October 13, 2016
All the good work to halt second property crash undone in a dayPosted in Irish Independent · 97 comments ·
We are faced with similar concerns on the horizon now. Unlike 2008, when this country went bust, or in 2012, when the euro as a currency was in real danger of falling apart, there is no serious internal threat. In 2012, the world’s central bankers cutting interest rates to zero prevented the disintegration of the euro. This may have saved the currency then, but it means that today central bankers have no ammunition left if there is another downturn. Interest rates are as low as they can go.
Unfortunately, the trading economies that Ireland depends on have not responded to zero interest rates with any real gusto. They are sluggish at best. This sluggishness means that the average guy feels left behind and sees real gains going to the very rich. As a result, the mainstream political players are now being rejected in favour of populists. This is happening everywhere, particularly in the UK, the US and France.
First, the Government stimulated the economy to the tune of €1.3bn rather than the expected €1bn. As you would expect from a minority government dependent on Independents and Fianna Fáil, there was no coherence. There was a little bit for almost everyone. Income taxes were trimmed marginally via modest cuts to the USC. Social welfare was increased, and capital investment was lifted.
So in short, there is no direction. It’s a mish-mash of parish-pump initiatives.
However, in terms of what signals it is sending out, there is one interesting development: the Department of Finance and the Central Bank — the two most significant economic agencies in the State — are now clearly at loggerheads. This is never good.
The Budget undermined the Central Bank’s authority profoundly.
The one significant policy unveiled by the Central Bank over the past few years was limiting the amount of money people could borrow to buy houses to three times’ income and limiting the borrowing to an average 85pc of the value.
It wasn’t popular but if we had a crash because people borrowed, then surely preventing people borrowing too much is one of the lessons we learned.
Almost overnight, house price inflation, which was nothing short of rampant in 2013/14, stopped. This has not played out well for first-time buyers, just yet — but in general, it has to be seen as one of the most successful and immediately effective policies ever.
House prices at the margin are affected by the amount of money a buyer can borrow against the house. If borrowing goes up, so too will house prices. It is really that simple. Those who warned of the crash years ago did so because we saw a massive debt bubble growing.
The problem for the Central Bank is that its policy has been too successful.
The implication of capping the amount of borrowing is that the housing market adjusts downwards and all prices and margins in the housing market will have to fall, as headline house prices come down.
However, the builders, landowners and vested interests in the business said they simply couldn’t cut prices.
They suggest now that the average cost of building a three-bed semi in the Greater Dublin area is an immutable €330,000. Construction costs come to €150,000, just 45pc of the total. Land, margin and VAT are the main elements of the other €180,000.
This logic puts the price out of the range of most first-time buyers if they are to remain within the Central Bank’s three times’ income limit plus deposit stipulation.
Rather than wait for the price of sites to fall or builders’ margins to fall, the Government yesterday came up with the tax rebate of 5pc of the cost of the house, which can immediately be offset against the deposit. This will simply allow people to borrow more.
So, for example, take a house costing €400,000. Before the Budget, the buyer had to save a deposit of €58,000. Now, because there will be a 5pc tax rebate on the price of the house, which is 5pc of €400,000, or €20,000, the buyer has to save only €38,000.
The net result will be a rush to buy now that the deposit rules have been loosened.
Prices will just go up and, meanwhile, the Central Bank’s authority will be undermined irreparably. Put simply, all the good work is now undone. That’s not a bad day’s work now, is it?