The merits of Ahearne proposal on housing market

 

National house prices have fallen by some 50 per cent from peak to trough, and new house building has declined more rapidly in that time. The downturn in the housing market was greater than many had feared – 94,000 houses were built in 2006, compared with fewer than 10,000 units annually over the past three years. Some parts of the property market, mainly in Dublin, have since rebounded – stronger and sooner than many had expected. The reason is clear.

The pace of economic recovery has been faster in Dublin, and demand for new homes, which are in short supply, has increased and pushed up prices. Low interest rates have made house purchases more affordable. Ireland, in some respects, has not benefited as much as other countries. Here banks, which are under pressure to rebuild their balance sheets, have raised rather than lowered the interest rates on new mortgages. Increasingly, as Dr Alan Ahearne pointed out last week in this paper, cash-rich investors seeking higher returns have moved some of their savings into property – encouraged also by a zero rate of capital gains tax on that investment. This has boosted house prices.

Dr Ahearne, an economist who in 2007 provided some prescient early warnings of an impending boom and bust in the property market, notes that this time credit expansion is not fuelling house price rises. Nevertheless policymakers, he argues, should worry about swings in the housing market and act to moderate excessive price expectations, by ensuring future house prices become more predictable. The Government, he suggests, should adopt a credible plan to boost housing supply in Dublin and other major urban centres where need and demand are greatest. And, lest recent economic history be repeated, Dr Ahearne also advises that Government should act to check any speculative excesses developing in the housing market, by ensuring house prices in 2020 will not be too far above their current level. Dr Ahearne’s cautionary words should be heeded.