February 2, 2015

The Central Bank’s new rules simply make life even easier for those who are already wealthy

Posted in Sunday Business Post · 105 comments ·
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This week, people are asking whether the Central Bank’s new restricted credit regime will stop house prices from rising. To answer that question, we have to know what drives house prices in Ireland.

Is it the “fundamentals” that you hear certain people talking about, such as people’s wages, people’s ages and the amount of accommodation available? Or is it the amount of credit sloshing around in the economy, and how much we think house prices are going to increase in the year ahead?

In other words: do Irish people buy houses because they need them, or because other people are buying them?

The evidence from the last cycle is that Irish people bought houses because other people bought houses. As people looked around and saw others buying houses, they thought house prices would continue going up. Panicking, they jumped on the ladder for fear that they would be left behind, thinking they would otherwise have to pay more in the next year.

These inflationary expectations, fuelled by lots and lots of bank credit, resulted in the banking sector being mortgaged to the housing market, and vice versa.

This self-reinforcing process is a classic bank/credit/asset bubble that we see time and again when that most fragile of things, human nature with all its idiosyncracies, meets an unregulated banking sector whose objective is to extend as much credit into the system, book as much short-term profit and drive up the share price. Not surprisingly, as the share price determines the top dogs’ bonuses, there is an inherent flaw in the system of light-touch regulation, which leads to massive over-lending.

In the ensuing melée, first-time buyers were pitted against buy-to-let investors; the latter hoping the former would become their tenants and the former trying desperately to leap from being a tenant to being an owner. And in the end, Irish people bought and sold Ireland to each other using other people’s money.

Of course, it’s also true that the population rose – as did income and employment – but not by anything like the rise in the price of houses. Unfortunately, much of the mainstream of the economic profession bleated about supply and demand and soft landings when we were in the middle of a bubble.

Credit, not demand, drives up house prices. Ultimately the cure for high house prices is high house prices. The problem is when they fall, the expectations plunge the other way. If the credit part of the equation is controlled (by the Central Bank), surely this will prevent the wild swings in prices and something like the fairytale world of supply and demand might reinstate itself?

So, this time round, with its latest moves to tighten credit, has the Central Bank done enough? I’m not too sure, and would have preferred to see a backward-looking loan-to-value (LTV) arrangement, which ties the banks to only lending against the “average” house price of the past 20 years. This would break the line between credit and valuations, but it didn’t happen.

From the outset, it has to be appreciated that doing something is always better than doing nothing, mainly because of the impact it has on the crucial part of the housing conundrum: expectations. Anything that reins in expectations of house price rises is good news.

As more than half of all mortgages are taken out by first-time buyers, the Central Bank focused on this sector. For properties up to €220,000, the maximum LTV for the first time buyer is 90 per cent. Above that, the LTV will be 80 per cent. In the past, the figure was an LTV of 92 per cent.

As the average house in Dublin costs €270,000, this means that the first time buyer aiming to buy this house has to come up with €32,000 (a deposit of 10 per cent on the first €220,000, plus a deposit of 20 per cent on the remaining €50,000), as opposed to €21,600. This is a massive change for the potential buyer.

How are they supposed to find this type of cash, when the top income tax rate is kicking in below €40,000? Income taxes are simply too high, and take-home pay is simply too low. We would need to see falls in house prices for a number of years, increases in wages and decreases in taxes for the average first-time buyer to be able to save anything like this amount. Remember, the majority of first-time buyers are having (or planning to have) children, and everyone knows that this is when weekly spending goes through the roof.

Therefore, I have no doubt that it will impact on activity and prices at average house level in Dublin. But maybe not as much as people think.

First, the kids of rich parents will be fine, because the parents will pony up. There is some €90 billion on deposit here, so there are plenty of wealthy parents. A move which results in the social endgame of only the relatively rich getting a look in seems to be a bit odd, don’t you think?

The Central Bank has done a good job in the past few months in introducing uncertainty into the market, and we have seen a significant cooling-off in the last three months ahead of the announcement of the new rules. But will this last?

Just because the first-time buyers may be locked out from buying doesn’t mean they automatically emigrate. They are still here, for the most part, and they still need a place to live.

The fact that many first-time buyers are locked out of buying means they will have to rent for longer. So we will see a spike in demand for rental properties, pushing up rents and therefore yields for investors.

Thus, young workers will be tenants for old landlords, again providing an income to the already wealthy and topping up their pensions.

The impact of eurozone quantitative easing on Irish deposit rates means that money that is now on deposit, earning nothing, will flood back into the housing market because yields in the housing market will rise in tandem with the demand from the renters.

In time, price expectations will resume their upward trajectory – though maybe not at such a giddy rate – and the only significant change will be one that reinforces the supremacy of the already wealthy. We will have the same dynamics in the market for accommodation, just with different owners. The middle-aged have been handed a tax-efficient pension vehicle and the young pay for it.

Remember, Irish people buy houses because other people buy houses. This move doesn’t change this fact. It simply changes the type and age of people doing the buying.

Many years ago, I interviewed Tony Benn. He said to me: “The young and the old have one thing in common: they get bullied by the middle-aged.” Rings true, doesn’t it?


  1. Colin

    Unsubscribe.

    ‘The fact that many first-time buyers are locked out of buying means they will have to rent for longer.’

    No it does not David. Why can’t they live with Mom and Pops or the in-laws rent free and cut down on unnecessary spending and save for a deposit that way. Wasn’t it common in the 80s for married couples to spend up to 1 year living with the parents / in-laws while they saved for a deposit for a house?

