What will stop house prices rising at double-digit rates from here?
First, the banks might not partake in extending credit. Without credit, the recent house price surge can only be sustained by a massive switch from money on deposit to money in housing – as this is a finite amount, eventually the momentum would taper off.
A second way would be a dramatic rise in interest rates, which by driving up the cost of borrowing might cause people to think twice about the monthly cost of going into massive debt.
A third aspect may be a rapid increase in housing supply, which may flood the market in precisely the places where people want to live, puncturing the buyers’ panic and coaxing more sellers to sell before this new supply swamps the market.
The fourth might be the State deciding that accommodation is a utility like electricity, some of which should be provided at a reasonable price by a large company that isn’t always looking to maximise profits.
How likely, in the near term, is any of the above?
The first is highly unlikely because banks lend. Banks make profit by taking money in at a certain rate and lending money out at a higher rate. Unless you think that the banks will decline the opportunity to profit, it’s hardly likely that the banks will do anything but lend now. Lending leads to over lending and we may be back to banks driving housing markets that in turn drive lending.
The reason one feeds on the other is that once house prices start rising, the balance sheet of the bank itself plays tricks on the bank. The bank feels that the collateral against which it is lending is going up, so it feels able to lend more against it. But this just means that each time house prices increase, the very increase makes legitimate a bigger loan and we are on our way to a house price/credit spiral.
Because the State wants to get rid of the banks it owns, it wants them to be profitable in order to sell them. So the quickest way to profitability is more loans. This means that the State has a short-term strategic interest in more lending for housing.
So it is hardly likely that reason one above will change dramatically.
The second issue: are interest rates going up any time soon to dissuade people from taking on more debt?
The categorical answer is no. The eurozone economy is heading for deflation and the head of the ECB, Mario Draghi, has stated that he will keep rates low for as long as necessary. This could last years. We have seen in the US that rates can head downwards for three or four years and the US’s problems are nothing like Europe’s. The better model is Japan after the 1990s crash. Interest rates remained very low for a generation. This is an enormous opportunity to refinance Ireland’s productive sector but if we channel all this cheap money once again into property, we will only have ourselves to blame.
Unfortunately, with bank lending for mortgages rising rapidly, it doesn’t look like this cheap money is going anywhere else.
Interest rates will remain low and this will continue to lull people into a false sense of how much their huge loan actually costs. Remember, mortgages are 20-30 year commitments and some time in the maybe distant future, rates will rise and people will be walloped.
What about the third reason? Will there be a huge, rapid surge in supply, flooding the market and pushing down prices? Maybe, but where will this come from? Does NAMA have a significant portfolio of turnkey properties waiting to be sold? Or are there builders and developers building houses today that will come on stream next year? In fact, although construction is up, the number of housing permits is still way below demand.
As for what is decomposing in the entrails of NAMA and whether there are estates there ready to be sold and which need nothing more than a civil servant’s signature to boost supply, well, your guess is a good as mine. If there were, wouldn’t you think that the Government would have leaned on NAMA to make these available to prevent the buyers’ panic that is out there?
The one thing we know about housing supply is that it is slow to adapt but once it gets going, it is hard for builders to stop building. The reason is because of the same inflationary dynamic that is implicit in the housing market. Developers buy land in order to build, so the land is only worthwhile as long as they are building. The one thing they need to avoid is being Paddy last, that is the last builder, because that’s how they get caught when the market turns. As a result, once they start there is a group dynamic, which leads to all of them building as much as they can at the same time.
If supply adapts, it will do so well after prices have risen because prices rise much faster and instantaneously. This is what causes people to panic.
Now let’s look at our fourth reason to be optimistic about a tapering off of house prices. This reason involves a change of heart in the Government and a move to see accommodation as a utility, which is provided, in some cases, by a company, which aims to provide accommodation like electricity. This would cap the increases in the price of accommodation at the rate of inflation. Could this happen?
It could, but will it?
It is difficult to see the Government giving up the electoral aphrodisiac of higher house prices Because so much personal wealth is tied up in housing, rising house prices give people in negative equity hope for the future and give those on the right side of the property market the sense that they are wealthier this year than last year.
Coming into the acute phase of an electoral cycle, the feelgood buzz is too much for an incumbent Government to turn down.
None of the four main reasons that the property market might slow down look likely to come to pass. We will get a phase where buyers react to rising prices with more, not less, demand because they are afraid of being left behind. In addition, existing homeowners may say to themselves, ‘if there’s another 20pc in this, why not sell later?’
The State could nip this in the bud by instructing the banks to lend not against the last price but the average of prices for the last five years. By using this average, you break the link between the last price increase and new credit. This would stall price rises and allow supply to catch up but would mean that bank profits become disentangled from housing.
