If you were worried about the Dublin property market entering bubble territory, then the government’s plans unveiled during the week, makes that bubble more, not less likely.
The Construction 2020 document is long on aspirations and short on detail. There is lots of talk about task forces, reviews, strategic groups and consultation groups, but in terms of initiatives, there’s nothing. The government says it wants to achieve 60,000 jobs in the construction sector. No one can argue against that. There are tens of thousands of construction workers on the dole and anything which can give these men a chance to work again is laudable.
The other objective is to get the construction sector cranking up to build as many houses as are necessary, so that we don’t find ourselves permanently faced with today’s dilemma where young couples are being priced out of a rapidly rising market by older ‘cash buyers’.
The government has decided to help first-time buyers with a ‘help-to-buy’ scheme, the likes of which was introduced in Britain two years ago. This will involve the state underwriting some of the mortgage so that if the banks get into difficulty in the years ahead with defaults or a massive price crash, the state will pay out. The state is calculating this will help first-time buyers get access to funds because it will coax the banks to lend.
The state is dealing with the housing problem as if the solution is to be found in economics – or classical economics, at least – but this is not the case. The housing market in Ireland is driven by deep psychological urges on the part of most Irish people which renders the old-fashioned laws of supply and demand not just obsolete, but dangerously inaccurate.
Traditional economics says that when the price of something goes up, as is happening now in Dublin housing, buyers will get put off by high prices and will stay out of the market. In contrast, sellers will respond to high prices by seizing the opportunity to sell. In addition, builders will respond to higher prices by building more.
This is actually not what happens. The opposite happens.
People who want to buy respond to higher prices by panicking and wanting to buy more now – not less – because they are worried about prices rising even higher. This means that when the price goes up, demand doesn’t fall, it rises. This is the first mistake of applying economic solutions.
The second mistake is the behaviour of sellers. Traditional economics says sellers will respond to higher prices by selling to take advantage of today’s prices, but this doesn’t happen either. Sellers see house prices rising and think that if prices keep rising, they would be mad to sell now, so they wait to avail of yet higher prices and profits next year.
So, instead of supply increasing when prices rise, supply actually falls as sellers wait. Thus the laws of economics are turned on their heads. In terms of new supply, yes it comes on stream, but only slowly. It takes a long time for an entire sector to grind up a few gears. In contrast, psychology changes instantly.
Finally, one last aspect which impacts on the movement of house prices is herd behaviour.
The government is focusing on the travails of the individual buyer with its ‘help-to-buy’ scheme, rather than thinking of the collective. What is good for the individual isn’t always good for the collective.
In housing, everything I do impacts on you, and everything you do impacts on me, even if you have no idea that that is the case. So if I bid over the odds, it throws down the gauntlet for you to do likewise.
Think of it a bit like a football match. Imagine you are watching a game and everyone is sitting down. So we can see the pitch. Then the guy in front of you stands up and doesn’t sit back down. You have to stand up. But that forces the guy behind you to stand up too, and pretty soon most of the stadium is standing up uncomfortably when we should have all been sitting down.
The economy works in the same way. Every actions prompts a reaction, and soon each price increase prompts another one, and prices go out of control. This is exactly what happened in Britain in response to its ‘help-to-buy’ scheme.
Look at the chart. Remember the ‘help-to-buy’ was supposed to make houses more affordable and look what happened.
In Britain, there have been two phases of ‘help-to-buy’. You can see that the reaction to both has been more money chasing the market upwards and prices are now sky-rocketing. This is much more pronounced in London.
If we go down this route, the dynamic of the London market will repeat itself in Dublin. Like London, Dublin houses prices will pull away from the rest of the country as they are doing now. South Dublin will turn into Ireland’s Knightsbridge or Kensington, while the rest of the country will lag way behind.
This will make the already wealthy of south Dublin wealthier, and make the young generation, who are simply looking for a place to live, ever more indebted.
