Market view

We must accept that we can have low house prices or low skylines, but not both, says Marc Coleman

"There's a fair amount of evidence that at long last house price growth is starting to moderate and that's a welcome development," said the man from the Central Bank. It is Tuesday - last Tuesday afternoon to be precise - and I am listening to a presentation of the Central Bank's latest Quarterly Bulletin. It's hard to concentrate when the talk is a variation on a theme that I've heard many times before.

And so my gaze turns to something much more interesting: we are on the seventh floor conference room of the Central Bank's headquarters - a room with windows on two sides - and the view is really stunning; the bay to the east, Phoenix Park to the west and the Hill of Tara to the north. In between are rows and rows of cute redbricked houses, Georgian mansions and a legoland façade of multi-coloured house fronts along the Liffey's north quay.

"Dublin can be heaven if you're looking at it from the right angle," I think to myself "and if you can afford to live here." The afterthought brings me back to the real world. "Do your job Coleman: listen to the presentation", I think to myself.

"There's still a big difference between the cost of building a house and the sale price" the man from the Central Bank continues before showing a chart to prove his point. Sad person that I am, I always find charts fascinating. This one shows the percentage increase in average national house prices for each full year since 1997 charted against the percentage increase in the average cost of building a house.

According to the presenter, house price growth has averaged 14.6 per cent over the period covered by the chart, compared with just 5.2 per cent growth in building costs.

"There are two reasons for this," the man says. "The first is very strong demand."

He does not refer to the lower interest rates since 1997 and the rapid expansion in credit since 2004 as factors explaining house price growth but, by and large, his answer is on the money: an expansion in credit can only cause the price of a good to increase if the supply of that good does not increase in tandem and, as all commentators agree, the availability of zoned land in Dublin is chronically scarce, so scarce that it impacts on the national average house price. That is the second reason the man mentions.

Two years ago I worked in a central bank, the European Central Bank to be precise. From the 28th floor where I had an office, a horizontal gaze would meet buildings in some directions and from the seventh floor, buildings in all directions. From the seventh floor of our central bank building, a horizontal gaze meets sky and seagulls. Frankfurt city looks like a bell curve, with high rise develoment in near the centre with apartments for young people, suburban houses with gardens for families on the outskirts and excellent transport system in between. Well designed but high density apartments means the younger half the city can live within walking distance of its centre, reducing house prices for those with children who need houses. In Dublin we have done the reverse: Our city centre is a splendid but fantastically expensive place to live. Our failure to exploit its potential for high rise apartments has exiled the young and single to apartment blocks far from our city centre. Other cities are following suit and many families are condemned to ridiculously long commutes because of badly designed towns. Some day we will hopefully accept the lesson I learned last Tuesday: we can have low house prices or low skylines, but not both.

Marc Coleman is Economics Editor of The Irish Times