June 5, 2014
It is hard to believe that we are at it again, but we are and it’s kind of surreal. I was walking past a small end-of-estate, three-bedroomed semi the other day. It is for sale, and it is going for auction – a sure sign that the mania is upon us again. The “for auction” sign is enough to torpedo the spirits of even the most optimistic first-time buyer.
Once you see “for auction” you know the estate agent plans a bidding war, where the winner takes all. The winner is likely to be a cash buyer, who will elbow out the first-time buyer and hope that the same first-time buyer will become his tenant.
This particular auction sign bragged that the “site” had potential for another house. The “site” in this case is the smallish back garden in a run-of-the-mill 1960s estate in Dublin – the type I was brought up in at a time when a decent back garden meant room for a 20-a-side soccer match. (The days when we had jumpers as nets, defining the size of the plot, not estate agents’ sales patter.) So yes, maybe there is just about room for a house – but we are talking a Wendy House or a Leprechaun house, a place for the little people to live.
Across the road from where I am writing, there is another telltale sign of the panic, this time fomented by another estate agent. The photo here reveals the state of mind of the estate agent as he goads renters to get in quick and pay up pronto, otherwise they haven’t a hope of getting a place to live.
The “sorry too late” taunt truly sums up the sense of hysteria that some estate agents are obviously happy to stir up in the minds of renters.
The truth, for me at least, is that this sign suggests that he is not sorry at all, but is in fact delighted because the more panicked are renters, the higher the rent he can get. The higher the price he can get, the more cash buyers he will attract into the market (to become “tuppence-ha’penny” landlords) and the more cash buyers, the more auctions the estate agent can preside over. And what does all this mean? It means big juicy fees.
Now you can hardly blame the estate agent for maximizing his profit. After all, that is what he is paid to do.
But should the Irish State yet again stand idly by and allow its citizens be mortgaged again in what is likely to be another monumental transfer of wealth from young workers to older landlords and landowners? Should we allow the housing market – the market for that most basic of human needs, accommodation – be used as a “get-rich-quick-scheme” for the already wealthy?
Forget for a minute the self-evident equality issues at stake here and let’s consider the economy, which has to compete in the real world.
If you take a bit of altitude from the streets of Dublin, and think about the impact of unnecessarily high house prices on the competitiveness of our economy, you can see the inconsistency at the heart of economic policy here.
Ireland has to pay its way in this world. This means that our living standards are ultimately determined by whether we can sell stuff to the rest of the world at a profit and the extent of that profit determines our standard of living. Therefore, all prices in the country matter.
The first thing to appreciate is that cheap accommodation, like cheap energy, is a huge positive to the ability of the economy to compete. Countries with expensive housing are automatically at a competitive disadvantage.
Consider how can a country with high costs for housing compete with a country with lower housing costs? Either it is better at producing stuff, or it has smarter people, or better systems or a massive inherited stock of capital that means it is already rich. In the absence of any or all of the above, a country with high costs of housing must possess lower costs elsewhere to compensate.
Given that the biggest costs in any economy are wages, if property prices are high, either wages will have to be lower or, if they are not, unemployment is likely to be higher.
Do you begin to see the picture? Expensive property in a highly open economy is not a sign of wealth but an indicator of likely future poverty!
Ireland is the least densely populated country in Western Europe and yet we have now the fastest-rising house prices.
So what can be done about it?
The key is to get more and more houses built and in the time that it takes to build them to ensure that people don’t panic and drive prices upwards. The worst thing that we could do is allow prices to spike up now and then allow supply to come on stream too late. This is what happened in the 2000-2007 period when we ended up building far too many houses, too late and in the wrong places!
The way to stop house prices rising dramatically from here is to stop credit going to housing, because ultimately credit drives asset prices. This can be achieved by preventing banks from lending excessively against property. If we were to lend against the average house price over the past 20 years, rather than the last price rise, it would prevent the inbuilt dynamic which links banks to credit to house prices kicking off again.
One other move could be to introduce “use it or lose” it rezoning, so that developers can’t sit on land banks and have to build within a certain timeframe.
This would accelerate building because they’d have the incentive to build.
Both of these moves are part of an arsenal that could be deployed to prevent us making the same mistakes again.
You may say that it is all a bit too early to be getting worried about this again, especially when in lots of parts of the country the property market is moribund.
That’s a fairly understandable position, but we Irish have a bizarre psychological relationship with land and houses and you can never be too early.
The only way of preventing bubbles is to be early, when everyone else is nonchalant. If we wait until people get into a frenzy again, it will be too late.
David McWilliams hosts the Dalkey Book Festival from June 19 to 22. dalkeybookfestival.org