More on housing...

I’m always interested in the discourse in the society around the issue of property, not least because in so many ways it is that area that played such a prominent part in the subsequent issues facing the state. But also because it’s such an odd tangle of assumptions, aspirations and certainties. It’s also been an area where the roll back of state intervention has been most noticeable and most lamentable. And of course it is part of a nexus of corruption, as Mahon so ably demonstrated, where politics, local and national, intersected with developers. Then there’s the appalling record as regards planning, beyond corruption, and the manner in which – for example – it has shaped public policy responses such as household charge/taxes and water charges.

It would be facile to say everything is linked back to property, but it clearly is a significant component of the mix.

Good analysis then by Richard Curran in the SBP on that Central Bank paper which argues/suggests that house prices have fallen too far. The arrival of that report was greeted by some as indicative that the situation was changing, that the market was about to take off. Dan O’Brien’s piece in the Irish Times was notably optimistic on that score And yet, there’s little to suggest that the report had any great prophetic powers.

As Curran notes this is the same Central Bank which in 2004 in its Financial Stability Report…

…outlined an extraordinarily vivid case as to how and why house prices were hugely over-valued at the time.

“The risk of a substantial fall in residential property prices is the risk that poses the greatest potential threat to the health of the banking system. A significant fall in the level of house prices would have a negative impact on the banking system’s profitability, provisioning and capital reserves,” it stated.
“The magnitude of the impact would vary with the size of the fall in prices as well as the level of default among mortgage-holders. The most significant losses for the banking system would arise from those borrowers who have only recently taken out mortgages and have not yet built up significant equity in their properties.
“A sizeable correction in prices would be devastating for those households, who would be unable to ride out any such fall in house prices.”

Obviously we now live in a future where precisely that came to pass. As Curran notes also:

The report was quite prophetic; it even identified the role of tax breaks, bank de-regulation and easy access to wholesale funding as driving house prices long before these issues were identified as a problem.
The reason this view did not shape Central Bank policy at the time, which could have saved citizens billions of euro, was because the authors actually came up with a different final conclusion. They said that, if house prices were valued on a multiple of rental income, then in 2004, they were seriously over-valued. But if an alternative valuation model was applied that takes into account other factors, then they were not over-valued.

Curran is probably over generous to the authors of the report. He says:

However, the Central Bank conclusion should be welcomed. It gives a sense of perspective at a moment in time of how house prices have performed relative to the affordability and availability of property. It also provides a useful indicator of where house prices could or should go in the future, without getting carried away about exactly how or when this will happen.

One might quibble with the following too:

Other factors will affect future prices, such as the type of property and the location – it is hard to imagine that an apartment in Roscommon or Cavan is undervalued, but a three-bedroom family home in Glasnevin might be a different prospect.

The obvious problem there is that it is more likely that it will be difficult to sell (or purchase) the former, less difficult to sell or purchase the latter. But that’s precisely the problem. In Roscommon or Cavan the difficulties in improving local economic conditions – in terms of employment etc are considerably greater than in Glasnevin – though unemployment in Dublin is dismal too.

And while he says:

Ireland’s economy and its housing market may be turning the clock back to 1999 or 2000, but it seems hard to imagine that it is heading back to early 1990s levels, especially where desirable family homes in attractive population centres are concerned.

…I’m not so sure about that. If Alan McQuaid et al are correct then we’re looking at 1997 or 1996 prices. Early 1990s? Well, 14 per cent unemployment, wage stagnation (in real terms) and a glut of housing make that a not entirely incredible prospect (and on a purely anecdotal level subject to all usual caveats although there are more For Sale signs around where I live there doesn’t appear to be any great evidence of an increase in sales).

But that links with Curran’s most sensible point, and it is here that he demonstrates the shallowness of the discourse extant elsewhere.

Recovery, as defined by a rise in house prices, may well begin in the next three years for certain types of property. But recovery, as defined by prices returning to where they were, is decades if not longer away.
Modestly rising prices should not be a goal in itself, but merely a reflection of better things going on elsewhere in the economy.

And that’s the most important thing. House prices are a symptom, and an imprecise one at that. But the manner in which they were regarded as an indicator of economic health, as well as an host of of other indicators, during the 1990s and 2000s was to entirely misinterpret the dynamic of the events taking place. We can easily list those who were most culpable in generating that attitude, the housing market itself, a complacent and unenquiring media that was itself compromised by links with that market and was all too willing to celebrate excess and outliers at the expense of appreciating the situation facing both those for whom purchasing an house was a struggle and those for whom it was and remains an impossibility, a political class whose economic analysis was abysmally shallow and of course those who were part and part of that excess. It beggars belief that there would after all that has happened any appetite to return to those days. But, apparently there is and once more we see it swinging into action as best it can at even a sniff of the old days returning.

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