    • gerry

      That’s exactly what we did. Move in with my folks and save like crazy. It was incredibly tough with a child but we managed to save a fair chunk of money and were then very fortunate to be able to buy where we wanted to.

      That said we feel that we were very lucky to be able to buy our house. Even on a decent joint income and with a decent deposit we just about could afford to buy our house. We were limited by income, child care fees and age.

      If it was today we simply would not have been able to afford the deposit. It took 18 months of hardship to save 40 k. If we had to save 60/70k it would just have been too much for us, my folks and my toddler.

      • MidasMoney

        Well Gerry, you didn’t have to save up €40k in the eighties for a deposit, unless you were buying a top of the market house. We bought our first house in 1982 for IR£29,950 and our second in 1985 for IR£40,000, and the second one was pretty much a mid range about 50% above average size house in a south Dublin area. In the first case we saved for the deposit, and in the second, because the market had fallen and we had little equity coming out of the first house, we borrowed five grand from family to top us up. Yeah, in both cases we had to graft, but then, so did most people who wanted to get on. It didn’t seem strange or unusual and we didn’t feel hard done by. I think if they really wanted to put a brake on rising house prices, they would mandate non-recourse lending for residential housing. That should be sufficient to dampen the banks’ ardour for stupid lending, together with a ban on securitising loans.

    • mcsean2163

      Colin, how would that work for someone from Poland or Donegal working in Dublin? I don’t think you thought that through….

      • Colin

        Mcsean,

        I do not care about the polish having to rent because they cannot get mortgage approval. I’m concerned first and foremost about Irish people and how they’ve been screwed around. Polish can go home with savings in their bank account and buy in Poland if they so choose to.

        My Donegal friend living in Dublin can save up and buy a place near where he grew up.

        But you will find most Dublin folks stay in Dublin area, most Cork folks stay in Cork and most Limerick folks stay in Limerick and it is these people that I’m talking about.

        And you may find a Mayo man engaged to a Dublin lass living in Dublin who could stay with her folks in order to save, and vice versa. In other words, not everyone renting is a blowin. People rent to escape mom and pops, so coming in steamed at 3 am doesn’t have repercussions.

        • mcsean2163

          So basically, people from outside Dublin should not move to Dublin unless they are engaged to a Dublin person? Did it occur to you that many parents downsize and their adult children don’t have a parents house to move in. Your postulation is imbecilic on so many levels, I think it is best you reflect on what you said…

          • Colin

            They can move there, who am I to stop them? Just stop moaning about rent when a little research in advance by any class of an imbecile would show that rent would gobble up a huge percentage of your net income.

    • MidasMoney

      it wasn’t common in my circles. For those likely to buy a house in the first place, they generally bought the house before getting married. Why would parents want their married children moving in? Are they not supposed to have their own lives and their own privacy??? Maybe for lone elderly parents it would be a blessing to have their children move in with their families, but I think that would probably mostly apply to quite elderly widows/widowers.

    • flyingalexf68

      I’m sure Mom and Pops would love to have me and the girlfriend stay with them rent free for the 3.7 years it would take us to save 35k towards a deposit on a house, but they live 130km from where we work. So I guess I’ll just have to rent for longer.

  2. michaelcoughlan

    Hi David,

    At the end of the previous article on aer lingus tony brogan made an error in that the link he posted links to my personal email data. Can you please remove it thanks.

    Michael.

    • It doesn’t link to anything personal Michael.

      I have checked it – there’s no way anyone can use that link to get into your account etc., impossible.

      • michaelcoughlan

        no but they can see my emails. It was only an error tony made and thanks for the concern.

        Michael.

      • michaelcoughlan

        actually I just discovered if I have logged in and someone clicks the link they access my internal account.

        • They cannot access your internal account.

          You are seeing that because you are logged into gmail on your own machine and the link takes you to there.

          No one else can see it on another computer unless they already have your password.

          • rockhammer

            I seem to recall,many moons ago, a very regrettable incident on this blog, where a poster “whatamess” took it upon himself to give out (on a public forum!) your email address Michael.( which you had previously shared)In my books,that’s reprehensible behaviour!

            That’s people for you – they’d put you astray in the head, if you thought long enough about them

          • michaelcoughlan

            Hi rockhammer,

            First of all its rather gratifying to know someone has been following me for as long as you have and clearly keeping notes etc. on my posts.

            It’s precisely to prevent the likes of you from getting those details that I politely requested David or his administrator to remove the link which he ignored for reasons known to himself as is his prerogative since he owns the site.

            If you remember at the time whatamess kept getting banned and kept returning, The reason he used my email (like must atheist totalitarian nut cases he didn’t see anything wrong in his behaviour by using other people’s property like David’s blog or my email) which didn’t belong to him and did so in a malicious manner was to divert the blogs attention from his own incompetence and inconsistent drivel.

            Similarly your post;

            “I seem to recall,many moons ago, a very regrettable incident on this blog, where a poster “whatamess” took it upon himself to give out (on a public forum!) your email address Michael.( which you had previously shared)In my books,that’s reprehensible behaviour!”

            is written in the same inconsistent illogical manner in that any one reading it would fail to decipher who the “reprehensible” person is. That and the fact that you too like whatamess lack the courage to post in your own name and as far as I know haven’t posted here before leads me to believe that once again the bonbon’s are back at their old tricks.

            Regards,

            Michael.

