Month: March 2009

I came across another interesting article from the archives. This time it’s from April 3, 2001, and is an opinion piece by Maev-Ann Wren.

It’s title says much: Why is Government against falling house prices?

Wren argues that vested interests have a bigger role in Government circles than is widely known and the latter half of her piece is extremely telling and worth quoting at length:

In 1999, the cheapest new house available to first-time buyers in Dublin cost around £103,000. That was the average price paid by the 25% of first-time buyers at the bottom of the market. Last year the equivalent price had risen to £129,500.

The third Bacon report on the housing market concluded last year: “The level of average new house prices is outside the reach of many Irish workers. For most couples, two incomes are required to satisfy the mortgage lending criteria at current house prices.”

Despite the probability that competing lenders are allowing couples to over-borrow, the gap by which average new house prices exceeded average new mortgages doubled at £47,230 between 1995 and 1999. “For an increasing number, the amounts involved simply cannot be financed. That summarises the affordability issue in a nutshell,” the report concluded.

If this is true, why does the Government not want house prices to fall, or rather, continue falling? In the first and third quarter of last year, new house prices fell in Dublin. Second-hand prices fell in the first quarter. Full-year figures are not available yet.

Has the Government celebrated this fall? On the contrary, it has reversed three measures designed to make houses cheaper. It has cut stamp duty for “investors” in property and abandoned both an anti-speculation property tax and a penalty tax on landowners who fail to put lands zoned for residential use on the market.

The first two measures were intended to stop property speculation. In 1999, up to a quarter of house loans were going to “investors”, portrayed sometimes as potential landlords, but often simply speculators gambling on making an easy buck in a rising market. To curb such speculation, Bacon recommended an annual tax on dwelling which were not owner-occupied. That’s not going to happen now. And a higher stamp duty for investors, which had been credited with reducing speculative purchases, is also to be cut.

All analysts agree that the major problem in the housing market is increasing the supply of houses, but the Government has dropped its plans to penalise landowners who hoard residential land. The ESRI believes land and property prices will go up this year as a result.

All this only begins to make sense of the Government does not want house prices to fall. Why not? Who gains from these Government U-turns?

In the late 1990s, up to 2,000 holiday homes a year were being built for “investors” (contrast that with the building each year of fewer than 3,000 local authority houses). In the middle of the housing shortage, house building per head of population was highest in counties such as Wexford, Kerry and Clare. Increased stamp duty made builders switch from such schemes to starter homes in the cities. But that hurt developers and estate agents in rural constituencies, classic Fianna Fail supporters.

Rising prices suit builders whose profits have soared, landowners and developers making massive windfall gains and speculators. They would be the real losers of house prices tumbles, so that nurses, teachers and even industrial workers might aspire to own a house again. Could developers who borrowed against grossly over-valued land and bankers foolhardy enough to lend to them have the ear of the Government?

Falling prices would mean recent buyers have loans in excess of the value of their houses, so-called negative equity. Falling prices would lessen established homeowners’ spurious gains in wealth.

There is no escaping that this has to happen if we want a society which can house nurses and teachers and allow couples to exist on one salary. Don’t expect to hear estate agents say that. But that is what the Government should be saying.

While scanning through the Irish Times archives I came across this little gem. Tucked in the corner of the business pages on February 12, 2000, was this:

“The former head of supervision at the Central Bank, Mr William Slattery, has reiterated his recent warnings about the danger of negative equity for house owners if house prices collapse.

Negative equity is “an absolute certainty” if the current levels of growth in personal borrowing continue, he warned.”

“In the UK in 1989 at the peak of its crisis, borrowing was growing at 16%. Here, credit growth is at 27% and accelerating… It cannot continue,” he warned.

Mr Slattery called for “definitive actions” to be taken by all the players involved including the banks, the local authorities, An Bord Pleanala and the Government.

“It is clear that the monetary conditions are out of control. There’s a potential financial crisis on the horizon if this situation continues. It’s very serious indeed,” he said. The Irish housebuyer was in a “crucifying dilemma”, he contended.

“On the one hand he knows in his heart that there is a danger of house price collapse in the future, but, on the other hand, he can’t predict what is going to happen in the future.

“So the housebuyer is faced with a horrible dilemma, but there is no way these conditions are sustainable.”

Irish Times, February 12, 2000.