We need to break the link between banks, credit and houses and to do this we need to give less credit to the housing market – not more – while encouraging new builds to start soon.
The best way to do this would be to force the banks to lend, not against the collateral, which is today’s house price, but against the average house price for the last 20 years. At a stroke, we would eliminate the situation where rises in house prices facilitate more credit and drive prices yet higher. Without this lending dynamic, house prices couldn’t rise.
Also, the state could implement a ‘use it or lose it’ approach to planning, whereby a developer who owns residential land has to build within three years, or the land reverts to industrial zoning. That would increase supply overnight.
These are practical measures which could be introduced tomorrow, and would stop house prices spiralling and increase new home building rapidly.
If we don’t do something like this we are on the same road we were on between 2000 and 2006, and we all know where that road led us.
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David McWilliams writes daily on international economics and finance at www.globalmacro360.com
Another sleep in Adam ?
Collective Amnesia
But who is pumping in the money in this new building boom?
With every new building boom the prices will go up again and again. The developer and builder will look after the price hike.
Does the government really think that a new generation of young families has come on the market that isn’t aware of the crisis of the last 6 years?
Is priory hall type disaster forgotten?
Are we starting all over again then? Is that the idea?
Here’s another article concerned with housing, this time in London, very good one:
http://www.theguardian.com/society/2014/may/18/-sp-truth-about-gentrification-how-woodberry-down-became-woodberry-park
Very interesting article. The government is hell bent on creating another bubble in housing despite all the hardship the last one caused. The lack of easy credit would have curtailed this embryonic bubble but the government has now waded in to interfere in the lending market. Like most government interventions this will probably end badly. I have heard that the new building regulations which were brought in in March are a nightmare for small builders. Seems like more stupid over regulation.
Contrast the UK and Ireland policy with that of Singapore (from the article linked above): “The big difference is that since 2009, Singapore’s government has chucked bucket after bucket of cold water onto the overheating housing market. It’s clamped down on loans, jacked up stamp duty, punished people who sell property they’ve bought only recently – and levied punitive taxes on foreigners buying homes. In short, almost every policy urged on David Cameron over the past few years – and left unwrapped – has been deployed by Lee Hsien Loong. The message is simple: Singapore doesn’t welcome property speculation. But… Read more »
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Unlike myself (who has pursued a career in financial/economic engineering of all sorts for decades), my wife has always remained grounded in “reality” as she likes to call it. Reality being reflected in the price of bread, butter and potatoes etc! While she has no particular affiliation to Ireland, she does have opinions which she has formulated after years of listening to me “go on about Ireland”. My wife has decided that another property bubble is going to happen because the people who run Ireland “don’t know how to do anything else”. I suppose she does have a point given… Read more »
2 simple points…..
#1 If help to buy is available to all that want it at the same time …then that cohort will chase the existing supply.