          • rockhammer

            Thank you for such a prompt reply. It’s a little exciting [actually thrilling] for me to see your reply.It took some time for me to pluck up the courage.And yes,very hard hitting analysis Michael,as ever. And surely the whatamess character was a laddybuck masquerading as a Mickey-one-punch-finish-debater,but,it must be said,or rather,having a sense of fairness,i would like to add – that they/he/she was anything but boring.

            short
            https://www.youtube.com/watch?v=gml6b08eGxI

            Psssst ! word around the cyber campfire is that the bonbons are really twins and farmers living in south Kerry?..two men outstanding in their own fields

          • rockhammer

            the courage to post here ,i intended to write …i’m all thumbs with excitement!

          • michaelcoughlan

            Hi Rockhammer.

            Thanks for your response.

            “it must be said,or rather,having a sense of fairness,I would like to add – that they/he/she was anything but boring.”

            I agree with this and I was actually a fan of the bonbon’s indeed I used to look forward to reading their posts first. This is because their views were at such variance with my own I saw it as a real opportunity to learn something new.

            If you remember some of the posts were so original and insightful in some cases I too had light bulb type realisations once reading them.

            The pity is that they clouded all the real nuggets in the dogma and did their wonderful intellects and capacities and enormous disservice.

            I am on this blog to learn. I didn’t study economics but did study it as a subject in college. I find this blog (because of the robust debate) almost like a leading indicator of things about to happen most recently the revaluation of Euro against the Swiss franc for example.

            I hope I didn’t offend you in my response. If I say something which is inaccurate, contains wrong analysis, or differs in analysis from your own PLEASE post you rresponse. It’s only through self reflection we progress.

            Sincere regards,

            Michael.

          • rockhammer

            Offended? Nope,not me,but i can’t imagine whatamess being overly enamoured with your remark of his “incompetence and inconsistent drivel.” But hey,it begins with ‘t’ and ends in ‘f’ Michael. The truth hurts.

            very respectfully,

  3. michaelcoughlan

    Hi David,

    “Credit, not demand, drives up house prices.”

    I think this doesn’t apply in all cases. The rich kids pay cash. Some art works pieces were sold for millions a couple of days ago in London and i’d say bought with cash. The article doesn’t deal with whether there is a thin market or not so price discovery is mangled. The trouble now is when the first time house buyer wants to trade up he will have to save a second deposit as next time out he will need 20% deposit. This will create a bottle neck.

    I can’t see a supply side response because prices for new entry level homes/apts are now locked in below cost for years to come. Expect higher and higher rents and higher and higher prices as cash rich punters will drive valuations in a thinner and thinner market.

    Michael.

    • Colin

      Michael,

      I can see a supply side response. It’s the old codgers dying off or being dumped into the nursing home industry. This is happening a lot now on the road where I grew up, where most couples are now in their 70s, with a few more in their 80s. In fact, the house next door to my folks was recently bought by a first time buyer couple (who saved their deposit by living with their parents / in-laws). The husband died about 6 years ago and the wife died 2 years ago, both in their 70s. 3 of their 5 children live abroad, 2 left in Ireland live in other parts of the country and already owned their own property.

      This situation is ready to be replicated up and down the road many times over the coming few years.

      • Yes the 2011 census said 27% of people aged over 65 lived on their own which suggests deaths in this country result in around 8/9k extra vacant homes every year. With 22,000 people in nursing homes, perhaps 10% entered in the last year. So the issue you brought up may very well have resulted in 11,000 available homes last year – the same amount of homes actually built!
        From personal experience with relatives the homes were also vacant for 2 years from either deaths or moving into home.
        I also know of other houses where they have been vacant for longer, simply because the families haven’t been bothered putting it on market or are too lazy – a significant factor why I believe the vacancy rate is sill 9/10%.

    • Credit always drives up prices.
      It provides additional buyers bidding for product and so up goes the price to the highest or best bid.
      Reduce credit and demand is less so all things otherwise equal the price will drop.
      Banks can play markets indirectly like a fiddle.

      As often repeated the markets are so influenced by banks and credit that the markets are disfunctional as one has to second guess the next bout of manipulation. Such guesses are often wrong. Ask the people who used the Swissy to finance their home.

  4. The new mortgage rules may very well result in a slight decrease in house prices – however, with cash buyers consisting of 51% of the market in the first 9 months of 2014, there is really no way to know (excluding other factors).
    With statistics saying there were 13,472 home buy mortgages in 2013 and 13,226 for the first 9 months of 2014, it is still a very depressed mortgage market out there. Perhaps there may be around 20,000 new mortgages for 2014 when the figures come in this month, but it’s still a fraction of the 110,000 mortgages in 2006.
    Hopefully many of the owners of the vacant properties will now feel more encouraged to either sell or rent out to make it easier for potential buyers/tenants and get our vacancy rate to more normal levels. Aside from the issue of more young people saying they would never want to buy (even if they had the money), there is also the issue of young potential buyers simply taking a stake in the parents rental property so that the parents have a lump sum/are able to pay off BTL mortgage which may be in arrears.
    We obviously will not know for a while whether the cash buyer rate for 2015 will be below the 2011 and 2012 levels (39% and 44% respectively).
    This means that chances are that a good proportion of mortgage backed buyers have been bidding against a cash buyer and that the cash buyers will still have a huge influence on house prices.

    • EugeneN

      of course any drop in prices could see a rout if cash exits.

    • michaelcoughlan

      “This means that chances are that a good proportion of mortgage backed buyers have been bidding against a cash buyer and that the cash buyers will still have a huge influence on house prices”

      Yes so David’s statement that credit drives price isn’t exactly the full picture.

      Michael.

  5. mobshark

    “The young and the old have one thing in common: they get bullied by the middle-aged.” I think this final statement may contradict much of what went before in the article.

