Is it possible that we have got ourselves into the position where we have a housing crisis again, where those at the bottom and middle can’t find a place to live and those moving from the middle upwards are locked into, yet again, bidding wars for homes where the speculator and the owner are pitted against each other? Could we be in the situation where investors and large foreign funds are sitting on land waiting for the prices to go up in order to make a killing, thus exacerbating the supply shortage? It’s hard to believe – after everything we have been through – but it’s true.
Above all, the Irish property market needs stability. It needs to be liberated from constantly changing expectations about where prices are going to go. Expectations about future prices are what destroy a property market and lead to the unhealthy intrusion of speculators in the market for accommodation.
Accommodation should be a fixed cost in an economy, a cost faced by all of us, like the cost of electricity. Can you imagine what would happen to the use of electricity in Ireland if people thought the price was going to change on a daily basis and everyone had their own generator trying to sell at the best price to a national grid? Imagine the surges and scarcities in both use and supply as users and suppliers tried to get the best price.
Now think about the housing market.
When there is an expectation that prices are going to go up, it is understandable in a capitalist system that the people who own the land will wait for prices to go ever higher, thus squeezing potential buyers. It is also understandable that potential buyers will panic when they see prices rising and bring forward their demand so they won’t be left behind. This is precisely the opposite of what is suggested by classical economics. In classical economics, we are told that when the price of something rises then the demand will fall, but this is not the case in property. When the price rises, the demand rises too.
What do you think happens to supply?
Traditional economics suggests that when the price rises the supply will rise, but is this what actually happens in real life? If owners of land and houses believe that prices are going to rise, wouldn’t they be mad to sell now when they can make more money by delaying? So supply doesn’t rise when price expectations rise, it actually falls – exacerbating the panic.
So you can see that the issue for the property market is not so much supply and demand at today’s prices as the traditional economics model suggests, but rather the reaction of supply and demand to the expectations about future prices.
As a result of this real-life observation, we need to isolate what drives expectations because if we can isolate what drives price expectations, we can work backwards to solve these erratic shifts in supply and demand, which are destroying the market and heaping such pain on the renting class.
The root cause of price expectations is the availability of credit. In countries where credit is not extended by the banking system to the property market, we don’t see property price expectations that move out of whack with the real underlying value of property or real estate. Take most European countries: we don’t see wild property price movements because we don’t see wild lending by banks that drives up prices.
But it is not just the banks that are at fault: the valuation method for property is a massive problem.
At the moment in Ireland, we value land on the basis of the last market price. This means that the value of land or a house today is based on the latest price that a buyer and seller is prepared to do a deal at. This is what investment banks call “mark to market” valuation – and this is a huge problem because, when you think about it, you can see how basing the value on the last transaction will drive expectations and credit up and down wildly.
The banks take their lead as to how much they can lend based on some percentage of the valuation.
This is what is termed collateral. As long as the valuation says that all is okay, the bank lenders feel comfortable lending against the property. This means if the price of land moves out of whack – away from the real value of land based on long-term trends in land prices – there is an in-built bias for the banks to make legitimate the last price increase by lending more against the new valuation.
Let’s look at a small example.
Consider a house that was valued at €1000 last year, and let us say the bank feels it can lend prudently 80pc of the valuation to the buyer.
The bank could lend €800 against it. Now what happens if this year the house sells for €1200 because expectations have changed?
The bank looks at the new valuation and figures that it is now prudent to lend 80pc against this new valuation. So what it lent €800 against last year, then goes up to €960.
So it is not hard to see how the new market-based valuation can amplify price increases and push them away from fair, long-term value, thus leading to panic and upward moves in expectations. This is at the core of the property dilemma – the way we value land.
Imagine if we in Ireland valued land not based on the latest market price but on long-term valuations that took into account long-term prices, yields, planning, demographics and the likely growth in the economy and incomes?
