The State is about to create another housing bubble

The Irish economy is set to repeat its old mistake of excess mortgage-lending

‘It seems like an act of folly not to have used Nama in some way to reset the price of building land so that someone on the average wage could afford the average house.’ Photograph: Alan Betson

‘It seems like an act of folly not to have used Nama in some way to reset the price of building land so that someone on the average wage could afford the average house.’ Photograph: Alan Betson

 

The run-up to Christmas is always a good time for burying bad news and this year was no different.

On the Friday before Christmas, Bank of Ireland announced it was going to have to put more money aside to absorb possible losses on Irish residential mortgages.

Just how much more money was not very clear but it would appear to run into several hundred million euro.

The statement was extremely technical and did not actually talk about losses or defaults.

But the point is clear. The bank had already put aside some money to absorb losses that might occur as a result of people not being able to pay their mortgages. It now seems that more people than expected are going to default and the bank has had to put some extra money aside.

It is as timely a reminder as you could hope for that the Irish banks are still broken and still fighting their way through a mountain of problem mortgages as a result of their reckless lending in the run-up to the 2007 crash.

The banks have made huge efforts to get on top of their mortgage problems but – at best – there is substantial lingering uncertainty around the ability of a significant number of people to repay mortgages taken out during the boom.

At worst, the problems are much bigger than the banks are prepared to accept even at this stage.

Runaway property

We are in effect still paying the price for the moment when the traditional multiples linking mortgages to income were thrown out the window as banks and lenders chased a runaway property market.

It is scarcely believable that we are about to do it all again. Yet somehow we seem to have contrived a situation where the only way to put people in houses is to circumvent the rules brought in after the crash precisely to make sure we did not go down the same road again.

Here we are at the start of 2017 with property prices expected to roar ahead by 8 per cent and the Government launching a “Help-to-buy” scheme with no purpose other than to allow people to circumvent Central Bank rules aimed at stopping the banks lending people more money than they can repay (and in the process keeping a lid on house prices).

The reason for this madness would appear to be that builders will not build houses at current prices because they will not make enough money.

The main reason for this seems to be that they paid so much for the land in the first place.

We are again running the risk of being a construction industry with an economy attached to it.

It is hard to understand how we arrived at this state of affairs when, less than four years ago, the government was firmly in control of all the levers needed to dictate the cost of building land and the price of houses.

It had, through Nama, effective control of acres of building land nominally owned by developers, the bulk of whom where insolvent.

It also owned the banks and thus was in a position to exert influence over lending practices. It was a level of state economic control rarely seen these days outside of China.

Act of folly

We now face into a rerun of the reckless lending and rocketing house prices that characterised the previous boom and crash. It is starting to look as though the big mistake with Nama was to set it up as a standalone entity that had to make a profit, or at least cover its debts. 

Would it were that simple. Such wishful thinking belies both the economic reality facing the State in 2012 and the lack of bandwidth in our system.

It would have been a heroic move by the government to suggest to its creditors that it was planning to exit the bailout with Nama projected to make a loss of many billions in order to ensure that houses would be affordable in the coming recovery.

Instead, the Nama loans were sold off to the highest bidder and many developers were allowed refinance themselves out of Nama; the net result is that the price of building land remains at a level detached from the fundamentals of the economy.

But even if anyone had the foresight to suggest an alternative course of action, the ability of the system to bring it about has to be seriously questioned. This is, after all, a country that cannot collect water charges.

They could have done it in China, of course, but then again they are not so hot on democracy over there.

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