    • The middle aged in North America appear to be taking the hit from both ends and the government in the middle. Squeezed out of existence as middle class. Paying for lingering offspring at one side and looking after aged parents on the other. Taxed on incomes in the middle.

  6. McGoo

    David, your argument pivots on the idea that the new rules will cause rents to increase. But, as you quite rightly state, “take-home pay is simply too low”. Rents can’t increase, because people can barely pay them as they are. Any further increases will result in a situation where working people are giving half their pay to the government and half to the landlord. They will quickly see that unemployed people claiming housing benefit are better off, and that working has become pointless.

    I maintain that Dublin house prices are in a classic dead cat bounce, and will eventually fall to a new post-bubble low.

    • Renters will have to double up now. Two singles unrelated sharing a 2 BR suite.
      Home owners too. May be now 3 wage earners required to qualify for a mortgage. Could mean two families sharing a home with 4 wage earners!

      Times they are a changing

  7. I enjoyed the article and well written .

    I have a different opinion in some aspects as follows:

    ‘Pony-Up’ – this is much more difficult in reality because the capital tax thresholds have been slashed by the government and these so called ‘rich kids’ will end up having to cough up a lot of taxes to the government than fist imagined and will they have it ? Some will and many wont ; and

    The Central Bank in my own opinion , if they stick to enforcing it , did inject banking stability and house cost stability by their recent decisions because in doing so they have managed to reduce considerably the cost to buy an exorbitant expensive house anywhere not just Dublin ; and

    The Central Bank decision was dictated by the Enarchy in the ECB and this has been on paper there for a few years until now when it became revealed to the electorate .Their reasons are to enable the savers to spend and and reduce the 90bn euros saved to manage the excessive borrowings currently .

    I fully support the new policy on lending .

  8. As an Accountant I have noticed how banks avoid giving refusals to loan applicant for small house loans and they do this by initially refusing to read the bank account customers loan application so they do not need to show to the regulator that they are refusing loan applicants loans.

    This is an injustice to society and should be stamped out .

  9. SMOKEY

    This guy has an interesting take on mortgages.
    https://www.youtube.com/watch?v=yW0_4w0x64I

  10. EugeneN

    David is becoming populist in his middle age.

    For instance:

    “First, the kids of rich parents will be fine, because the parents will pony up. There is some €90 billion on deposit here, so there are plenty of wealthy parents. A move which results in the social endgame of only the relatively rich getting a look in seems to be a bit odd, don’t you think?”

    Of course they will. And unless you stop wealth inheritance they will be fine either way, because if they can get the deposit now at 20% they can get it at 15% were prices higher. However this puts a lid on it for everybody else and in fact helps savers who can’t inherit because of the lower prices.

    He’s also on a sticky wicket when it comes to blaming the middle aged for buying property under the noses of the young and picking on the old. As he himself pointed out that demographic os where the squeezed middle are, the people who bought from 2004-2008, or who didn’t buy, are in middle age now, albeit early middle age and most of our distressed mortgage holders are or will be middle aged pretty soon. Of course middle aged can mean anything from 35+ to 65, as if people lived to be 130.

    Come on David, its you who has popularised the idea that the generation running off like gangsters are old or late middle aged. Stop the new populism.

  11. Adelaide

    Although the Irish are the most apathetic citizenry in the history of ‘apathy’ I can’t envisage a wiped-out generation pointlessly working to pay their entire incomes on exorbitant rent and taxes with no stake in the ‘social contract’ nor a pension to look forward to plus the unfeasibility of having kids plus living in woeful accomodation and simply shrug their shoulders.

    • michaelcoughlan

      Spot on.

      89400 voted with their feet to april 2013 and another 80400 voted with their feet to april 2014.

      The Americans call it eating your young.

      • EugeneN

        Presumably more than that came in from abroad or we wouldn’t be having this discussion.

        • michaelcoughlan

          Hi Eugene,

          The inflow was substantially less.

          Michael.

          • EugeneN

            I doubt it regardless of official figures. We went into the bust with ghost estates, 10% of houses unoccupied, and a housing bust we were told was generational. Then rent increases at 30% a year. I don’t buy it.

          • michaelcoughlan

            You dont have to eugene but as I pointed out to you before your capacity for analysis is shite.

            Rents are rising because supply isn’t meeting demand nor will it with the policies being pursued by government and the Central Bank.

            Michael.

        • EugeneN

          Michael you are the dumbest person I have argued with on the Internet and that’s saying a lot. It’s you who claimed that outflows > inflows. If so explain rental increases? We had 10% unoccupied housing in 2011 in dublin, enough to house 100k – read back over David’s articles. Births over deaths don’t explain the removal of the surplus. So you are wrong about the outflows being higher than inflows. If this kind of thing is too difficult for you — and it is — maybe you could try posting on the Sun?

  12. ps200306

    David,

    I rarely disagree so thoroughly with an article of yours. It is not the central bank’s responsibility to ensure people can afford houses. Its responsibility (which you must know as a former employee) is to prevent a housing bubble and protect banks and borrowers from themselves and each other. The argument about better off people is a straw man — they are going to have a head start on the less well off no matter what the price level of houses. The supply of houses is a matter for builders and the government. The level of income tax is also not the central bank’s problem (albeit that if regulation had been as it ought to some years ago, we mighnt’t have such high rates now).

