John McManus: Housing policy dilemma a tale of two Irelands
Some need house prices to return to 2007 levels and others need them linked to 2015 wages
The failure of the coalition to agree on a housing package highlights the bind it is in.
Most people in Ireland fall into one of two categories. There are those who need house prices to return to 2007 levels and then there are those who need house prices to have some sort of sensible link to current wage levels.
The members of the first group are easy enough to identify. They include pretty much anybody who has bought a house. It absolutely includes anyone who has got a house that is worth less than their mortgage.
It also includes the banks that gave these individuals their mortgages. The higher house prices, the fewer customers in negative equity and the smaller their losses. Banks have another reason to want house prices to keep going up: they are in the business of lending money and the higher house prices go, the more money people need to borrow and the bigger the bank’s profits.
Another obvious category of people who would like to see house prices return to 2007 levels is property developers and people working in construction generally. The higher house prices, the bigger the developer’s profit .
One of the reasons being advanced for the housing shortage in Dublin is that developers are siting on sites because house prices are not high enough for them to make a profit. Part of the explanation is that they paid too much for land during the boom years and believe the best strategy is to hold off building until prices return to something resembling 2007 levels.
The members of the other group - those who don’t need house prices to return to 2007 levels - obviously includes anyone trying to buy a house at the moment, particularly first time buyers. They need house prices to have some relationship to their salaries , so that they are not forced to borrow more than they can afford in order to buy a home.
Anyone who has an interest in these people has an interest in seeing house prices having a link to earnings. This group should include pretty much every employer in the country who is not involved in banking or house building. The number one reason people give their boss when they go looking for a pay rise is that they want to buy a house. Rising house prices inevitably lead to higher wages. Broadly speaking anyone who has an interest in Ireland’s competitiveness - its ability to create jobs - would be in this camp.
The Government clearly falls into this category and one of its arms, the Central Bank, has acted in a determined fashion to check the potentially damaging run up in house prices that started in earnest last year. It has put a limit on how much banks can lend people relative to to their salaries. The bank would claim that what it is really doing is acting to stop a repeat of the irresponsible lending which contributed to the 2007 crash. But the knock on effect of its actions on the housing market was predictable.
The longer term consequences of the Central Bank’s policy will be to force down the price of development land and in the process wash out developers who over paid for land, Eventually they will accept that there is no longer any point in sitting on sites. If persevered with, the policy should lead to a resetting of house prices at a level that is linked to current wages, not the insane lending practices the banks’ engaged in during the years leading up to 2007. This will result in further losses for the banks potentially delaying the sale of AIB and Irish Permanent.
As economic policy interventions go it’s pretty heavy duty and there is a question mark over whether the Government has the mettle to see it though. Not least because it has led to something of a stand-off with developers and is contributing to the housing shortage in Dublin.
The Government is in a real bind. They can either back the Central Bank’s stance or put pressure on it to relax mortgage rules. It is a clear choice between short and medium term thinking.
The other option is a fudge. To try and negate the effect of the Central Bank measures by other measures. The expectation was that there would be some move in this direction announced in yesterday’s Budget. The failure of the coalition to agree on a housing package highlights just how serious is the dilemma it faces.
Kathy Sheridan is on leave