The need to avoid past mistakes on house prices

The case for the provision of low-cost accommodation through long-term, low cost borrowing becomes clearer

A much-abused quote about “feeding the crocodile” comes to mind as the Government persists in its policy of encouraging banks, builders and developers to supply reasonably-priced homes at low mortgage rates. The sectors that contributed most to the economic crash are again attempting to direct the run of play while housing output stutters and prices and rents accelerate.

The latest house inflation figures represent a stark warning, rising by almost 10 per cent nationally and threatening economic competitiveness and wage restraint. Contributory causes are clear: a politically-motivated help-to-buy tax break for first time purchasers and a decision by the Central Bank – following Government pressure – to ease mortgage lending rules.

These changes are boosting the profitability of builders, developers and the financial sector but, in spite of such incentives, last year’s housing completions were significantly less than half of the minimum estimated requirement.

A more assertive approach will be required of Government if low-income families are to be housed. Over-reliance on the private sector is misguided

Because the income-to-house price ratio compares roughly with that in the UK, with prices around five to six times income, it has been suggested there is little cause for concern. Outside of Russia, however, the UK cost ratio is by far the highest in Europe. The cost ratio of 8.5 reached here at the height of the boom was extraordinary when compared to a figure of 3.5 in 1995. As for rent levels in relation to building costs, Ireland is the fourth most expensive in Europe.

Previous governments closed down local authority house building and chose to rely on the private sector to deliver 20 per cent of its entire output for social and affordable accommodation. It didn’t work then and is not working now. A more assertive approach will be required of Government if low-income families are to be housed. Over-reliance on the private sector is misguided.

The banking and property collapse arose from excessive lending and inflated prices. And while neither sector has fully recovered, there are worrying signs that lessons have not been learned.

Rather than contribute to a potential “feeding frenzy” through further tax incentives and other measures, the Government might step back and consider a proposal from the Nevin Institute. It involves the provision of low-cost accommodation through long-term, low cost borrowing from the European Investment Bank, the Ireland Strategic Investment Fund and from pension funds.

The solution must not be a new house price spiral and a renewed cycle of excessive borrowing and lending

Minister for Housing Simon Coveney has rejected the notion of a fresh property bubble and said the Government will not allow people to borrow "ridiculous amounts of money". The core issue, he said, was a supply shortage.

His assessment is correct but the solution must not be a new house price spiral and a renewed cycle of excessive borrowing and lending. We’ve been there and done that, and we know the consequences.