    I also have a different way of looking at your example of a house costing €270k. In my view it’s irresponsible to give mortgages over longer terms than 25 years, even to younger people. There’s a reasonable chance that a person losing their job late in their career will not be able to achieve the same wages again, or perhaps get employment at all. Terms of 30+ years are nuts. The present value of mortgage payments does not erode as in former years, with modern low inflation policies. And if inflation isn’t low, neither are interest rates. That’s why mortgages should be stress tested to rates of at least 6%, which are still quite modest historically.

    So let’s take a mortgage of €220k (€270k minus €50k deposit) over 25 years at 6%. The monthly payments are €1,740. If the borrower can afford that, then they can save the €50k deposit in under two and a half years. And if you argue that they also have to pay rent while saving, I will argue back that the outgoing on their mortgage should be nothing like 100% of their disposable income — in fact, it is recommended to be only 30% or so. Therefore, while they are saving for their deposit, at a time when there is no risk to their home, they can push the boat out and save all their disposable income (just like people historically have always had to, except for an anomalous period of ridiculously easy credit). If they can’t afford to save at that level, then they can’t afford to buy the house. Simples.

    By the way, we need to dispel the myth that a person on average wages can afford to buy the average house. House prices and wages are two different distributions, so there need be no such connection. Indeed, in a comment on a recent online newspaper article about the CB limits, a reader was asking how a person earning €35k could ever save the €100k deposit for a €500k house! Some people obviously need to get a basic grip on reality. We should also not ignore the government’s finger in the pie of house prices — a very considerable portion of new house prices is tax and various development charges. This will have to be addressed if the supply issue is to be tackled. Dublin house prices are still insanely high. They showed some sign of returning to normality around 2012, but have taken off again from there. The central bank move should be seen as a holding manoeuvre while we attack (if we ever do) the real problems.

    • EugeneN

      Good analysis. Of course this €220k over 25 years at 6 leading to monthly payments of €1,740. is future proofing as the costs are nothing like that now. You are right we should stress test that 6% level at the very leas. If that €1,740 is assumed to be 30% of a persons income then we can see that the ECB moving back to even 4.5% will crush the market at it’s present ( so called) depressed level and the economy with it. I am assuming the retail rates will be at least 6% at that level. I mean we already would have massive defaults of the 2004-2008 400K mortgage holders in that case.

      And if that doesn’t happen over the time of the loan then the real price of the loan remains constantly high. Its utterly nuts to listen to the developers and bankers on this.

      If the government wants to help FTBs it is simple. Build state backed housing, tax land hoardings, and if necessary allow some VAT rebate on housing to stimulate the developers. ( Although god knows they can build apartments for £100K in Newcastle).

      • ps200306

        Agree, EugeneN. There’s a lot the government could do to stimulate house building. We also need to wean developers off the profit expectations of the bubble years. Recent breakdowns of construction costs published by various building industry interests are exaggerated. And it’s not like we build super high quality housing here. A lot of the existing stock is miserable.

    • “It is not the central bank’s responsibility to ensure people can afford houses.”
      Only the ECB produces money and it spreads through the EURO Zone.
      What can the Irish central bank do?

      The discussion is moot as there is no mandate for a central bank to do anything except enrich its shareholders…Banks.

  13. mogrady14

    I want a free council house like all the Romanians got in the housing estate where I rent. I live in Springfield, Tallaght (estate beside Tallaght hospital) and tno Irish were given council houses in years but a large Romanian community were. Weren’t the Romanians totally right not to buy as now they have a house for life and are not crippled by a mortgage? Why won’t the council give me a free house too?

  14. Pat Flannery

    What drives house prices in Ireland? The same forces that drive house prices everywhere: supply and demand in a particular market area.

    What are the real “fundamentals” of the Irish property market?

    It has become distorted by an almost total lack of planning. The fundamental resources of land, labor and capital, have been largely wasted. The Irish market has obscene regional oversupplies and undersupplies.

    The Americans are great planners. It is one of the things that make them great. Right next door to San Diego where I live is a city without planning – Tijuana, Mexico. I attribute much of the difference between the two societies to planning.

    Americans know how to balance free market forces with the fundamental need for planning. Many nations fail to do so. If David is right and “Irish people buy houses because other people buy houses” then the country is doomed to primitive boost and boom economics for ever.

    As for availability of credit being a “fundamental” in property prices, all the credit in the world would not drive up prices in rural Mississippi while tightening credit to zero would not prevent price rises in San Francisco.

    Ireland needs to establish planning as a key career for Irish students and reward them with lucrative jobs after graduation. Planning is becoming a national imperative. It is now and always has been the hallmark of a successful nation.

    • Mike Lucey

      I imagine co-operative Housing could be a good answer to many of the country’s housing problems. It should be encouraged and fully supported by Government but alas I fear the developer lobbyists wouldn’t like it!

      A completed co-op development of 30-40 units in a multi-storey or open field cluster naturally and immediately forms into a community, a very good thing.

      Take for example a 30 units development with 10 one bedrm homes for young couples setting up and retired couples downsizing, 10 two bed homes for the couples with one or two kids and 10 three bedrm homes for couples with 3 or more kids.

      With this setup their could be a revolving ownership / usage of the various units. As the one bedrm couples have a kid they move on to a two bedrm unit and the folks with a one or two kids that produce a third child move on to a 3 bedrm unit. The empty nesters move back to a one bedrm unit.

      All kinds of internal co-op arrangements could be set in place and implemented whereas for example the empty nesters get a nest egg along with the retirement one bedrm unit.

      Such co-op developments would be fun to live in with the age mix and generate a caring community.

      • Pat Flannery

        Mike, I completely agree. It could be done at local level. Such an initiative would be a great community builder. The Irish have been deliberately trained to look to government for everything. That needs to be changed. Other than the parish priest and the county councilor they currently have no local leaders.

