Let’s be clear, when housing supply is stuck, any increase to housing demand will produce higher prices. The Central Bank understands this logic and this is why it relaxed deposit rules last week. The deposit rules were relaxed in order for prices to rise, in order to coax builders who are sitting around waiting for prices to rise, to begin to dig foundations. This is state-sanctioned house price inflation. Nothing less. It’s like a hostage situation.
The builders/developers in cahoots with each other declare that they can’t build and make profit at current prices, so building stalls. They then put out a ransom, which is that if the state can engineer prices higher, they will build.
The state is, therefore, a hostage and as first-time buyers are voters, the politicians have an interest in getting things moving. So the state leans on the Central Bank to loosen things up. The Central Bank obliges. Under the cover that it has nothing to do with house prices, it claims to simply oversee bank lending. Prices rise.
Ultimately, the ransom is paid over by the first-time buyer to the builders, and the state, acting as the broker, gets a bit more tax revenue, the banks make a few more quid profit and we solve a supply problem not with efficiency, which would be good, but with house price inflation which is unambiguously bad.
Quite apart from the politics of this, the economics are quite straightforward. This notion that increased demand (when supply is rigid) will push up prices is pretty uncontroversial in microeconomics. The process works through two basic channels.
If it is easier to get a mortgage, first-time buyers will obviously “bring forward” their purchase because they have to save less. This is very clear. As more people bring forward their purchases, total demand goes up and prices rise because there are more bids, yet no more offers. The estate agents will (naturally) play off one first-time buyer against another and the upward momentum in prices will ensue.
However, there is another mechanism at work, which is less well understood, but can be actually more significant. This mechanism involves people’s expectations of where prices are going next. Once you change a policy – particularly a policy that was so successful and quite rigid – you trigger a whole host of other consequences.
The main one of these is the expectation that prices will go up because it is easier to borrow and will be easier in the future. Once prices rise, there is the natural momentum in expectations. So 5 per cent this year leads people to expect 7 per cent next year and so on.
Wage demands are also reframed accordingly. Additionally, there is a human tendency to conclude that if the Central Bank is prepared to reverse policy once, it will do so again.
Therefore, there is a further psychological mechanism on the part of buyers and sellers that now expects more “help” for first-time buyers. “Help” means that there is now a floor on house prices and “help” means higher prices by lowering the savings bar necessary to trigger a mortgage. As for the first-time buyer — the so-called beneficiary in all this — will they benefit? Is this prudent for buyers?
Okay, here is the new situation faced by an individual first-time buyer. She will now be able to borrow any amount with a deposit of 10 per cent. Up to last Thursday, she could have been approved for a mortgage with a deposit of 10 per cent for borrowings up to €220,000. She needed a 20 per cent deposit for all amounts over that. Now if she’s buying a home for €300,000, she will qualify for mortgage approval with a deposit of €30,000. Whereas previously, she needed a deposit of €38,000.
So will this individual be better off? At first blush, it looks like she will be, but a little knowledge of macroeconomics should cause us to rethink this rosy conclusion. The first fundamental rule of macroeconomics is known as the paradox of aggregation. This rule in plain English means that what is good for the individual is not always good for the collective. Where all first-time buyers act individually, competing with each other in the market for houses, they also influence each other profoundly.
This means that lowering the deposit ratio is great for the individual and gives her a leg up in the market, so long as no other first-time buyer avails of the new deposit flexibility. When all the rest of the first-time buyers avail of the same break, it simply cancels out the individual advantage and forces everyone to compete with each other at higher prices if the market is tight.
The same thing happens when the market is slack and faced with too many houses and broken balance sheets like it was in 2008. Banks would tell the individual who had too much debt to sell his extra apartment to fix his balance sheet. This was good advice so long as the bank didn’t tell every bankrupt the same thing because if they did (which they did) everyone would sell at the same time and prices would just fall and the seller would be faced with the same problem of trying to sell but at lower prices.
The best way to visualise this is to imagine you are at a football match and you are all siting down watching the game. Then suddenly the guy in front of you stands up to get a better view. Then you have to stand up to get a better view and in no time the whole stand is standing when we had all paid to sit.
This is how it goes with housing. What looks to the individual as being a unique advantage for her, is not because everyone can avail of it.
Rather than giving one person an advantage, because everyone avails of it and responds identically, every individual’s benefit is cancelled out by everyone else’s. We end up having the same problem, at higher prices.
This will happen here too and the Central Bank, which for the past two years has been the guardian of prudence, has turned itself into the agent of profligacy.
Could the Government puts out an EU-wide tender to get x houses built. It provides the land and sets the criteria, standards and requirements and then companies bid for the tender. I know this happens for other large infrastructure projects, so why not with this too?
