July 26, 2014
Property market resurgence a case of deja vu all over again – but can it be stopped?Posted in Irish Independent · 38 comments ·
News that property prices shot up again last month shouldn’t take you by surprise. Before we analyse, let’s just take stock of what is happening.
Property prices were up by 12.5pc in June across the country when compared with the same month a year earlier. In Dublin, prices jumped by 24.4pc over the past year. Apartment prices rose by 18pc, the new figures show and it was the 13th month in a row that prices rose nationally on an annual basis.
The question is where will this stop?
To answer this, let’s take a bit of altitude.
In early 2012, this column argued that the housing market had troughed and it would bump along the bottom until 2013 and from then it would begin to recover. At the time the notion of an imminent property market recovery was dismissed by mainstream commentators. But this was the same mainstream that argued for a “soft landing” a few years before.
A few months ago, the column warned that there was a definite bubble emerging in Dublin. Again the mainstream economic view dismissed this contention, arguing that the dynamics in the property market were all about supply and demand. This analysis shows a rather extraordinary inability or even unwillingness to learn. The last time we left the housing market to supply and demand, we ended up with “ghost estates” (far too much supply) and a monumental crash (far too little demand). Supply and demand didn’t synchronise. In fact, they went in opposite directions.
In short, supply and demand may explain the general direction of prices over long periods, but not the absolute velocity of price increases or decreases. Supply responds too late and demand responds too quickly.
Why is this?
It is because the extent of price increases is a function of human psychology and the availability of financing.
Let’s deal with psychology first.
Unfortunately, economists make economic models based on people who don’t exist.
Economists talk about rational people, who make decisions, like buying a house, based on logic. These sorts of people are supposed to be cold, calculating and utterly beyond emotion.
But have you ever met these people? Such people don’t exist and if they did, you wouldn’t fancy going for a jar with them.
In reality, real people – you and me – are more like football fans than calculating traders. We are terribly emotional, terribly easily influenced, we do highly irrational things, like falling in love, supporting pathetic teams and we always think that this time it will be different. We also panic. Rather than be coldly calculating, we are wildly emotional.
Nowhere is this more evident than in the Irish housing market where the rules of economics are turned on their head.
Economists think that when the price of something goes up, the demand will go down. I argue that the opposite is the case.
When Irish property prices go up, the demand goes up because people think they are going to rise yet further and we say to ourselves “if I don’t get in now I will pay more next year”. So increases in prices prompt real people to bring forward their buying decision.
As a result of deep human frailty, a property bubble begins in our heads. Once the herd moves, we all do and the extent of price increases is then a function of the amount of money available.
The reason Irish prices are moving so rapidly is that there is actually a lot of money in the country.
This is because when the balance sheet of the country imploded in 2007, people panicked and started saving.
Yes, I know it sounds odd when hundreds of thousands are trying to make ends meet, but the savings ration of the country went through the roof. These savings generated interest. But now that interest rates went to zero, the people with savings yet again started looking to the housing market as a place to put their savings. Today, rather than get nothing in the banks, they are betting on property. These are the “cash buyers”.
So money is driving up prices, but as it does, it creates the boom dynamic where every price increase scares first-time buyers to play catch-up and therefore, begets another upward price lurch. This is the “get on the ladder” panic, which is evident all over the country.
Mainstream economists argue that without credit there will be no sustained increase. But the problem with this view is that credit always finds its way into a bubbling market, because that is what credit does.
My hunch is that the vulture funds that bought the prime commercial prizes in 2010 and are now “cashing in”, will use a proportion of this loot to finance new mortgage lending. With clever lawyers, they will find a legal away of providing mortgage financing – this is what they do.
The funds have to get a return for their investors. In a world of zero interest rates, where the banks are still licking their wounds from the last crash, these funds need to act like, but crucially, not appear like, banks.
Remember, the commercial property market in Dublin went stratospheric without the Irish banks’ involvement at all, the same will happen to the mortgage market.
The Central Bank could act now to limit banks and these funds lending for property. But will it?
That’s the question.