    • EugeneN

      Unless everybody is buying for cash housing would collapse in San francisco with zero credit. And if the Americans were so smart they wouldn’t have regional housing booms.

  15. Deco

    Just wondering, but can somebody tell me how much of the 90 Billion euro that is on deposit in this country is relating to mncs who are using Ireland as a 2location for the declaration of the maximum possible revenue” ?

    The housing market is the confluence of a myriad of stupidity coming from Brussels, Frankfurt, the professional property extortionists, and the politicians.

    The whole thing is one gigantic mess.

    and it is highly regulated. Regulated to make it impossible for people to lead normal lives, like they used to. Instead the point of the system is to create debt slaves.

    The current limit is about the only thing that might reduce property prices.

    The media does not like it, and the politicians hate it. Because they represent vested interests who want prices driven upwards again, and the rebuilding of a debt mountain.

    • I tend to your view Deco.
      Interfering government policies are always changing the rules and moving the goal posts.
      Equilibrium reigns until an input is changed. Then everything moves to adjust to the new equilibrium.
      That is when the “Planner” sees the unintended consequence.
      so the planner now adjusts again and the who thing goes out of whack.
      Put several planners in there from different jurisdictions and you end up with the Mess as Deco suggests.
      Too many cooks spoil the broth as they say.

      Centrally planned economies are notorious for failure. partially planned economies are full of cock ups.

      Just leave the markets alone and all resolves itself.

      • Pat Flannery

        Tony,

        “Just leave the markets alone and all resolves itself.” Really? Are you against all spatial planning? Do you abhor zoning and other land use controls? What would the U.S. or Canada be like without planning? Do you prefer how it works in Third World countries?

        • That is exactly where we are headed.. to third world status. Central bank planning is making sure of that.
          In their case I begin to think it is deliberate policy.

          Talking of planning and lack of affordable housing. In Ireland to get building permission on a piece of land means you must be related to everyone in the neighbourhood or to have been a tenant on a farm for 20 years. Nobody else need apply.

          That’s is what I was told at the office in Swords.

          • michaelcoughlan

            local need it’s called. Thats if you are looking for planning in the open countryside. Same as UK. Ireland’s dispersal pattern has been so for thousands of years but now we know tow to the almighty in Brussels.

            Michael.

    • EugeneN

      Yes. And designed to create another crash. The CB is doing its job this time, the dept of Finance is as incompetent as it always was. Of course more money flows in these days if house prices go up. What does that TCD economist call this the developer-government-media nexus? Finance has skin in the game. higher property tax.

      The 87B on deposit seems genuine. It’s also where it was in 2011 so that doesn’t explain much. Loans outstanding are 140B

    • mcsean2163

      What about non-recourse loans? Risk on the lenders.

      • Pat Flannery

        mcsean2163. Right on. All mortgages in the U.S. are non-recourse. All mortgages in Ireland are recourse. Ireland is a capitalist’s wet dream. A “no-risk” country. The fault dear Irishmen ……

        • Last time I checked the Canadian mortgages were a mix.
          If a bank foreclosed then the had the house. Canadian law says that if there is equity left after the payout and expenses then the residual must be returned to the ex homeowner. If there is a shortfall then the banks suffer that.

          BUT

          At a time when property prices were contracting below the amount of the mortgage,or were ‘underwater’, Banks utilised a process called Court ordered sale. This is where they sued under the promise to pay but did not foreclose. They obtained a court order for the homeowner to pay them what was owed and so now could go after ALL the assets of the homeowner. This usually meant a court order sale of the house and then a claim to pay debt placed on other assets be that other property or bank accounts etc.

          The foreclose is non recourse and the court ordered sale is recourse.

          In neither case is the homeowner left with a debt overhanging for the next 20 years. They may get wiped clean but at least able to get a fresh start.

          Fair enough.

          • Pat Flannery

            Yes, in the States a mortgagor can waive its power of private sale (non-judicial foreclosure) and opt for a judicial foreclosure in which, unlike a private foreclosure, the judge can grant a “deficiency judgment”. Like any money judgment this is enforceable against the borrower’s other assets.

            It is rarely excercised however because it is expensive, slow and usually the deficiency judgment is worthless anyway. This puts the entire risk on the lender where it belongs.

  16. “This self-reinforcing process is a classic bank/credit/asset bubble that we see time and again……”

    Yes of course and unmentioned , followed by the equally sized bust.

    Anytime the conditions are artificially changed the result is a fragile edifice doomed to failure. Central bankers, central planners …a pox on both their houses.

    The only legitimate function of government is to prevent the aggression of ones neighbour against the individual and to protect the community from foreign aggressors trying to steal the lot.

    We still live with the residue of William of Normandy claiming all land in the name of the state. Nine tenths of land in Canada is still Crown owned.

    Funny what that can do to the prices of housing.

  17. Central Banks are on a reckless course of action to devalue their national currency. This it is said to make the economy more competitive. There is little proof this actually works. Inputs that are imported cost more. So it is an inflationary policy.

    As all central banks are doing likewise we have competitive devaluations. The result will be huge monetary inflation,huge debt inflation and a corresponding bust economy.

    The only money not able to be depreciated in this matter is gold. All currencies are loosing value to gold. That is the measure of the true inflation taking place.

    While interest rates are reduced to zero or lower pensioners funds will run out of cash and likewise the pensioner. Debt laden consumers are encouraged to go further into debt by borrowing to spend.