We would smooth out these fluctuations in prices and expectations because valuations would gyrate from year to year.
Next week, on Wednesday November 4, I am speaking at the Institute of Professional Auctioneers & Valuers, debating a novel system of valuing property that doesn’t currently exist in Ireland but is popular in Germany, Portugal and the Czech Republic.
The event will explore using such longer-term valuation methods. The interesting thing is that these methods may ultimately be imposed on Irish banks as part of the ECB’s move to regulate banks and bank lending more closely.
It would seem that now, with another housing/rental crisis on our hands, we should look to long-term solutions, isolating the root of the problem which is systemic, rather than looking for the next quick fix to get us past the next election.
You cannot compare anything to the electricity market. It is a crazy model with subsidies, supports, capacity mechanisms popping out of it left, right and centre. Electricity utilities are now like the banks of old – i.e. too big to fail. If the EU gets its way the electricity sector will be forced to stand on its own two feet and contrary to what you’ve said above it will indeed have variable pricing reflective of ‘time of use’ which will have price spikes both benefiting and disadvantaging consumers and producers. It could be well worth your while casting your eye… Read more »
The priority of the institutional state (in both Dublin 2, and in Brussels) and the part of the private sector that has the power to influence decision making in that institutional state, takes precedence over other concerns. Welcome to Fascism 2.0. This time there is no racism. It is internationalism not nationalism. It is about the synchronization of state and corporate power. Markets are being manipulated all over the place in order to drive up the valuations of the asset base of the society. And this is especially evident in real estate. But it also exists in the stock market.… Read more »
“Mark-to-Market”! the joke of the century…. another notional, voluntary measurement to be used or ignored by Banks as they see fit, if mark to market was used consistently none of the Irish Banks would have survived the 2008 crisis and that may have been no bad thing….
The government appears to have done nothing to address these issues such as preventing estate agents from having phantom buyers to bid against the actual buyers who end up paying more. It’s not rocket science to see how other countries prevent this by having a register of bidders for each property on market. Also it’s not hard to tax homes that have been empty for over 2 years at a higher rate to encourage owners to sell. It’s seems that banks are willing to lend at 80% of the price you are willing to pay instead of the original asking… Read more »
Future possible(not guaranteed) values of property is a “Lovely” excercise. I dont see how guess/possible future values of property can add an extra “SAFETY FACTOR ” for mortgage debt lending for the ECB. The buzz word now is mindfullness. Surely the old fashioned “bar stool method” of percentage of your salary should determine “Real Value Debt”. The housing market is determined by the wage packets of customers.Basic Logic. Well healed customers will pay more for a better location. The building labour costs are proportionally more expensive in good locations. While the material costs are the same in the better location,… Read more »
http://awaken-longford.com/2015/10/29/inside-job-the-full-movie-a-must-see/
Great stuff David re valuations and the IPAV. Could I respectfully suggest that rental yields also be part of the consideration i.e. if 7% is the yield and the rent is €1000 per month or 12k annually and 12k equals 7% then the value of the property is €171429 and not the bidded up ponzi figure created by access to cheap capital.
Also issue the fuckers with a guide for rental yields acceptable to different property types such as housing, warehouses, commercial, industrial etc.
If you need someone to march with you on this issue I am available.
Regards,
Michael.
Let me draw some historical analogy between the property bubble in Dublin (and the role of both foreign hedge funds and the unfortunate young property ladder climbers) and history. I hope you do not mind if I use the history of my homeland rather than my adopted homeland, as I am far more familiar with Polish than with the Irish history (you have been warned), but I hope that after reading my comment the analogy with David’s article should become clear at the end (btw, I still did not have a chance to read Irish writers recommended to me like… Read more »
“extended and lasting until this day influence of the Italian culture initiated by the Queen Bona Sforza – who shocked the Poles as she had arrived to Wawel Castle without having any – unknown in Italy – knickers;”
No Knickers? lasting until this day? in Poland? right through winter? OUCH!
