Too early to tell if there is a new housing bubble growing
Property market insiders attest to a high level of cash-only buying
A sustained boom is extremely unlikely – at least this side of a turn in the mortgage lending cycle
The question is already being asked: is a new bubble forming in Irish house prices?
It really is too early to tell. Despite Dublin residential prices being up 15 per cent on a year ago, we are a long way from seeing data consistent with another house price boom. At a national level, prices are 6.1 per cent higher than last year. However, compared to the 2007 peak, Dublin house prices are still 48 per cent lower; nationally, prices are 47 per cent below their peak.
All of these numbers relate to properties bought with a mortgage. Although hard evidence is scarce, it seems a considerable proportion of transactions are cash-only, and the price data for these deals has yet to feed into the CSO indices. Property market insiders attest to a high level of cash-only buying, as does the still low level of mortgage lending. Overall transaction levels are also quite low, particularly for apartments.
At this stage of the cycle, the rises we have seen are consistent with just about any hypothesis. We could be at the early stage of a sustainable recovery, we could be at the start of another bubble or it could be a blip – prices could easily start falling again.
That prices are recovering after such a precipitate fall should come as no surprise. That said, the rise in Dublin prices, if sustained, could be a signal of an underlying problem.
What is astonishing is the suggestion that despite the earlier bubble – in both prices and construction – we already have a housing shortage, at least in parts of Dublin. We might have built a lot of houses during the boom but it appears many were in the wrong place.
A sustained boom is extremely unlikely – at least this side of a turn in the mortgage lending cycle. That, in turn, requires the banks to be pronounced “fixed”, which means we have to imagine the personal debt problems, negative equity and future capital needs for the banks have all been dealt with.
The fuel for a housing bubble is always cheap, plentiful credit, and despite protestations to the contrary from the banks, there isn’t much of that around.
What happens when the banks are finally restored to health? Culturally, we remain obsessed with taking on as much mortgage debt as possible, preferably in our early 20s. Renting still has a ridiculous stigma attached to it. Incredibly, no new laws have been passed forbidding banks to lend huge multiples of salaries or give out 100 per cent mortgages. They aren’t doing this now but surely it would be prudent to implement rules restricting loans to the old-fashioned 2½ times salary and no more than 80 per cent of purchase price? These would stop any incipient bubble in its tracks.
The data for Dublin hints at a powerful policy lever available to the authorities. If a way could be found to permit lots more building in the capital, the demand does appear to be there.
This brings the planning regime back into sharp focus. It served us very poorly during the boom.
If the Government wanted to create a lot of construction jobs, it could simply suspend all the useless planning laws for a year or two. If that’s too radical, the planning regime should be fundamentally reformed to allow for accelerated building.