Cliff Taylor: Housing problem may not be a bubble but is a crisis
Nasty property squeeze could become bubble if Central Bank does not keep lid on lending
“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.” Photograph: Frank Miller
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: DéjàDeja 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 in the market, mixed with a recovering economy, which has pushed up prices. 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.
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, meaning it is higher for a significant minority.
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 and multifaceted. 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.