Hi, Your macro analysis is incomplete I feel. Firstly though I couldn’t agree with you more in regard to this part of the analysis which I feel is excellent; “Ultimately, the ransom is paid over by the first-time buyer to the builders, and the state, acting as the broker, gets a bit more tax revenue, the banks make a few more quid profit and we solve a supply problem not with efficiency, which would be good, but with house price inflation which is unambiguously bad.” especially the last bit of it. The omission in your macro analysis is that higher… Read more »
Academic commentators like David ignore what every successful property salesman in the world knows: “show me the money”. You must first qualify your buyer. Can this eager non-cash “buyer” afford the monthly payments? David would not last long in real estate sales as he would wallow in hypotheticals with every talkative eager buyer that came in the door. And the world is full of such eager unqualified “buyers”. I have fired dozens like David for wasting my electricity and desk space. In real estate “qualifying” your buyer is job number one. So, as usual this latest piece is full of… Read more »
3 articles from the pen of Henry Makow himself of henrymakow.com that will be iconoclastic for some readers ;
Well, sorry to burst yer illusions up until yee read the following.
I have some hope in Trump after viewing this very human exchange from Trumps mother interviewed with Frank Patterson the famous Irish Tenor for Irish TV some years ago ;
Worth perusing ; . The Fourth Turning: An American Prophecy ; What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny . Authors ; William Strauss Neil Howe . Ref. Wikipedia.org . EXCERPT ; . The Strauss–Howe generational theory, created by authors William Strauss and Neil Howe, describes a theorized recurring generation cycle in American history. Strauss and Howe laid the groundwork for their theory in their 1991 book Generations, which discusses the history of America as a series of generational biographies going back to 1584. In their 1997 book The Fourth Turning, the authors expanded the… Read more »
I would really like to see a price breakdown explaining why developers cannot build houses profitably at current prices. Is it the current cost of Labour? Materials? Land?
I believe that it is none of the above. The problem is the price that the developers paid for their land banks, back in 2007/8, peak property boom time. They are refusing to build on that land until they can make a profit based on the price that they paid. Crazy, but very simple really.
If Price Paid is a function of Supply, Demand, Government Interference and Capability to Buy.
Surely, once the first time buyer purchases the soon to become a second hand home, though the demand is high, there are now a fewer number of capable buyers for that home. The now, soon to become, second time buyer may find next themselves in immediate negative equity with fewer options to move than before should circumstances change – A weak government (capitulating rather than collapsing) should not interfere. The free-ish market will sort the current housing crisis quicker.
Still unrequited ;
Perhaps, too advanced a question.
November 24, 2016 at 11:58 am
So, what is a citizen to do when the State bans :
importation of Gold
[ exportation of Gold ? ; As part of an economy using actual Money — i.e. Gold or Silver — as the Currency for foreign trade ]
ownership of Gold ?
You forgot the 3.5 times salary rule. That rule is still in place. it makes housing affordable for people that can afford the mortgage repayments but not the 20% deposit. Lots of people stuck renting and competing with other receiving gift deposits.
I do agree that this pushes prices up but then hopefully this indirect incentive to the builders will also increase supply.
DannyG: how many buyers do you think are within the 3.5 times salary limit but cannot buy because they are short on the deposit? That is how many extra buyers an easing of the deposit requirement will bring into the market. How many civil servants for example, whose incomes we know, will be able to buy as a result? Judging by the widespread threatened strikes I am under the impression that younger public employees, who are likely to be first-time buyers, are already way above the 3.5 times salary qualifying limit for anything developers would build. Am I wrong? Is… Read more »
Agree David. You know Ireland is a fine country, that has come a long way, but we struggle to join the dots – (just look at the genius of Dublin’s public transport system and our National snail rail). O for the bigger picture. We had one, or at least a mechanism for creating one (thanks to the EU – the National Development Plans), but threw the baby out with the bathwater during the crash. Time for a new one. One that prevents self defeating decisions with dubious knock ons (like the one above) – by the sheer power of its… Read more »
I’m not the only one who thinks macroeconomics belongs on the trash heap.
The last few articles but this one in particular brings to mind the phrase “burden sharing”. The questions to be asked are- 1. Who’s carrying the burden. 2. Who’s being targeted to share that burden. The poor banks, god bless, are certainly carrying some of the burden. Absentee owners who are in arrear and just pass on the rental income. Keys handed back are teo example. They want to start dolling out dividends asap so that we all think what a great job they’ve done saving our dumb ass ungrateful necks. The taxpayer is certainly carrying the burden. The solution… Read more »
teo = two
Stimulate supply = stimulate more demand
Mike Lucey: allowing longer debt repayment periods increases borrowing capacity and feeds the price spiral. Some acceptable mechanism (or mechanisms) has to be found to curb the price spiral. The only entity that has the power to do so is government. Meanwhile house prices are at the mercy of anti-government ideologues, as is the cost of health care.
