Spectre of permanently low property prices need not be scary
GIVEN THE time of year, your columnist has decided to write about the horror story that is the Irish property market, and the monster that is the Irish banking sector.
While doing so it has been decided to avoid any reference to the Christian origins of Halloween lest it slip seamlessly into consideration of the concept of All Hallows (All Saints’ Day – All Hallows’ Eve being Halloween) and that, in turn, should spark thoughts of All Hallows College in Drumcondra, where former taoiseach Bertie Ahern used go when he needed time to consider which of his policy options would best serve the Irish people.
No, that is too scary a spectre for a business opinion column on a bank holiday weekend. So, instead, this column would like to conjure up the Ghost of Permanently Restrained Property Prices, not just as a possibility, but as a policy to be pursued by the Government.
To promote such an idea is not to ignore the painful plight in which so many people find themselves, having to repay massive loans taken out to buy homes that have fallen enormously in value.
Nor is it to ignore the effect the fall in property prices has had on the health of our banks (the recidivist criminals of Irish business life) and, by way of associated property loans, on our public finances.
These days it is easy to imagine that most people in society are ardently wishing for a return to robust growth in the value of land, houses and apartments.
However, while it is obviously the case that we need increased activity in the housing market, that should not be confused with wanting a return to rising prices.
The reason is pretty obvious. The cost of housing, by way of wages, is a cost that permeates all aspects of business life. If Ireland Inc is targeting international competitiveness, then business should lobby government for a system that restrains property prices.
During the bubble years this columnist, during a short visit to Stockholm, read a hotel room brochure in which the lord mayor welcomed the guest to the Swedish capital and pointed out that, as part of a drive to attract inward investment, the city was providing affordable, high-quality housing, so as to restrain wage costs. The contrast with the dysfunctional policies then being pursued back in Ireland was striking.
All of which brings us to a Bill recently introduced in the Seanad by the Independent Senator and TCD economist Seán Barrett.
Called the Mortgage Credit (Loans and Bonds) Bill, 2012, it would allow for the introduction here of a system of housing finance introduced in Denmark in 1797, following the great fire of Copenhagen, which destroyed a large proportion of the city.
The proposal is for a system where the loans issued by a bank are balanced on the other side by bonds (containing bundles of these loans) issued on behalf of the bank to investors. The loans, in total, equal the bonds. The interest and principal on the bonds is tied to the interest and principal paid by the borrowers/house purchasers. The bank sits in the middle earning a mere administration fee. The plan involves a rigid loan-to-value ratio.
The Danish system has proved to be extremely robust and the bonds are considered a safe investment. They would be of interest to the Irish pension industry. Crucially, the system, which separates the issue of financing the purchase of a home from the issue of property investment, has a moderating influence on the housing market.
This tabula rasa approach to funding house purchasing involves not just an interesting contribution to our efforts to reboot the housing market but also a more general lesson as to how we should go about seeking to fix our broken economy.
Government and business should decide on their priorities and place any resolution to our current problems within that context.
If we want to have a lean, competitive economy, then affordable, quality housing is something to be wished for, and the boom- bust behaviour that is fuelled by our system of variable rate mortgages offered by a duopoly banking system is something to be avoided.
When fixing our problems why not address the faults in the system that contributed to the problems in the first place.
We need to set our sights on the medium term. Halloween, or Samhain in the old Celtic tradition, may mark the arrival of winter. But spring always comes around.