A debt-free housing bubble?

Cantillon: Not all bubbles are based on frenzied debt-fuelled buying

Photograph:  Andrew Matthews/PA Wire

Photograph: Andrew Matthews/PA Wire


If you ask most economists, a bubble is a credit-fuelled event that drives asset values above their fundamental level. In other words, a period of excessive speculation financed by debt. But what happens if you don’t have the debt component?

There are many cases in economic history when bubbles were driven by frenzied buying without recourse to lending. The dot.com bubble in the US in the 1990s, for instance, saw a rapid rise in equity markets fuelled by investments in internet firms.

During the Irish boom, the lack of foreign investment in the Republic’s residential property market should have acted as a red flag. Prices were too high and with people taking out mortgages that were 10-times their income, foreign investors rightly gave Ireland a wide berth.

Since the crash, the opposite has occurred: there has been an influx of foreign investors, snapping up distressed assets, correctly speculating that the post-2008 correction in house prices was too sharp and that there would be a bounce.

Between 2013 and 2017, depending on which set of figures you analyse, prices nationally have risen by either 57 per cent or 72 per cent, and investors have made a killing.

So now we’re in the midst of a price boom, albeit without the credit. The question is whether this feeding frenzy, which is driving the current froth in prices (in tandem with the supply constraint) and railroading potential owner-occupiers out of the market, could expand too much and then snap. This is what University College Dublin academic Michelle Norris was alluding to at the Economic and Social Research Institute’s housing conference on Thursday.

You may take a view that the arrival of foreign investors here is part of the natural post-crash financial ecosystem – vultures coming in to clean up the rotting carcasses of past follies.

That is provided you don’t hark back to the days when property wasn’t a fully commoditised financial asset and was simply a thing to house workers. Either way, the implications of having a residential property market that is part foreign owned are far from certain.