: we are in midst of another bubble

House buyers are under pressure
House buyers are under pressure

Thomas Molloy

MANY mainstream economists argue that Dublin is not experiencing a house price bubble at present. They are wrong, just like they were wrong last time.

There is no malice in most cases; they almost certainly believe what they say. The problem is that the data they are using to formulate their opinions is faulty while their definition of what constitutes a bubble is limited.

Loose credit is not the only way to create a bubble; illogical government policies or short-term supply constraints can also push up prices in the short term by creating unnecessary shortages. That's a bubble in most people's book if by bubble, you mean something that can be pricked with a pin and explode.

Yesterday's CSO data appears to show that the cost of buying a house has risen by a bubble-like 24pc in the capital over the past 12 months thanks in part to the biggest monthly jump recorded since records began in 2005. The data is problematic because it excludes the 50pc of transactions that are cash and is several months older than the figures would suggest.

The reality is almost certainly more extreme. Separate data which looks at individual areas in the capitals suggests prices have gone up by far higher percentages in places as diverse as Dun Laoghaire and Finglas.

Wild swings in any direction are bad news. So what will happen in the next few months and what will happen in the medium-term?

The short-term is clear enough; we will see further gains in the capital and many other areas around Leinster as well as our major cities. There is no reason to believe that the ECB will stop printing cheap money in the short-term thanks to the fragile nature of the eurozone and there is no reason to believe that the shortage of property will unwind very quickly.

In the medium term, things are likely to be different. The 'recovery' we have seen on prices depends on very low transactions.

While transactions have risen 35pc year-on-year, transaction activity remains low, accounting for 1.7pc of the country's total housing stock and only 2.2pc in Dublin. In other words, we have half the number of transactions seen in the UK when adjusted for population.

That is not sustainable. Around one in 10 houses in Dublin stands empty. The owners, whether they are banks or families, will soon step in to sell these buildings before they begin depreciating.

Goodbody Stockbrokers made the simple point that this is not a "quality" housing market recovery. It also helpfully gave a good definition of quality recovery; a bounce "accompanied by substantially improved liquidity, increased gross mortgage lending and more supply".

We may well see developers step in and begin building again despite their self-serving claims that it is still too expensive to build.

Whether we do or not, the reality is there are already enough houses in the capital to put a roof over the heads of everybody currently looking for a home. It is only a matter of time before people begin selling in big numbers. The trend has already begun at the top end of the Dublin market. It will trickle down. It always does.

Rising prices are seductive for anybody who either owns a house outright or anybody in or close to negative equity. Most people probably want prices to keep rising for years against their better judgement. History and common sense tell us they won't.

Irish Independent

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