David McWilliams: Rising house prices suit too many people
The latest help-to-buy scheme will do the opposite of what it’s supposed to achieve
Have you noticed a certain recurrence in the Irish property game? How come over the past few decades, every time the government intervenes in the housing market to make houses more affordable, the intervention makes them less affordable, and ensures that the first-time buyer is more indebted?
The whole point of the intervention is to make accommodation cheaper, yet this never seems to work.
Could it be a national conspiracy whereby the establishment tolerates high prices for accommodation and therefore, higher returns for the construction industry, the property business, its commercial handmaiden the banking and finance sector and, of course, landowners?
According to such an argument, this is how an economy captured by the interests of one extremely powerful sector develops, and the State simply rubberstamps it and collects the taxes.
There’s a lot of merit in this answer, and it helps frame the discussion about accommodation in Ireland through the prism of one sector extracting rent from the rest of the society.
An interesting aspect about the extractive role of Irish property is how subtle and collusive it is. If it were simply a matter of one sector gouging the rest, the rest would eventually revolt. But this doesn’t happen because there is something far more duplicitous going on; let’s call it the duplicity of collusion.
If you can inveigle others to collude with you, you can create a group experience in property where enough people’s self-interest is tied up in rising prices.
Therefore, as long as the conveyor belt of generation after generation house-buying continues, this game can continue with the capital gains at the top underwritten by the people coming in at the bottom, each person hoping to get out at some time in the future.
As a consequence, paying ridiculously high prices for accommodation while living in one of the least densely populated countries in Europe could be seen as an extra “tax” levied on workers for the privilege of living on this benighted isle. As long as they are part of the game, getting on the conveyor belt as some stage, then everyone’s a winner, sort of.
People’s attitude to house prices change the minute they buy. Before they buy they want prices to fall, once they buy they want prices to rise.
In the short term who pays to keep this ticking over?
The aspiring teacher, nurse, garda, back-office clerical worker, the people who pay either through rents or mortgages. While these commuters might not have well-paid lobbyists to agitate for their interests, they do vote. Every few years they can give the thumbs up or thumbs down to whoever is in power.
Such is the democratic leverage of the suburbs which links house prices to the electoral cycle.
This explains the periodic and spectacularly unsuccessful state interventions. The government’s latest help-to-buy scheme was unveiled this week.
In a nutshell, the help to buy scheme offers first-time buyers a way to circumvent the Central Bank’s borrowing recommendations by offering low-interest-rate mortgage to 1,000 potential borrowers. The lower the interest rate, the more you can borrow and still stay within the crucial limits the Central Bank has set for monthly repayments as a percentage of disposable income.
Validate high prices
It’s a debtors’ charter that will propel more people into more debt. Rather than explore options to bring down house prices, the State has decided to validate high prices and make houses more affordable by allowing people to incur more debt, not less.
Now let’s think about the individuals involved here. If you are locked out of the market, a scheme like this must seem like “manna from heaven”. So let us not be surprised if first-time buyers welcome this move.
But, like every advantage incurred in a competitive environment, it is only an advantage if you are getting it and no one else is. If everyone has the same advantage, the unique benefit is nullified. Prices rise, everyone pays more, and the only person who benefits is the person selling.
We call this in economics the “paradox of aggregation”; it refers to the phenomenon where what is good for the individual is not always good for the collective.
How does it work? Imagine you are at an Irish soccer match. You have good seats and a decent view but when Ireland work the ball up to the opposition box, the lads in front of you get excited and stand up. They have no idea that in seeking to get a better view, they’ve obscured yours. You have to stand up and this forces the guys behind you to stand up and so forth. In no time, the entire stadium is standing when they have all paid to sit.
The Government’s new initiative will work in a similar way.
Much of the population is complicit in the property game. Until there is a realistic alternative providing secure tenure in the rental sector, home ownership rates are always going to be exceptionally high in Ireland. Therefore, human behaviour and group psychology is going to be as significant in determining Irish house prices as economics.
When houses prices rise, the first rule of traditional economics says demand will fall. But once you introduce group dynamics into the equation, demand doesn’t fall – quite the opposite. The basic rules of economics don’t apply.
People panic and, fearing further price rises, bring forward their buying decisions, making further price increases a certainty. So rising prices lead to rising demand, not falling demand.
The first-time buyer panics, prompting the voting-conscious politicians to react. Their senior civil servants – who are well on the property conveyor belt and therefore, personally vested in rising prices – deploy classical economics to what is as much a group psychology dilemma as a market failure.
These initiatives are a political success only if the individual voter forgets the collective. And the property conveyor belt grinds on.