Why we keep making the same mistakes over housing

John McManus: Politicians and builders are united in need for rising house prices

There is nothing new under the sun and this applies as much to the Irish housing market as anything else. The truly alarming thing about the current housing crisis is that it is really just a rerun of the crisis the preceded the housing crash.

And the Government seems as incapable of doing anything about the current crisis as it was the previous one. The reason being that is remains locked in a dysfunctional relationship with housebuilders – or developers as we rather sycophantically refer to them.

This relationship goes back decades, to the massive surge in housebuilding that followed the economic turnaround in the 1960s and 1970s brought about by Sean Lemass’s economic policies.

Successful housebuilding then, as now, required one thing above all else: rising house prices. This is best achieved by controlling supply. And the best way for housebuilders to do this is by controlling the market for building land as well as influencing government policy towards land use. Manipulating the planning process also helps. All of the above have been features of the Irish housebuilding industry for decades.


The puzzle has always been why successive governments sat back and let this all happen. The corruption exposed by the planning tribunal does not really explain why administration after administration let a fairly small group of individuals extract massive profits from what is arguably one area of the economy where intervention is warranted.

Link to wages

In theory politicians want house prices to be in some way grounded in the rest of the economy and linked to wages in particular. Modest house-price inflation, like modest inflation in the rest of the economy, is not a bad thing. As long as people earning average wages can buy average houses without beggaring themselves in the process, the market could be said to be working.

What politician in their right mind would go to the country saying they had knocked 10 per cent off the value of everybody's house but staved off an economic crash by doing so?

People talk nostalgically of the days when a guard and a nurse could marry and buy an average house, but the truth is that such times – if they ever existed – are long gone.

From the mid-1990s onwards successive governments let house prices race upwards. At a minimum they facilitated the boom through negligence and at worst encouraged it.

The reason was simple: electoral politics. The sort of people who own houses or want to buy houses are the sort of people who vote. What began as a political imperative to encourage rising house prices became an impediment to acting to calm the market when things got out of control. What politician in their right mind would go to the country saying they had knocked 10 per cent off the value off everybody’s house but staved of an economic crash by doing so?

Instead they kept existing house owners happy by letting prices inflate to the level where everybody living in a suburban semidetached thought they were a millionaire. The difficulties this created for first-time buyers were ameliorated by diverting some of the revenue generated from all this economic froth into various incentives and tax breaks. They also let the banks lend people the money they needed regardless of whether they could repay it. The rest, as they say, is history; and, as history is wont to do, it is repeating itself.

Faustian pact

Astoundingly, the Faustian pact between housebuilders and politicians seems to have survived the crash it played such a big role in bringing about. Even though the Fine Gael-Labour government controlled all the relevant economic levers it did not restructure the industry.

This was despite controlling nearly every bit of building land in the country through the National Asset Management Agency. It also had controlling stakes in the banks or outright ownership of them. It was a once-in-a-generation opportunity to re-establish a link between house prices and wages.

But they didn’t do it. Nama is now winding down and housebuilding would appear to still be in the hands of the same players and their their backers. It is business as usual with house prices being squeezed up, loose bank lending and incentives for first-time buyers.

So why didn’t they do it? There are plenty of reasons. The first is simply bandwidth. It would have been a massive task that was probably well beyond what the State was capable of.

The second is that it would have deepened the financial crisis because it would have led to greater losses being incurred by the banks and ultimately foisted on the the taxpayer.

But the main reason is the pact that exists between government and the housebuilding industry held up. Both require rising house prices. They have got them once again.