Property market bounce is built on wishful thinking

The nascent recovery in residential property means that the release of monthly price data is no longer a “jump behind the couch and look through your fingers” moment. This pleasing trend will hopefully continue tomorrow when the data for September is released by the Central Statistics Office.

Prices were up 2.8 per cent nationally in the year to August. The trend in Dublin was even better, with prices ahead 10.5 per cent in the year.

There are several reasons for Dublin’s strong performance. Employment is growing and disposable income is stabilising. But one other factor in particular has come in for a lot of comment: a shortage of houses, particularly family homes in popular areas.

Last week, the head of asset management at the National Asset Management Agency, John Mulcahy, upped the ante by warning that it may well be too late to do anything to prevent localised bubbles and peaks, such was the extent of shortages in these areas.

Rezoning not the solution
The veteran surveyor was speaking to the Society of Chartered Surveyors and his proposed solution – removing planning bottlenecks so more houses can be built – was music to the ears of the assembled builders and estate agents. Economist Colm McCarthy was singing a similar tune. He explicitly identified restrictive planning permission as a problem and advocated that more land should be rezoned when house prices increased by 10 per cent, in any part of the State.

Unfortunately, it’s not really that simple. As Minister of State for Housing and Development Jan O’Sullivan pointed out at the same conference, there is planning permission outstanding for some 30,000 “units of accommodation” in Dublin. This should be enough to be getting on with.

The Minister is probably gilding the lily a bit. A good number of these permissions are no doubt for types of accommodation that people no longer want to buy. But the real problem with the builder-friendly solution offered by Mr Mulcahy and Mr McCarthy is that it ignores the biggest constraints on the supply of family homes in the desirable parts of Dublin: negative equity and mortgage arrears.

It’s axiomatic that the room for new development, or even redevelopment, in the more desirable part s of the Dublin is limited, unless you are talking about rezoning parks and various other green spaces. The parts of Dublin where properties are most scarce are the established suburbs. The normal source of housing stock in those areas is people moving up or down the property ladder.

They are also the areas that saw the biggest appreciation in prices over the boom and more than likely – although there do not seem to be reliable statistics – they are the areas with a very high proportion of homes in negative equity.

It’s also more than likely that there are plenty of people in these areas who can no longer afford their mortgages. The banks are supposed to be doing deals with these people aimed at keeping them in their homes. Progress is slow and many people are not engaging with the banks. Either way, very few are going to be putting their homes up for sale any time soon.

One suspects that you could develop – if not overdevelop – every infill site in these parts of Dublin and you would still not put a tooth in the supply problem. Political interference in the planning process in these areas, including pressure for more rezoning, is going to make builders rich in time-honoured fashion but it is not the answer. The solution is, of course, to deal with the underlying problem of negative equity and the incredibly slow rate of progress in arriving at sustainable solutions for the overborrowed.

Anchor of negative equity
The best way to increase the supply of housing in Dublin is to keep up the pressure on the banks to do deals with people in arrears and develop negative equity mortgages and similar products. Put these people in a position where they can seriously think about moving and the property market should start to function.

Suggesting that the problem with housing supply in Dublin is planning is just another manifestation of the understandable desire to believe in the Irish recovery story and a return to normality. It means ignoring the fact that hundreds of thousands of people are fundamentally insolvent because of property-related debt.