Of course Polish women do wear knickers or their derivatives; in fact many of them they are fastidious in terms of picking the right one (I would also like to point out that my Irish ex-girlfriend having shopped for sexi stockings in Poland stated that Polish-made stcckings are more durable than… well, not the Irish ones as we do not produce them any more, only scarves and jumpers – but the ones she had bought before). Queen Bona Sforza knew little about Polish winters though. She was very horny – the Poles expected a Queen who would be obedient and… Read more »
When is the next 5 year plan due? Seems your only solution is a planned economy. Communism is the only way. All are equal. Does it beat the current fascism model we have had foisted upon us? This has to be fixed and that too. Above all we must be fair to each other. It is not fair others have what I do not. The rich must pay their fair share. Tax this and tax that. Now I feel better. Elections are not about good governance but about what the government can do for you. Bankers manipulate money and interest… Read more »
“There is no hope until the whole thing blows up in our faces and we start again” – this was my hope for many, many years; but some time ago I have realised that when the whole thing blows up, rather than starting again, the anti-system parties may indeed introduce communism and next 5 year plans you have mentioned as Poland since to be the only country in the continental Europe where the anti-system parties and movements are in favour of less regulation and anti-central banking. Anywhere else, Greece, Spain, Germany, etc., the anti-system movements do not want to change… Read more »
By the way, have any of you guys watched the 3rd Republican debate last night and how the candidates performed? I had to give it a miss (family issues). Has Rubio now emerged as the main candidate (I like his record better than Trump’s or any other candidate bar Rand Paul who is now an embittered and frustrated loser who spits gall) or is still between Trump and Carson? Is Jeb Bush finished (not that it would worry me in the slightest, though personality-wise he seems to be the nicest of them all bar Carson, which is surprising considering his… Read more »
“Acting maggots” – I am in a hurry. I just did not want to write “he was an arshole” about the President of the United States
With interest rates from central banks going to zero or less and the world economy on a downtrend to eclipse it may be that those who finance a tracker mortgage will be paid for taking a loan. Here you go Mr. Brogan. Take a couple of hundred thousand or more if you wish. No principal payments required and your first monthly check will be in your bank account at the end of the month. Everyone can borrow whatever they like and be paid for doing so. With a negative 1% interest that is 2000 a year to be received. It… Read more »
You just have to wonder how much the speech at the “Institute of Professional Auctioneers & Valuers” will resemble David’s “debate” with that bank chief economist (who’s name I can never remember) in 2006?
I’m reading a book called ‘Flat Earth News’ by a British ex journalist called ‘Nick Davies’. It’s long, and explores the state of the media in, mainly the UK, and how the concept of ‘truth’ has simply vanished without trace, and why. Very interesting, and revealing.
“how the concept of ‘truth’ has simply vanished without trace” This reminds me of a debate I had with two guys 5 years ago. One was a Sinner, the other one was a Trotskyite. I asked them what they thought of Nial Ferguson’s book “The Ascent of Money”. None of them would answer me until they checked where was Ferguson from and what party, if any, did he belong to (actually the Sinner – an-ex counciller – when I did not want to tell him any of it asked me what school did he go to). Stephen. Everything is better… Read more »
Ted E: BEST QUOTE OF ANY ERA! “The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance.” – Cicero, 55 BC
So, evidently we’ve learned bugger all over the past 2,069 years.”