#2 If the “help to buy” scheme here does sharply elevate prices then that makes it more probable that the banks will call the governments guarantee
Berlin has the same footprint as Dublin, but three times as many people. It still manages to have large urban parks, and public infrastructure space. Urban residential housing density in Dublin, is barely even urban. Look at West Dublin, and you see this very clearly. The problem is the density of residential housing units is simply too low, for the demand that exists. We need to build up. How about a spatial strategy for the area to the east of the M50 ? Or even a “strategy” ? Redistibution of some state functions out of Dublin also makes sense to… Read more »
It is a terrible indictment when a huge segment of society has lost all confidence in the Bank and Public Representatives to make the right decisions, the implications are not worth thinking about although we are living through those same times right now, David you said ” The state is dealing with the housing problem as if the solution is to be found in economics – or classical economics” there just seems to be no economics model, we have watched and are watching Banks that have existed for decades and more implode before our eyes, a case in point is… Read more »
Bamboo. You have to look at it from the point of view of the politicians and senior public sector staff. The economy is in tatters, employment is in tatters, and their positions depend on ‘doing something about it’. The problem is that to fix the underlying problem – increase wealth generation – is incredibly hard, and takes decades. Taxpayers will have to be just a lot poorer. A whole load of really unpopular decisions will have to be made – all various degrees of bad. Their opponents will be promising a land flowing with milk and honey by Tuesday fortnight.… Read more »
Hi, Better balanced article than yesteryear re housing. You make the same mistake as you say in the article; good ideas but short on detail. My two pence worth is the existing banking system can’t be reformed. So fuck it. Let’s create a secondary one which runs simultaneously. So why not recreate a credit union or a mutual bank to specialise in lending mortgages only as you said based on a 20 year time frame for valuations. We must keep sociopaths like fingers out this time (remember he was more interested in coming first than winning as his mutual which… Read more »
I said it before and I’ll keep on saying it, and that is the only way you’re going to get ‘change’ of any sort in this country is to boycott all of the politicians who are members of the mainstream parties and just vote for independent candidates next Friday. Doing that will teach the idiots that we’ve had for politicians down through the years that we the citizens have had enough!! Party politicians have only two loyalties to themselves and their parties!! They don’t give a toss about the ordinary people of this country, so, you know what you have… Read more »
Let’s play a game called, spot the elephant in the room……
Look!!!!!!
Vacant houses
Total housing stock grew to almost 2 million homes, of these almost 290,000 were vacant on Census night giving a vacancy rate of 14.5 per cent. Leitrim had the highest overall vacancy rate with over 30 percent of homes vacant. Donegal was next with a vacancy rate of 29%.
http://cso.ie/en/newsandevents/pressreleases/2012pressreleases/pressreleasethisisireland-highlightsfromcensus2011part1/
Bank of Ireland Mortgage Write Off
For the record a client of mine has had a mortgage written off from €150,000 incl legal fees and o/s unpaid interest to €32,000 .It has not been officially recorded yet it is a fact and was settled in the Masters Court .
“A government big enough to give you everything you want, is big enough to take everything you have”. The international banking system is artificially supplying more and more money to the general supply and this gives artificially low interest rates. This provides artificially stimulated demand in whatever sector people deem appropriate. This can never be forecast and is always a “surprise” when it happens. Interference in the economy by banks and government both result in misallocation of resources and severe distortions in the economy and then in society in general. This is a world wide problem as the Ponzi banking,… Read more »
“The government has decided to help first-time buyers with a ‘help-to-buy’ scheme.” Sorry, David, that’s a bit of a stretch, it’s a pre-election thought-for-the-day forgotten-tomorrow sidenote suggestion in a quango paper. Cormac Lucey wrote a similar article yesterday on the same topic in the Sunday Times ‘Business Section’. His conclusion, it’s all BS. The government will do diddly squat as per their proven record. His other points, house prices still have a further 20% to drop / it’s time to introduce a universal guaranteed income / for me the following was the most interesting, without social welfare we’d be the… Read more »
http://www.ecb.europa.eu/press/pr/date/2014/html/pr140519.en.html
I won’t pretend to have the same gift of foresight as our accomplished host, but I do believe we will see rent controls and/or trailer parks, in the very near future in Dublin. What we are seeing now is a massive political crisis unfolding in relation to housing in Dublin. The Labour leadership appear to be walking around in a state of absolute shock, they are looking at a complete and total wipe-out in the upcoming local elections, and this collapse in support has gathered momentum well before Fr. Peter Mc Verry came out informed us yesterday, that Dublin is… Read more »
HI Bamboo, thanks for that, no blog, maybe I should set one up?!? I post here the odd time… I am amazed at how this FG/Labour gov appear to be absolutely bamboozled, post Friday will be very interesting I reckon…
Only two things need to be done.
1a Abolish local authority rates. b Abolish LPT. c Abolish stamp duty.
Replace these with a site valuation tax.
2. Remove leverage from the property market ie all property must be bought with 100% cash.
Problem solved.