    You want my debt as your income is the true lament.

    http://www.cnbc.com/id/102379625

    “”The next shot in the currency war will be fired by…”"

    It is a race to the bottom. Rank stupidity unless it is deliberate and then it is evil. A wicked policy.

  18. http://kingworldnews.com/historic-revolt-corrupt-western-banksters-now-underway/

    Here is the evil. Deliberate central bank policies lead to insolvency and to asset stripping of the countries one by one.

    Greece is the time bomb. 28th Feb is the deadline date.

      • Thanks Adam

        Austrian commentary usually makes sense.
        This is a critique of fiat money and the policies of central banks and the CB behaviours.

        It points out as I did above that if a fiat currency is left standing after all the devaluations it will be the first time in history of such a happening.
        It also points out that the currency left being used will be chosen by people because of its inherent value to society.

        Will it be gold yet again? he asks or will it be the crypto currency bitcoin?

        Bitcoin was given all the characteristics of gold by its creator because gold has proven its values as a medium of exchange and store of value. It does not decay , burn or rot and is fungible and portable in small volume for large value.Neither can it be fabricated or immitated.. Those that argue there is not enough gold for the modern economy or state one cannot eat gold must consider Bitcoin is similarly accursed. However it is possible to create other crypto currencies with the same caricature as Bitcoin and thus flood the world with duplicates.

        At present one cannot take a bitcoin and pocket it to carry with you. One relies on electronic pulses to hold the accounts and to make the transactions. Very convenient. Also Bitcoin is out of the direct control of government and such is a currency of the people.

        Gold can be carried personally and kept at hand without the use of any electrical gadgets and so is useful for those who do not trust electronics or who do not have access to a computer.

        It is possible to have gold deposited and a derivative, an electronic representation of gold transferred to another. Thus it can attain the caricature of bitcoin.

        However if someone offered me a choice of payment, currently,
        I would out of the two, opt for gold at this moment. I still fear the spread of government interference in the electronic system or a lack of electrical power just when I might my money.

        There is a certain comfort in being able to lay ones hand on what one owns at any time one needs to.

        Of course the ultimate wealth is land as it provides sustenance to all people.

        • Always a pleasure Tony.

          I’m writing this from the middle of the English Channel, somewhere between St. Malo and Portsmouth – Internet connection is dire – it’s like being back in the 90s.

          PS. Bitcoin can be backed up offline – on paper or even stamped on gold – does not require the internet – little known fact.

          SOS … _ _ _ …

  19. locoloco

    If the central bank want to ensure some sanity in the property market, why don’t they go down the road of “no recourse” mortgages. If you don’t pay, you loose the house….but that’s all you loose. And that’s all the bank get – the house.
    So the temptation to over-lend in a “hot” market is reduced. Bankers would need to develop the skills of valuation, and of predicting risk, or they loose money.

    They might earn their keep !

  20. michaelcoughlan

    Hi David,

    Its not just the central banks making things easier for the rich. Where are the customer yachts;

    From 12.30 https://www.youtube.com/watch?v=84j6DzzzyK8

    Michael.

  21. Central banks have loaned out so much money that the world is broke.
    All will eventually default. The daisy chain assures that one default will create another.
    The lie of vaulueing debt at par rather than to market will be exposed.

    Greece is the first real test for the monetarily and morally broke ECB.
    28 Feb is the show down at the OK Coral. As Bill Holter explains, the positions have hardened and the line is drawn. Winners will be losers here, as they will not be able to collect from the loser and the derivitives may collapse like dominoes. Have you heard of counterparty risk? Gold has none.

  22. Yanis makes an excellent case for a decentralized Europe of disparate peoples working together for a common goal.

    Centralization is not the prescription.

    https://www.youtube.com/watch?v=CRRWaEPRlb4

    • Brilliant from Yanis as usual.

      I have been following him for a few years now and his work is compelling to watch.

      He is a man with a vision and I wish him and Greece all the best.

  23. mcsean2163

    Fair play David for calling it like it is.

    I have been thinking the same, friends have returned from Canada, have a baby and are paying €1800 in rent.

    How will they ever afford a deposit?

    • michaelcoughlan

      Hi,

      “How will they ever afford a deposit?”

      The answer to that is very straight forward but the Irish Govt will never do it.

      The gubernment are about to auction off a huge amount of loans to the “Markets”. They should hold some and develop the sites themselves using money from a sale of government in share like aer lingus for example. This would mean no extra borrowings with no subsequent increase in the money supply.

      Develop the properties through a co-operative structure like mondragon; http://en.wikipedia.org/wiki/Mondragon_Corporation which means a better distrubition of wealth created to producer and customer alike. An Initiative like that would fit beautiful as far as I can see with the ideas of a Keynesian economist like McWilliams and his writings re the looting of labour to serve capital, fiscal counter cyclical responses, prudent monetary policy etc.

      Once the properties are developed they could be “sold” on a rent to buy basis whereby the rent paid for the first 3 years in agreement with the co-op would constitute a deposit which subsequently could be used to finance a mortgage. In other words rent paid would equal equity gain for the tenant until they hit the magic 10% ratio.

      Will it happen? No. Why? The government are singing to the tune of big bird lagarde and the whole exercise is geared towards stopping the derivatives bubbles from exploding in the face of lagarde and gsucks etc.

      I am sounding more and more like a socialist god help me but I really feel that real capitalism hasn’t been practiced anywhere for such a long time now that people don’t actually know what it means. Originaly capitalism in the US had to serve the common good in that you weren’t allowed to register a ltd company unless it did and had to be trammeled by moral consideration as indicated in the Theory of Moral sentiments by Adam Smith a work which rarely gets mentioned nowadays.

