PROPERTY TRUTHS
Richard Curran: 10 years after ‘Future Shock’
NEXT week, it will be exactly 10 years since RTE broadcast a television documentary I made on the property market. The programme suggested that we were in grave danger of a sharp house price crash and it examined what a financially traumatic event like that might look like.
It was watched by over half-amillion people and it divided opinion. Many vested interests, from politicians to estate agents and economists, lambasted it for being “negative”, “irresponsible”, “perversely irresponsible” and “talking down the economy”.
Media commentators variously described me on TV as “politically motivated”, the “boy who wanted to cry wolf ”, a “loose talker who costs jobs” and the man who “wrecked the property market”.
The truth was that exactly 10 years ago we were on the cusp of a massive economic disaster. Most of us didn’t realise it. Many were unprepared to even contemplate it.
As we know, the scale of the collapse was truly frightening.
Around 500,000 people lost their jobs. One third of a million households would be in negative equity by 2012. The banks would collapse at a cost of €62bn (net cost around €32bn, still one of the most expensive in the world for our size). The country would need a €60bn bailout from the Troika within four years.
With so much pain, you would think this society had really learned the right lessons from it. And in some ways we have, while in other ways we continue to fail.
House price inflation has surged in the first three months of this year. Many will be worried when they see the asking price for new sales in Dublin was on average €19,000 higher in March than it was before Christmas. House prices nationally are up 9pc on the year while Dublin prices are higher again at 10.2pc.
A loosening up of bank lending limits, the Government’s help-tobuy scheme and a fear of further rises have contributed to an acceleration in house price rises. It is deeply ironic that rents in Dublin are now 15pc higher than they were at the peak of the boom a decade ago, while house prices remain around 30pc cheaper.
Someone who bought a house in Dublin in 2013 to rent it out has seen its value go up by around 65pc. Meanwhile, Dublin rents are 65pc higher than in 2010. So if you bought a house in Dublin to rent out in 2013 for €300,000, it is worth about €195,000 more. You can charge about 40pc more in rent and sell the house three years from now without paying any capital gains tax. At those rents, why would you?
But there is an obvious human and social cost to this. People are handing over massive percentages of their income in rents or racking up significant mortgage debt to get on a property ladder, which increasingly feels like it will continue to go up. And there are economic costs and dangers too. The housing crisis is a significant threat not only to our citizens’ quality of life but to our attractiveness and competitiveness as a place to work and do business.
There are stories now of people paying €400 per month for a bed in a room in Dublin. This will undermine our economy’s ability to attract inward investment. It will stifle achievement as some people will never make it to university because their parents cannot afford city rents.
Long commutes eat away, not just at people’s productivity, but at their quality of life and their health. Ultimately, wage demands will increase, the economy will become more expensive and less competitive. However, the more immediate question on everybody’s lips is, are we heading for another boom/bust?
Today’s rapid house price gains are not being driven by the same things.
The brakes have been put on excessive bank borrowing, firstly by the banks themselves and also by the Central Bank. For example, 10 years ago, private sector credit was growing at close to 30pc per year.
Today, net credit has been shrinking as Irish people pay down more debt than they take out. There are early signs of that changing now, but it is nowhere near the levels of the past.
A decade ago, the banks were using money borrowed on the wholesale international markets to fund the consumer splurge. Traditionally, banks used their deposit base to fund lending — but in the noughties, that all spiralled out of control.
Ten years ago, banks had customer deposits worth less than 60pc of the loans they had issued. In some cases, like PTSB, banks had lent out three times what they held in deposits.
Today, across the banking network, deposits held in the banks are equal to around 80pc of the loans issued. This is a much safer model — but is still below the 82pc figure of 17 years ago.
There are still genuine risks in the system. For example, a decade ago, property-related loans accounted for around 64pc of outstanding loans. That figure is roughly around the same levels today.
But this is because of legacy property loans rather than new ones. For example, there were only 24,000 new mortgages lent last year. Those legacy bad debts are still hanging around and pose a risk for banks, but nothing like they were five years ago.
The banks will no longer do large-scale 100pc mortgages or lash out consumer loans of tens of thousands to practically anybody. In 2006, 30pc of mortgages were for 100pc of the value of the house. So that is all different. However, there are real factors which will continue to drive up house prices and rents unless active measures are taken to counter them. Population growth is one. By 2030, some 65pc of the population will live within 25 miles of the east coast. By 2040, there are expected to be an additional one million people living in Ireland.
More immediately, rising house values are taking large numbers of people out of negative equity. This is a very positive development for many struggling families who got caught up in the buying frenzy of the last boom.
They have either been trapped in starter homes, or even ended up becoming reluctant landlords as they tried to move on from the mistakes of the boom.
Those people are now finally getting out of their small apartments and looking to trade up to more suitable family homes.
They are ready to become buyers again, for the first time in perhaps 11 or 12 years. At the end of 2012, there were around 314,000 households in negative equity according to the ESRI.
Accelerating house prices may eliminate negative equity entirely by next year.
Lessons have been learned in relation to banking and regulation. Lessons have also been learned by many consumers who are still scarred by their financial experiences of the last eight years.
The real danger in all of this is whether our politicians have learned the lessons.
The enormous human, social and economic value of having relatively cheap housing, whether rented or acquired, has not been grasped. The solutions are actually obvious. Implementing those solutions involves making some tough decisions but not impossible ones.
The Central Bank did the right thing with its mortgage cap but it was heavily criticised at the time — not least by politicians who wanted to row back on it. After easing up on the rules, the Government still went ahead with a help-to-buy scheme that stimulates demand in the short term but does nothing for supply in the short term.
The Government needs to get builders building in more costeffective ways. High-rise should be considered, especially in parts of Dublin.
There should be more brownfield sites used for building houses in cities. The State is likely to make a profit of around €2.3bn on the wind-up of Nama. As a taxpayer, I think it would be better for Nama to break even, and that €2.3bn be used to roll out large numbers of affordable properties.
According to some estimates there are close to 6,000 Airbnb properties up for short-term rent in the Dublin area. The Government needs to deal with professional landlords using apartments for short overnight Airbnb stays, as it would free up properties for renting.
A review has been promised on building costs. It should be speeded up and its recommendations implemented quickly.
Rapidly rising house prices and rents are only good for a handful of people.
Unlike a decade ago, our current rising prices are based on thin volumes and are not being fuelled by excessive borrowing — for now. House prices are not sitting on the edge of a cliff as they were a decade ago.
But we can’t afford to get it wrong again. Ten years ago our national debt was €37bn. Today it is about €180bn. The warning signs are telling us that we still haven’t solved our housing crisis.
Our leaders didn’t listen the last time. They have to this time.
‘Ten years ago, Ireland’s national debt was €37bn. Today it is about €180bn...’