Posted but under moderation. Seems to happen with more than one link in the post. Your comment is awaiting moderation. May 20, 2014 at 6:02 pm If you had money to invest? would you put it into bonds? so little return on investment with record low interest rates, I don’t think so. Bonds valuations are a bubble. would you invest in stocks. I don’t think so even as the stock markets hit record highs, trading volumes are thin. Another bubble? perhaps. Where to invest cash? somewhere you can see it and hold. As an owner occupier it is generally giving… Read more »
Here is the next bit
Never mind the local, regional or national politics, look at the large picture. All governments manipulate all things in the process destroying the price discovery mechanisms of the marketplace. There are no longer any free markets.
What is not in a bubble, you may ask. That which is ridiculed and denigrated! And what might that be?
http://investmentresearchdynamics.com/
a super article http://laroucheirishbrigade.com/2014/05/12/chinese-official-elaborates-chinas-railway-going-out-strategy/ “Chinese researchers at the Applied Superconductivity Laboratory of Southwest Jiatong University, led by Dr. Deng Zigang, are developing a maglev train prototype to run inside an evacuated tube, which could potentially reach supersonic speeds,up to 1,800 MPH. The limit to the speed of a maglev system is not the maglev technology itself, but the ‘aerodynamic drag’the vehicle encounters at high speeds.” “…The original patent for this system,using high energy-flux-density superconducting magnets,was,in fact, ranted to two scientists working at the Brookhaven National Laboratory in New York, in the mid-1960s. Magnetic levitation transport systems,developed initially in the U.S.… Read more »
All we have now is unsound ‘beliefs’ in “dirt-to-prosperiyt” dogma and ‘faith’ is not a pathway to Truth,right? We use reason as a pathway to discover Truth in every endeavour of our lives,but then with it comes to Truth in economics,the blind trust in so-called free markets actually blinds us to what ‘could be’,if we wilfully combine our creativity and Science. Faith is not a virtue and there is no choice in belief.We need to divorce ourselves from these anecdotal economic doctrines,proffering delusions through a monetary lens.It’s evidence that determines whether or not our perception of reality is reasonable and… Read more »
Tyler I think I said it to you before when you were using another name. You need to get out more and have a few beers and get your c**k sucked. It may not make you a better person but at least it might make your comments more engaging.
The inherent absurdity of it all is inescapeable. State policy is devised to drive up the price of real estate, and it does exactly that. In fact this is the second time it has done it in twelve years. And now pressure builds for state policy to do the opposite. Banks are more important as a factor in the decision making process than people. The EU is more influential as a factor in the decision making process than the people. And the markets are to be pleased, before the people are to be served. Welcome to a country called Euroland.… Read more »
Current events make David’s book “Follow the money” look increasingly relevant – possibly more relevant now than previously.
DMcW, you can always rely on the machinations of the Dublin real estate sector to put you back in fashion.
“Who will rid me of this meddlesome Priest” was I am sure the thought that entered Enda’s head after our old friend Fr. Peter mcVerry described “our leaders” solutions to the homless problems as “saying nothing” and “waffle”. Padre Pete went on to question whether the gubberment was trying to SOLVE the problem of homlessness or MANAGE the problem. The problem can be SOLVED very simply by giving someone a home as they will then, no longer be homeless, simlple you would think.Putting forward solutions like housing people in old army barracks and such like is what the Padre called… Read more »
Shatter The Illusionist The Dynamic :
€70,000 Lump Sum
Choice 1 – He Refuses – Tax payer keeps the €70,000 ; and
Choice 2 – He Accepts – Shatter keeps €35,000 net , Tax payer keeps €35,000 ; and
Choice 3 – He Accepts …..but ….but…but…he gives it to Charity —
Shatter claims tax relief of €35,000 , Charity receives €70,000 and Tax Payer receives NOTHING …and LOSES €70,000 .
….Shatter The Illusionist ….supported by the invisible pen of his assistant QUINN of Labour .