Hous­ing prob­lem may not be a bub­ble but it is a cri­sis

The Irish Times - Business - - FRONT PAGE - Cliff Tay­lor

Is his­tory re­peat­ing it­self? Or is it dif­fer­ent this time? The most im­por­tant part of the ti­tle of the new ESRI pa­per en­ti­tled Ir­ish House Prices: Déjà Vu All Over

Again? is the ques­tion mark at the end.

Prop­erty prices are again on the rise, invit­ing com­par­isons with the Celtic Tiger era, but the firm con­clu­sion of the re­port is that we are not back in the 2006-2007 ter­ri­tory where a credit-fu­elled boom pushed prices here out of line with eco­nomic fun­da­men­tals. This, in turn, begs an­other ques­tion.

If this is the case, then why do peo­ple find it so hard to af­ford homes and why is the rental mar­ket in such a mess? We are clearly in a cri­sis: it is just a dif­fer­ent kind of one.

The ESRI pa­per, writ­ten by re­search pro­fes­sor Kieran McQuinn, points to the ex­tra­or­di­nary long-term moves in Ir­ish house prices, which had the largest gain among in­ter­na­tional coun­tries be­tween 1995 and 2007, fol­lowed by the big­gest fall dur­ing the crash and, since then, the most sig­nif­i­cant re­cov­ery.

The Ir­ish hous­ing mar­ket matches our econ­omy in terms of its boom-and-bust vo­latil­ity. We just don’t do slow and steady. How­ever, what mat­ters is where we are now, and McQuinn con­cludes – based on a wide range of fac­tors – that house prices are not out of line with eco­nomic fun­da­men­tals and could, in fact, be a bit higher on the ba­sis of what is go­ing on in the Ir­ish econ­omy.

This is in di­rect con­trast to 2007, when a credit bub­ble pushed prices 30 to 40 per cent above the lev­els jus­ti­fied by eco­nomic fun­da­men­tals, driven by a boom in the pro­vi­sion of credit.

Be­fore the cri­sis, the key fac­tor push­ing up prices was soar­ing credit avail­abil­ity. Re­mem­ber the 100 per cent mort­gages. Now it is a short­age of sup­ply, mixed with a re­cov­er­ing econ­omy. In some cases the prob­lem for buy­ers is that they can’t af­ford a prop­erty, but in many cases, it is that they sim­ply can’t find one.

McQuinn says prices are set to rise by a fur­ther 20 per cent over the next three years. Those strug­gling to buy and find­ing the sums cur­rently re­quired chal­leng­ing, or im­pos­si­ble, will look askance at that fore­cast.

In­come lev­els

While over­all house prices in Ire­land may not be out of line with in­come lev­els, there clearly are af­ford­abil­ity prob­lems for a sig­nif­i­cant num­ber of po­ten­tial buy­ers – and the risk is of these quickly wors­en­ing in the next few years.When house prices are ris­ing at 12-13 per cent per an­num at the same time as earn­ings are ris­ing at 2-3 per cent, the dangers are pretty clear, even if house price growth is, on the ESRI fore­casts, set to slow a bit.

The grow­ing af­ford­abil­ity prob­lem shows up in var­i­ous ways. House prices are higher in Dublin, for ex­am­ple, and af­ford­abil­ity data sug­gests that sin­gle buy­ers in par­tic­u­lar face a squeeze in the cap­i­tal, with mort­gage re­pay­ments – if they can af­ford a loan at all – now of­ten tak­ing well over a third of an av­er­age dis­pos­able in­come. Even for dou­ble-in­come cou­ples, the fig­ure is prob­a­bly now head­ing over 30 per cent on av­er­age.

Younger buy­ers

And there are wider eco­nomic fac­tors mak­ing it dif­fi­cult, par­tic­u­larly for younger buy­ers. Of­ten the re­turn of a sec­ond part­ner to work is ham­pered by child­care costs, for ex­am­ple, which are very high by in­ter­na­tional stan­dards. So does the sim­ple fact that Ire­land is an ex­pen­sive place to live.

Mean­while, an­other sur­vey from Daft shows rents – al­ready well above Celtic Tiger peaks – con­tinue to rise in dou­ble-digit per­cent­ages year on year, clos­ing off an op­tion for many who can’t af­ford or don’t want to buy.

High rents are also mak­ing it dif­fi­cult for many al­ready rent­ing to save the de­posit on a new home and are also clearly adding to the home­less cri­sis. The so­lu­tion is more hous­ing sup­ply for both buy­ers and renters. Dr Ro­nan Lyons es­ti­mates in the Daft re­port that 50,000 ad­di­tional prop­er­ties a year are re­quired.

The prob­lem is that houses take time to plan and build and the range of poli­cies needed are com­plex. Lyons points to avail­abil­ity of land and the cost of con­struc­tion as key fac­tors need­ing a foren­sic anal­y­sis and pol­icy ac­tion,in ad­di­tion to the in­creased pro­vi­sion of so­cial hous­ing. He warns against the ever-present dan­ger of the po­lit­i­cal sys­tem try­ing to “do some­thing” to try to fix this. There are few quick wins to be had.

Our prop­erty mar­ket could yet de­velop into a 2007-style bub­ble, but only if the Cen­tral Bank doesn’t do it job in con­trol­ling bank lend­ing.

But it doesn’t have to be a bub­ble to be a big prob­lem. His­tory may not be re­peat­ing it­self, but we are in the mid­dle of a nasty prop­erty squeeze.

Dr Ro­nan Lyons es­ti­mates in the Daft re­port that 50,000 ad­di­tional prop­er­ties a year are re­quired

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