Posted at http://www.lemetropolecafe.com
I think locoloco called it exactly right on this issue. Non recourse mortgages ensure that the lender has skin in the game. The buyer takes the hit with the deposit if it goes south and the lender does likewise with the loan.The lender will be certain to then accurately assess the realistic market value and lend based on realistic values. Speculators,banks and vulture funds might lose out but the government aren’t really interested in protecting those groups are they? They say actions speak louder than words and to paraphrase grezgorz vested interests have the fur coats and the government have… Read more »
DB4545 & locoloco When there is a crisis, the first rule is to shout STOP. Then you look at the crisis backround, investigate and identify the problem plus causes. Once you identify the causes you proceed to set out CORRECTIVE ACTIONS. After following the corrective actions you proceed to set up a CIP (continuous improvement programme) to ensure that there is no chance of a recurrence of the problem/ crisis. THIS PROCESS SHOULD NOT TAKE MORE THAN SEVEN FECKING YEARS TO GET TO THE SECOND STEP. Politicians(all parties but mainly FG & Lab for last four fucking years),the central bank… Read more »
David, I think we should also look at what is actually available on the property. Well, it is shit – pure shite and crap. I just had a look at daft.ie for 2 of my children and their partners who are trying to get a home. Yes, they just want a home to live in comfortably and in a relatively good location. I am purposely not metioning, “get on the property ladder”. After all they are putting in a lot of their lives to pay it off. They are young married couples with children. What is available for them to… Read more »
[…] • Great Expectations: The Driving Force Behind Latest Property Crisis (McWilliams) […]
We’re still skirting around the issue folks. There’s nobody of note behind bars. Until there is we’re going nowhere as a society.
GREAT EXPECTATIONS Dear David, I have to write to take issue with your article in the Independent last Wednesday with the above title. While I accept that you are recognized as a renowned economist, but that article has to regarded as a little naive to say the least, and would or should certainly have been given a poor mark had it been written by a candidate for their leaving cert economics paper. To start with the premise that property prices can be compared to the price of electricity is plain daft. There are many things you could make the comparison… Read more »
My expectation is for the continuation of the ruination of the economies by expansion of the money supply that is inflation that robs everyone by stealth and creates such distortions in the economy that it collapses. One of the primary signs are asset bubbles including real estate. The salvation of the housing market is the secession of the aforementioned activities. Get rid of the current central banking money system and return to an honest money system that eliminates inflation. [The following is an excerpt from the October issue of TDV released to subscribers today] One of the biggest crimes against… Read more »
Fraudulent COMEX market
http://www.tfmetalsreport.com/blog/7241/futures-market-fraud
We just need to ask ourselves if our actions and decisions will create a society where our next generation will have a chance to fulfil their great expectations. At present that means(as grzegorz pointed out) we spend half our working life and income in the service of the State like a medieval serf. Our take home income is then plundered by private vested interests. 300k for a fairly shabby house doesn’t seem like the fulfillment of anyone’s expectations. Jobsbridge is a subversion of any Citizen’s expectations. I’ve spent the last couple of days in Iceland. The people seem confident and… Read more »
David, Great to read a mainstream article in a mainstream newspaper explaining to the greedy guts the consequence of their ponzu property addiction. ‘Next week, on Wednesday November 4, I am speaking at the Institute of Professional Auctioneers & Valuers, debating a novel system of valuing property that doesn’t currently exist in Ireland but is popular in Germany, Portugal and the Czech Republic.’ On the point of going into the ponzi Lion’s den and channeling into their freeze brain it makes sense to overhaul their poisonous way of doing business in property – banking – development I fear they will… Read more »
David,
The solution to the ponzi property insanity Ireland post 2001 is now being destroyed by culturally seems to me to be very much some kind of a paradigm shift required. I just can’t see any other way through the scale of the problem as it is right now. Those who have the power to fix it are the very bastards who are coining it the most in the first place. The system is completely rigged top down side ways.
“As a result of this real-life observation, we need to isolate what drives expectations because if we can isolate what drives price expectations, we can work backwards to solve these erratic shifts in supply and demand, which are destroying the market and heaping such pain on the renting class” David have you ever tried knitting soot? “Imagine if we in Ireland valued land not based on the latest market price but on long-term valuations that took into account long-term prices, yields, planning, demographics and the likely growth in the economy and incomes?” Isn’t that what is we already do? “It’s… Read more »