August 13, 2008
In recent days there have been calls from prominent quarters for the State to take action to stimulate demand for houses. While these ideas are interesting and understandable in the face of the crisis, it would not be a wise course of action — either in the short term or in the long term — for the country.
For a decade, the housing lobby — builders, developers, the banks, estate agents and the like — hijacked the economic debate in Ireland. So much so, that it became an article of faith that what was good for the building industry was good for Ireland and, conversely, anything that might be bad for the construction business was bad for the country.
Ridiculously, any questioning of the wisdom of more and more houses and higher and higher prices was labelled “unpatriotic”. In fact, scepticism in the face of an orgy of greed was real patriotism.
We know that the housing boom was not a fundamental sign of economic robustness but a mirage fuelled by reckless lending and backed by incessant propaganda.
However, we are where we are, and there is little point in recrimination. The best thing we can do now is avoid a repeat of the housing nonsense. This implies allowing the market to adjust downward as quickly as possible and this means doing as little as possible by way of interference.
Such inactivity makes sound economic sense for a few basic reasons.
First, no country has ever become rich by buying and selling overpriced houses to each other using other people’s cash. This is what we ended up doing. The Irish banking system borrowed cash abroad and lent it here at home so that developers could make astronomical profits, while at the same time saddling an entire generation with monumental debts. This will be the long-term legacy of the housing boom.
Saddling one generation with debts is bad enough, but for the State to intervene now to stoke up first-time buyer demand again and in the process saddle another generation with debts, would be wrong.
A second reason against intervening with a tax-break is that it would be a dreadful waste of money when cash is tight. It is crucial now that Ireland invests as much as possible in our productive capacity, brains, education, infrastructure and technology. By spending on these areas, we create the conditions for export-led growth. Only by exporting efficiently can we sustain the living standards we aspire to. During the housing boom we forgot this and our current account went from an impressive surplus, to a lamentable deficit, as we borrowed to mask this weakness.
Speculating on houses does not generate any long-term benefit to the country. It sucks precious resources into an inferno of “cute hoorism”, where the lad who sells the most overpriced piece of crud to the next fella is the winner. This is no way to run a society, let alone an economy.
A third reason to avoid action is that Irish houses are still way overvalued and have to fall yet further for value to return to the market. If we assume that prices in Ireland can’t deviate from international prices indefinitely, how can the average suburban home in Dublin still cost nine times that of a similar home in Texas? We will not become internationally competitive at these prices.
Houses are one of the single biggest costs in the economy and it is the knock-on effect from inflated house prices on wages which is adding to our lack of competitiveness. Therefore, in the long-term, house prices need to fall dramatically if Ireland is to recover. Although this might sound counter-intuitive, particularly in the face of incessant propaganda from the housing lobby, it is the plain economic truth.
A fourth reason for allowing the market to work its way through this boom/bust cycle is that bailing out the developers and the banks would encourage bad behaviour yet again. This is not some puritanical point about wrongdoing, but an economic point about what is best for all of us.
We have to realise that houses are only places to live. A house is not some shortcut to instant wealth. Neither is it the ATM machine many believed it was when we dipped into our “equity release” pool, borrowing against the “wealth” in our houses.
The downturn gives us time to reflect on the past few years and it also allows us to think about the next phase in the Irish economic story. Maybe it will prove to be the best thing to have happened to us in some while, because it will help us to focus our minds.
We know what we have to do. Ireland needs to use its talent to create new industries. To do this, we need vision and we have to react to adversity with clear thinking which is unencumbered by vested interests. Because we are small, we can change quickly.
There are plenty of examples from other countries that have reacted to economic challenges and social challenges admirably. The Danes, for example, reacted to the first oil crisis by building the world’s premier wind-farm business. Not only does Denmark get 20pc of its energy from wind, but it also exports the technology all over the world.
Amazingly, in 1973, Denmark got 99pc of its energy needs from the Middle East; today, it gets nothing from that region. The Finns also reacted to their early ’90s property bust by investing in technology and education. Today, Nokia is a world beater; and in OECD tests, the Finns are consistently top of the league on maths and science. Also, in the late ’70s, when Finland discovered that it had Europe’s worst record for heart disease, the government reacted by changing the national school diet. In a generation, Finland has gone from having the EU’s worst rate of heart disease to having the least.
These are examples of countries which have learned from their economic mistakes and galvanised their population to change direction. Ireland could do something similar — our Taoiseach could go for a “game changing” policy initiative which brings out the best in us and makes a virtue out of necessity.
Propping up the housing market will not change the game. It will make thing worse. It will be more of the same and we’ll be back to square one with another boom/bust in a few years.