One of the things we really must have learned from the past three or so years is that inflated house values will quickly destroy an economy. House prices become inflated for these purposes when they reach levels at which they are realistically unaffordable but where they still find purchasers. This will often happen while interest rates are low, but once they increase (as eventually they always will) significant numbers of people will own properties they cannot afford; their fate will then not only be a personal disaster, but a wider economic one.
One thing you know for sure is that when average house prices are six times the average pay, it is only a matter of time before people will lose their homes; you simply cannot repay loans for that kind of money. This is, apparently, the current position is Australia, which until now has managed to escape the recession that engulfed most of the developed world. But when the bubble bursts, the fall-out will run through the entire economy, as it did in Ireland.
In Ireland of course this whole story has been played out with near tragic effects. Some of the biggest business names, whether in the property sector or in the financial sector, have become insolvent, and the taxpayer is having to deal with the consequences.
My own personal suspicion is that you cannot mix accommodation and investment. Generations of people in these islands have been invited to buy houses in order to live in them, and at the same time in order to make an investment whose asset value will increase substantially. This particular model will only work if housing appreciates in price constantly and substantially, because if it doesn’t the huge loans that ordinary people take out will overtake the value of the investments. But if prices appreciate too much, large sections of the population are pushed into unaffordable debts, which will quickly undermine property values: at which point you have large debts with negative equity.
It sees to me therefore that we need to address our taste for private property investments, and to re-engineer our housing so that it is based much more on rental rather than make-believe ownership (‘make believe’ in that the real owners are the financial institutions) – as is the custom in most European countries. We should learn from recent events that while bankers and property speculators behaved in an insane fashion, they were encouraged to do so by a social framework of housing that is quite unworkable in the longer term. As we now know, investment in property is not a safe bet when it is based on steep appreciation in asset values. I hope it will never go that way again.
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