      Michael.

    • Colin

      By finding a job near where mom and pops or the inlaws live. They really should have thought this decision they’ve already made through a bit better, now that they are lining some landlord’s pockets to the tune of €1800 per month.

      • mcsean2163

        Fair play Colin, finger on the pulse.

        Everyone should live with there parents, even if there are no jobs around. They shouldn’t take a chance move to Canada and get a job there. They should stay in their parents house because even if they can’t get a job and have to go on social welfare, living at home with their parents who may not want them there, at least they are not paying rent. Why chase your dreams in Dublin when you could be unemployed living with your Mammy in Newcastle West?

        I think it may be time for all Irish economists to step aside and let you speak your wisdom on their behalf. All hail Colin the wise!

        • Colin

          moaning about rent will get you nowhere mcsean.

          • mcsean2163

            Colin your wisdom knows no bounds, except perhaps on this occasion, as I was not moaning about rent, rather commenting on how hard it would be for a couple renting in Dublin, to put together a 20 percent deposit. However, tis of no concern, for surely as word spreads of ingenious solution, the plight of such citizens will be rectified.

        • Colin

          Mcsean,

          Sorry to point out to you that a couple will not need a 20% deposit. Please familiarise yourself with the sliding scale.

          As Tony Brogan points out here above, property prices will come down when credit is restricted. I think that is a good thing, but if you and everyone of your mates wish to be large debt junkies or martyrs, you missed the boat.

          Yours sincerely,
          Colin.

          P.s. sarcasm is the lowest form of wit.

  24. “Their Annual Report, which was published just three months before the Government was forced to unconditionally guarantee the deposits of the Irish-owned banks,said: “The banks have negligible exposure to the sub-prime sector and they remain relatively healthy by the standard measures of capital, profitability and asset quality. This has been confirmed by the stress testing exercises we have carried out with the banks”.[19]["

    http://en.wikipedia.org/wiki/Central_Bank_of_Ireland

  25. “It also fostered a belief that governments can plan the peace and happiness of mankind, if only the political leaders of those governments (Central Banks?) have the power to direct our lives.

    Our task in the remainder of the twenty-first century is to finally free ourselves from this legacy.”

    – See more at: http://www.thedailybell.com/editorials/36052/Richard-Ebeling-The-Ghosts-of-Yalta-Still-Haunt-the-World/?uuid=6F800609-5056-9627-3C5071902B060BF2#sthash.XHm5yPen.dpuf

  26. Fat Tony

    `ere – what happens if a Eurozone recovery or currency issues lead to an increase in the current absurdly low interest rates – another crash lower?

    • StephenKenny

      It’s another indicator that the state and central banks efforts to boost the global economy, haven’t really worked.
      If anything, we’re in a worse position than 2006 – at least at that time we still had all these financial and policy tools available to us. Now they’re gone.

      • Fat Tony

        What I’m really asking though is will rates rise happen, and if so will this lead to a fall in house prices (in contradiction to DMcW’s claims that prices will rise)?

        • StephenKenny

          The problem we have at the moment, is that the various indicators and mechanisms we’ve grown used to, over the past 30-40 years, are no longer effective.

          Interest rates are an example: Central banks have explicitly stated that no rates will be allowed to move according to what we used to call ‘market forces’. So rates are not going to rise, until the central banks lose control, or are caught between a rock and a hard place, and raising rates is the least of the bad options available.

          Asset prices are in bubble territory, which used to indicate that the economy at large was booming away: we’d expect to see surging wage pressures, a consumer borrowing boom, falling welfare costs, rising tax take, increasing commodity prices, and a general rise in the cost of ‘doing business’, and so on.

          All we really see is rising asset prices, and even then, it’s essentially stock markets and property. Even with the huge global stimuli, everything else is limping at best, and more generally being ‘exaggerated’.

          Interest rates can’t rise in an meaningful way, as the option that has been chosen is to make the pensioners and young people tomorrow, pay for today.

          Another side effect is to force savers/lenders into ever more risky speculative activities, which rewards risky, short term, businesses and business strategies, over the more mundane, and longer term wealth generating businesses. So property, stocks, and companies who could make millions an billions by Christmas (or go broke, of course).

          Were rates to rise, it should cause a fall in house prices. But, like in the UK where the government is now directly, financially, involved in pushing up house prices, anything could, and probably would, happen.

  27. http://www.whatdoesitmean.com/index1832.htm

    “No doubt the people know they can have their Republic back if they want it enough to fight for it and pay the price.”

    Garet Garrett (19 February 1878 – 6 November 1954), one of the most influential American libertarian writers of the 20th century

    Freedom does indeed have a cost…especially for those of us on the front lines so you don’t have to be….after all, someone has to fight against this evil…will you join us too?

    Please help us all you can.

    With God,

    Sister Ciara

    Dublin, Ireland

    17 January 2015

  28. “But with currencies, who knows? Government can throw a surprise party any time changing everything. That statement is so intrinsically hateful & stupid I can hardly type it, but it’s true. Goofy world where government & central banks determine the economic destiny of us innocent sufferers.” Franlin Saunders, The Money Changer.

  29. http://www.reuters.com/article/2015/02/04/us-bank-of-montreal-gold-idUSKBN0L80BQ20150204

    NNot sure I’d trust a bank to operate a gold fund without reading the prospectus tree times and thinking about it for a month.

    Bailin legislation is passed in Canada and is sure to be used at some point. all G 20 vowed to pass such legislation.

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