Wednesday 26 June 2019

Mark Keenan: 'Exemption restrictions fog our reading of the housing sector but there's no need to panic yet'

  

Michael McDowell’s promised stamp duty abolition never materialised but still affected the market in 2006. Picture: Collins
Michael McDowell’s promised stamp duty abolition never materialised but still affected the market in 2006. Picture: Collins
Mark Keenan

Mark Keenan

When the last property crash occurred, we didn't see it coming for eight months because there was a great big red herring distracting us from the real reasons behind fast flattening prices.

It started in mid 2006, when Michael McDowell, then a PD minister in Government, promised that he would abolish stamp duty in the Budget.

Around the time of his announcement, property prices flattened in the capital at the high end of the market. Everyone reckoned that the slow down in big house auctions in Dublin, stasis in prices and a softening in activity, was down to the fact that no one in their right mind would buy a house (especially a big one) in the six months to the Budget given that there was a promised stamp duty wipe out on the cards.

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Well, the Budget came and went and there was no abolition. But prices and activity continued to languish. It was only when the first data showing falling prices in Dublin was reported in March 2007 that some realised something big was coming down the tracks (and the point when vested interests started talking about 'soft landings').

The red herring effect is the reason why we should make all attempts possible to remove distorting factors from the property market, especially when clarity is required for Government or Central Bank to make far reaching decisions on policy.

Of course, we must forget wiping Brexit off the visibility screen - there's not a lot we can do about it.

However, we can sort out the distorting effects caused by annually frontloaded mortgage exemptions. which are playing a part in fogging up our windscreen right now when it comes to reading what's going on with the property market.

Since the recovery started we have seen prices soaring in Dublin and Cork while they have been dead elsewhere in the country.

More recently we have seen the opposite occur as Central Bank lending restrictions put the brakes on Dublin prices, in turn boosting prices in 'long' commuter locations in particular.

But we haven't yet seen such a flat quarter as this one occurring in the Irish Independent/REA survey for semi-detached homes across the country.

The flat prices are not all one story - there are different factors at play in different parts of the country and to different degrees. In Dublin the loan ceilings were long ago reached among average earners for most of the city's semis, and this has led to small rates of inflation generally through the past few years, most of which has occurred for smaller and cheaper homes.

But the frontloading of exemptions has lately caused a dulling of price inflation in the latter end of the year while boosting it in the first quarter.

Last month the property sector appealed to the Central Bank to look again at the way exemptions are doled out and the appeal was rejected. At present there's a "January sales" mentality in place whereby banks go from a 'no exemptions' position in the last quarter to a 'come and get it' binge from January, until all the exemptions are gone.

And, as that radio ad says, when they're gone, they're gone.

A more gradual dispersal would be better, with some give and take to increase and decrease the issue on a monthly basis and with corrections allowed over longer terms.

It would at least remove the distorting effect that the current method of dole out has on the market.

While Brexit has had an impact on the top end in Dublin mostly, it has a huge impact on property purchase outlook nationwide, especially with a 'bad' British exit now looming.

It stands to reason that Brexit has tended to influence the market more in locations where the farm incomes are a big factor in the economy.

Returning emigrants from the UK also make up a large chunk of activity in regional markets and these buyers will be sitting tight right now in the Brexit storm.

Their spending power on Irish property can go up or down in big increments depending on the outcome so they're right to wait.

Many regional locations have their own local Brexit fears: border counties whose local economies could be poleaxed, holiday locations which might lose tourists, areas popular with British based holiday home buyers and centres like Cork which include a substantial number of people who commute to London by air. All with potential to whack the local property market.

The common outlook in the property sector is that there's no panic and that the New Year, with a Brexit outcome of some kind and the usual bumper issue of mortgage exemptions, will keep the market ticking over into 2019.

There's no fear yet of a crash landing. It's just something of a shame that the Central Bank's lending regulations, enforced for years and cited by experts as the main reason why we won't have another crash, have also been responsible for so much fog at year's end.

Irish Independent

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