But don’t bank on such a simple solution!
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None of the above will happen David, you are right.
It will all be done arseways as usual.
>lend not against the last price but the average of prices for the last five years.
David, you always suggest this lending criteria, instead of the much simpler maximum multiple of the borrowers income. Can you explain your preference?
There is one more thing that could halt or reverse the surge in Dublin house prices – a house price crash in London!
Prices in London seem to have peaked after a crazy runup. If they do crash, it will kill buyer confidence all over these islands, including Dublin. It might not happen, but right now it seems more likely than any of the 4 things suggested in this article.
5. Dublin being built upwards like a city rather than outwards like an endless village. Dublin has a footprint the size of Berlin, but Berlin has three times the population, and Berlin does not have an endless house price mania. And Berlin even manages bigger parks. Construction in other West European cities is based on a higher residential housing density, and a higher skyline. There has been some improvement in this area in the last decade of the building boom. If Dublin were to build upward, there would be less of a need to move in places like Gorey, or… Read more »
Space Walk
Without saying it David is talking about MARKETS and might be understood to believe that we on this Isle have no Mario Draghi to corrupt the flow of the currency gravity .
We need a Galileo who can show where the gravity in space falls .Its teasing and moves fast and awareness does pay off .
Sharp English
English has fixed edges almost everywhere and in our mindset its dept is restricted to 2 Dimensions thus why Austerity is the final frontier in deciding a government economic policy .
French has 3 and 4 Dimensions and has a richness that no English dog has gone before thus reason why in France their government rule out Austerity and corners are rounded in different ways .
The insiders already have the solution and the first step is being implemented as we speak. It’s called the ‘extra-long-working-abroad-holiday-returning-later-with-pockets-full’ policy. So, young Seamus goes to the sites in Sydney, Paddy to the mines near Perth, Brid to the banks in Boston, Niamh to the offices in Ontario, Liam to the law firms in London, Mairead to the manufacturing lines in Munich, Aidan to the architecture firms in Auckland and Peig to the private acadamies of Paris. And after 10 years there, where they make a lot of money and save it wisely, they return home and plough it into… Read more »
Slightly off topic, but here’s an idea that some people might find interesting: It’s a game of backwards thinking, to see whether it casts any useful light on the past 6, and therefore the next X years. I was sitting in a cafe with a friend, discussing some recent piece of spin wrapped incomprehensible government lunacy. “They must be insane” we were saying, shaking our heads in wonder, “or completely corrupt” was another option. “What possessed them to do such a thing?”. The last question was the one that kicked it all off. “What possessed them to do it?”. We… Read more »
The answer is much simpler.
Raise stamp duty on investment second or subsequent homes and keep capital gains tax low to encourage investment home owners to sell.
‘It is difficult to see the Government giving up the electoral aphrodisiac of higher house prices Because so much personal wealth is tied up in housing, rising house prices give people in negative equity hope for the future and give those on the right side of the property market the sense that they are wealthier this year than last year.’ There it is right there the problem the ‘aphrodisiac’ of money and the seemingly lack of resistance in people to delay its gratification. The role of government to steward the resources of an economy responsibly – this includes utilities of… Read more »
One starts to ponder the possibility that the culture in Ireland has been lost for centuries. Merely the corruption adopting different forms throughout history. NAMA to the teenagers today means absolutely nothing, Anglo history. YET, the cost of both they will pay for. Are we dealing with an institutionalised power rolling the masses over from one generation to the next. An economic system locked down, concretised in. NAMA will be sold to the teenagers today as the agency which saved the Irish economy. As we all know on here NAMA was a stroke to cover up the truth and make… Read more »
Decent article from one of David’s favourite (not!) journalists:
The Kink in the Human Brain
http://www.monbiot.com/2014/10/02/the-kink-in-the-human-brain/
There were plenty of decently priced and cheap property at the last Allsop auction and currently on daft.ie.
For what problems seem to exist it seems to be a Dublin issue; so the majority of the country is not hit badly at all. And even in Dublin on daft.ie there are nearly 750 properties with an asking price of €200K and under for sale in Dublin City.
What price do people expect to pay for a residence in the capital?
David you are pefectly right, there’s not a chance any of these will happen to ease the houseprices anytime soon. Looking further down the line, but this is slightly off your topic of recent delivery, do you think option four will ever be considered. In Singapore they have the Housing and Development Board (HDB), it’s government sponsored (controlled), and it works. It works so well. I understand the environment is totally different culturally, economically and in other ways, but do you think it could work? Unlike Ballymun, which was a complete disaster in hindsight, the HDB meticulously plan the developments.… Read more »