Why slug­gish growth in North­ern Ire­land’s house prices is good

Belfast Telegraph - Business Telegraph - - News - by Paul­macflynn @Pmacf_neri

The Econ­o­mist magazine re­cently re­leased a re­port claim­ing that prop­erty prices in Dublin were over­val­ued by as much as 25%. This find­ing has caused some amount of un­ease south of the bor­der.

Given the very re­cent ex­pe­ri­ence of a prop­erty crash, th­ese fig­ures will be quite alarm­ing for any­one who re­cently bought or in­tends to buy a house in the cap­i­tal in the near fu­ture.

More wor­ry­ingly, the Econ­o­mist magazine made a sim­i­lar fore­cast back in 2003 be­fore the last crash, and if any­thing, they un­der­es­ti­mated the prob­lem. Mostly the ar­ti­cle in ques­tion caused con­cern be­cause it con­firms some­thing that most peo­ple think but don’t want to ad­mit.

Prop­erty prices are an ob­ses­sion for both economies on the is­land of Ire­land much as they are across the wa­ter in Great Bri­tain.

We all suf­fer from a mis­taken be­lief that ris­ing prices are a sign of a healthy econ­omy and some­thing that should be en­cour­aged. This is a dis­or­der that should have been wiped out by the last re­ces­sion.

It is worth ex­am­in­ing how The Econ­o­mist as­sessed the sus­tain­abil­ity of prop­erty prices in each of the ci­ties it sur­veyed. A city was deemed to have over-val­ued prop­erty if prices were grow­ing faster than me­dian in­comes. For in­stance, it may be more ex­pen­sive to buy an apart­ment in New York than it is in Dublin, but in­comes in New York keep pace with prop­erty prices. The same can­not be said of Dublin.

The heat of the prop­erty mar­ket south of the bor­der seems a world away from the ex­pe­ri­ence up here in North­ern Ire­land. Both economies en­dured a deep and pro­tracted prop­erty crash, but prices up here have failed to reach the es­cape ve­loc­ity seen in the Repub­lic. Many see this as an­other sign of North­ern Ire­land’s un­der-per­form­ing econ­omy.

How­ever, such pes­simism is largely mis­guided. If we take the method­ol­ogy that The Econ­o­mist magazine used and ap­ply it to North­ern Ire­land, our sit­u­a­tion may be more nu­anced. Yes, the growth in prop­erty prices has started to weaken of late and the last quar­ter saw a fall in the av­er­age price of a house.

How­ever, the growth in house prices has ex­ceeded the growth in me­dian house­hold in­comes in North­ern Ire­land ev­ery year for the last four years.

The growth rate of me­dian in­comes re­ceded some­what in 2016/17 and, if any­thing, we should be glad this is re­flected in house price growth.

There is a be­lief that prop­erty prices should al­ways grow and that the econ­omy is in trou­ble when they don’t. There is no ba­sis for this as­ser­tion. Prop­erty prices should be a func­tion of in­come growth; if not, then some­thing is wrong. In Dublin, prices have risen be­cause a sig­nif­i­cant in­crease in pop­u­la­tion was not met with a suf­fi­cient in­crease in hous­ing sup­ply. In­comes are not ris­ing to meet the cost of hous­ing which means that peo­ple are over ex­tend­ing them­selves fi­nan­cially. This can­not con­tinue in­def­i­nitely.

An­other prop­erty crash in the Repub­lic is by no means in­evitable, but un­less the scale of pol­icy re­sponse is stepped up, it is a real pos­si­bil­ity. In par­tic­u­lar, ef­forts to in­crease the sup­ply of hous­ing need to be re­dou­bled, es­pe­cially with re­gard to the pro­vi­sion of so­cial hous­ing.

New mod­els to de­liver pri­vate hous­ing such as cost-rental should be em­braced. Most im­por­tantly on­go­ing ac­tion by Cen­tral Bank to con­strain bor­row­ing should re­main firmly in place.

For North­ern Ire­land we should not be con­cerned that prop­erty price growth looks a lit­tle slug­gish. We should in fact be glad that it is re­flect­ing fun­da­men­tals in the wider econ­omy. If we want to be con­cerned about some­thing let us be con­cerned by the weak growth of house­hold in­come.

We should also be con­cerned with other dy­nam­ics in our prop­erty mar­ket be­yond house prices. Pri­vate sec­tor rents have seen some of their largest in­creases over the last num­ber of months and th­ese in­creases af­fect a much larger sec­tion of the pop­u­la­tion then they did in the past.

The pro­por­tion of peo­ple who rent pri­vately has dou­bled over the past 10 years and this trend has dis­pro­por­tion­ately im­pacted on young peo­ple. In 2006, just over one in four 18-t0-34-year olds rented their home pri­vately. By 2016, that pro­por­tion had in­creased to one in two.

There is also ev­i­dence that the col­lapse of so­cial hous­ing has pushed more peo­ple into the pri­vate sec­tor. In many in­stances th­ese house­holds ex­pe­ri­ence poverty due to hous­ing costs they can­not meet. This is where con­cerns about hous­ing in North­ern Ire­land should be con­cen­trated.

We should end our ob­ses­sion with house prices and be con­tent that they re­flect in­come af­ford­abil­ity. We should be more con­cerned that many peo­ple will never be able to own their own home and, in many in­stances, they are left in an un­reg­u­lated and in­creas­ingly ex­pen­sive pri­vate rental sec­tor.

In next week’s Econ­omy Watch, we hear from Danske Bank chief econ­o­mist Conor Lambe

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