Insane idea. Last touted during the boom.
1995 was the last time that the housing market seemed to work. A 65,000e house in galway city was affoardable at about 3.5 times the average industrial wage and the mortgage interest rates were 7%. The land owner made money when he sold the land at about 78,000 per acre. The bank and builder also made money. There was a complete circle and everyone was happy. The aggressive profit growth strategy of Irish ” bankers ” started shortly after and exploded from 2003 to 2009. ” The same thing happens when the market is slack and faced with too many… Read more »
Some “home truths” & propositions : . . Landlordism — incl. landlording & being a tenant & queuing for a living — is crass ! . “U can never beat the Landlord.” . “Court is where rich men go to sort out their affairs.” . “U cannot beat ‘City Hall’.” . “There is no justice for the poor man.” . “It is all about control.” . Any attempt at making one’s own shelter from improvised material by homeless & roofless persons are dealt with by destruction & physical assault from the Garda-Landlords / Landlord-Gardai. G.A.A. = Garda Athletic Association .… Read more »
Unlike 1995 when a three bed house was 3.5 times the average annual industrial income the 350,000 three bed apt of 2007 was 10 times the average industrial income. Its true for Dan O Brien when he said we must have had no economists of any note to provide guideline measurements. A room in galway city is now 400e/ mth. This is 93e/wk and 21% of the net wage of 450e. Whos rental crisis is it? The workers or the room provider with a 350000 mortgage? The mortgage arrears process proved to be completely bogus with regard to restructuring the… Read more »
@ Grzegorz, . Re ; Paul Krugman [ “renowned” Economist ] . Krugman is one sick puppy ! Has hidden agenda to have European-Americans to wrongly blamed as solely responsible for the wrongs done by USA directly & done as proxy. No admission by Krugman as to who to the Americas were the main slave trade originators, financiers, shippers, traders, & owners. And, it is the Irish who have been the vast majority of actual slaves in North America when all the tenure of slavery is considered. Many of the Irish as children were forced to adopt new religion of… Read more »
Fake news these days, as it has been for a while, is the MSM.
Thanks Mike Indian campaign to garner tax revenue resulting the reduction of bank notes now only available in small denominations. It is another in the campaign to ban cash. In India they want to ban the only real money , gold, too, but they will never be able to as the black market already flourishes in gold trade and will blossom if the government tries duties fees or confiscation. Banning cash cannot work as a quarter of the Indian population do not have a bank account. This is part of a world wide campaign to ban the use of cash… Read more »
There’s an awful lot of Putin worship on that site. Found myself laughing out loud during US election as to who must be funding it.
From the personal pen of Henry Makow ; . Trump’s Real Mission: Make Israel Great Again . November 30, 2016 . EXCERPT ; . “We shall purify the idea [of God] by identifying it with the nation of Israel.” Banker Otto Kahn While we’re being distracted by domestic issues, Trump’s appointments all suggest we’re being led down the garden path to war with Iran leading to world war. Trump’s election heralds a return to sanity on domestic policy but an alarming cognitive dissonance still exists in terms of Iran and the so-called war on terror. All of Trump’s appointees are… Read more »
PCR on demise of MSM because of Fake News
Celente on MSM. They will reduce from daily to twice weekly.
Let’s make the swamp great again.
List of Banks Owned or Controlled by the Rothschild Family
Authored or posted by Pao Chang
Updated on December 21st, 2015
12h12 hours ago
Rothschild man Wilbur Ross – leader of a notorious Wall Street secret society – is Trump pick for Commerce Secretary
Irish State welcomed Wilbur Ross to fleece Irish nation recently too.
Do not expect Trump to be even-handed to the Palestinians. Rather,- expect Trump to be merciless to the Palestinians in Israel’s push for greater Israel. . WW3 coming with Trump the Bad. But, at least not WW3 coming with Hillary Clintion the Evil. . . Blaming Palestinians for fires part of Netanyahu’s “strategy of incitement” . EXCERPT ; . Palestinian citizens of Israel were as much victims of the wildfires as anyone else – particularly in and around the mixed city of Haifa. And rescue workers who are Palestinian citizens of Israel have been risking their lives to protect others.… Read more »
I know I am off topic but my VHI bill for my family is 25% higher this year than last year. My car insurance is the same about 25% higher.
Now guess what? The WAR on cash continues. The ECB are going to stop printing the 500 euro note from 2018 on;
The 500 euro note represents one third of the total value of EU currency in circulation David.
Any chance you or someone like you would sound the klaxon;