Sunday 8 December 2019

Governor can safely pack away his bubble-popping tools

We should not be afraid of ending credit famine and return to prudent growth in lending

MAKE GOOD CHOICES: ‘Even within a fixed overall budgetary envelope, Government is faced with a vast scope of choice on the specifics of taxation,’ says Central Bank Governor Patrick Honohan. Photo: Gareth Chaney/Collins
MAKE GOOD CHOICES: ‘Even within a fixed overall budgetary envelope, Government is faced with a vast scope of choice on the specifics of taxation,’ says Central Bank Governor Patrick Honohan. Photo: Gareth Chaney/Collins

Marc Coleman

'We have a toolbox of measures which can be used to cool down credit-fuelled demand…We will not hesitate to use them". With these words, Central Bank Governor Patrick Honohan today reminded readers of this paper that, just as it is the Pope's job is to be a Catholic, a Central Bank governor's job is to nip credit-fuelled inflation in house prices - or any other prices for that matter - in the bud.

No problem there. But context is everything. He may not wish to create that impression, but his remarks lend fuel to say that there is credit-fuelled demand when in fact there is nothing of the sort. Nowt. Nada. Nichts.

Sure, house prices are up by 12.5pc nationally in the year to June and 23.9pc in Dublin, according to figures released on Friday. These rates have not been seen since the boom that preceded the crash. According to the "my dog has four legs, all cats have four legs therefore my dog is a cat" mindset of some commentators, this means another boom is upon us. And possibly, in their way of thinking, another crash.

Given the heterodox lapses of the past, Patrick Honohan is right to reaffirm his doctrinal purity. But as sure as the Pope is a Catholic, there ain't no boom. And in fairness, Honohan is not saying that there is: Just that if one emerged that he would act.

But there is a different problem with which - given economists' love of symmetry in all things - the Central Bank should be equally concerned about: Between a third and half of households are crucified by negative equity and afraid to spend. Young families are unable to trade their way out of sardine tins to provide decent accommodation for growing children. Hundreds of thousands of households are paying a property tax - designed to tax wealth - that in fact taxes negative wealth.

As the Central Bank's own figures show, loans for house purchase declined in May by 3pc, against an already low backdrop. On an annualised basis, mortgage drawdowns are lower than any year since 1972 and whether in Dublin or nationally, house prices are barely half of peak levels.

Besides the case for ending the agony inflicted on homeowners in negative equity, there are compelling economic reasons to suggest that far from worrying about prices being driven up by a non-existent credit bubble, we should be worried about them being kept artificially low by a dysfunctional banking system. With employment and gross income (which banks use to calculate loan to income ratios) already above 2004 levels, a population that has since then (despite emigration) risen by over 400,000, and with comparable mortgage rates, normal credit supply should see prices settle around 2004 levels (ball park).

Honohan is spot on in saying that - should one emerge - a credit-driven bubble would need to be burst. But a credit famine is equally unappealing. Here policymakers tend to err on the side of caution and security, perhaps this is because they enjoy working conditions that are highly secure.

Outside the walls of officialdom, most voters face poor and sometimes non-existent pensions and job insecurity. At a time when, across Europe, policymakers face the challenge of reconnecting with voters, concerns about some notional future credit bubble need to take a back seat to the here-and-now challenges of negative equity, overtaxation and resultant working poverty and underemployment. With real GDP rising at a rate of 2.7pc and with inflation positive and population growth we should not be afraid of positive rates of mortgage lending of around 5 to 6pc. So, while correct to be vigilant about any future threat of excessive credit growth, the Central Bank must equally accept that it is high time for a return to moderate prudent (single digit) rates of credit growth.

Honohan is also spot on in warning the Government against an electoral spending binge. The 31pc hike in spending between 2004 and 2006 did more damage to our economy and debt pile than the bank bail-out, adding as it did €20bn in spending each year (most of which is still there).

But tax cuts are different. Sure, the economic cycle should not, as Patrick Honohan says, be dictated to by the electoral cycle. But the economy of 2004 and 2014 are worlds apart. The last thing the economy needed in 2004 was a stimulus. Now consumers and homeowners desperately need the proverbial foot of high taxation and negative equity to be taken from their throats. Notional non-existent threats are no reason for letting them choke.

And it is badly needed. With every percentage rise in house prices, thousands of homeowners are released from the chains of negative equity and given the confidence to spend money. And a normalisation of the housing market can lift construction out of its current state of chronic underemployment and low output.

No one wants a "feel-good factor" induced for electoral purposes. But a prudent "feel-OK" factor is desperately needed. And if that happens to benefit politicians as well, that is incidental. Neither a return to moderate and sustainable house prices nor tax cuts - both of which are justified by economic fundamentals - should be denied to us just because of a dog-in-the-manger concern that politicians might benefit from them. The stimulus of 2004 was an unjustified binge at a time when it was least needed. The economy of 2014 is in a very different place and while caution is always worthy, cutting off our economic nose to spite a political face is never good economics.

The Marc Coleman Show is on Newstalk, Sunday, 8pm

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