Housing insanity

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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7 Comments on “Housing insanity”

  1. Vincent Says:

    They could reenact the “Three Fs” (Fair Rent, Fixity of Tenure and Free Sale), with up to date tweaks. And all this rubbish would be halted in its tracks. While at the same time making sure that the owners do not run the properties down. And there are very simple mechanisms to prevent such happening.
    Business rents could be restricted within the towns by making certain, certain core activities have priority. And I do not mean £-shops or a gazillion dress shops owned by the kid of the local GP/legal eagle or Auctioneer. But the type of shops that carry people into the centre. The butcher/Baker/ Greengrocer. The candle maker and the fellow flogging incense can be off out on the ‘by’-pass.
    I don’t know when I was on the main st of Kilkenny/Clonmel or Waterford. While I would consider Cork Dublin or Limerick ludicrous. And Shop St in Galway pointless.
    As to that Supreme Court decision on Rents delivered in the 70’s that everyone trots out. Well, property is but a word and given that the whole place one way or another is being held on a lease, how can one lease be property and have priority over another.

  2. Mark Dowling Says:

    Several mistakes were made, but the biggest was for the government to keep contributing to the growth of the market after it was self sustaining. Mortgage interest relief should have been ratcheted down in an orderly fashion in the early 2000s and mortgage insurance made compulsory for anyone with less than 20% down, beginning with houses bought as investment/rental. Instead the government reacted to high house prices with more pro-cyclical policies because that’s what the donor… ahem… developers wanted.

  3. Robert Browne Says:

    NAMA is a concerted effort by the government to try and make sure ordinary people do not get cheap property. These fiasco sites should be sold and the excess houses and apartments sold if there are any buyers for them. One Caveat, developers who are “bankrupt” should not be able to buy these cheap, less than cost houses/apartments with salted away money through family and friends.

    It is better for people to be paying a 100 Euro’s a week of their own money for an apartment than the government giving them a 650 Euro rent subsidy every month to ‘rent’ the apartment. The government have not figured that one out yet. The government should move the knocking down stage forward also. Removing the mistakes from the landscape.

    If the government were not too busy bankrupting the country trying to protect their developer friends these surplus houses could be sold off below cost and at least these individuals would be able to afford the payments.

    Building houses is not expensive. It becomes expensive when the site costs are artificially inflated and end up costing a fortune or when you have the government lining up to take a 43% tax take from the total cost of building a house or apartment that is when the prices morph. Later the government have to pay the money back to the dispossessed. Large numbers of people are going to end up with no roofs over their heads before this crisis is over. That will start happening after the last batch of bad loans have been transferred to NAMA february next.

    It must be apparent to all by now, that NAMA is the biggest obstacle to normalization of the banking system. If banks go broke they go broke and are replaced by other banks within a short time. Their debts would not hang around the necks of future generations. Lenihan has given us a zombified broke banking system with debts placed around citizens necks and those people can only pay if the state borrows the money to pay them. That is how crazy the whole thing is.

    People have also conveniently forgotten that we were bringing in workers by the plane load from abroad to assist us with the crazy building government and local government sponsored spree. We need one planning authority for the whole country to avoid the myriad petty corruption evident at local level.

  4. Al Says:

    We cant have gombeen capitalism without land speculation.
    And from the looks of things we want gombeen capitalism….

  5. kevin denny Says:

    There is a difference between us and Australia which is that here the real economy crashed taking the property bubble with it whereas the real economy in Australia is doing pretty well, all things considered. Our “real economy” was to a large extent based on construction which has made it all the more painful whereas theirs is being driven by demand (mostly from Asia) for commodities i.e. mining. So I would not expect them to suffer anything as dramatic as we have had. Plus their government is in a vastly better position to prop things up if it all goes pear shaped.

  6. Pete Says:

    itulip.com has been saying that for years that property asset bubbles are like atom bombs for the economy. First the expansion and then the fall out.

    I’m glad that there will never be such an economic malpractice in Ireland ever again. When prices stabilize then people will know where they stand. At the moment we are still in the early part of the contraction phase and so the pain will continue till probably the end of the decade but who knows.

    To speed this process up there needs to be a website where both buyers’ offers and owners’ offers can meet in the middle. There will be a lot of personal bankruptcies but the excess debt has to be lanced quickly IMO.

    There is such a website that does this and I will shamelessly plug it here. I finished it yesterday and hope it will help the property market in time to come. It’s called http://houseflog.ie/ and it’s free to use.

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