The Value Of Nothing

Property prices in Ireland
Property prices in Ireland converted to 2011 currency. The red line shows the pre-boom average. ©RonanLyons.com

So house prices in Dublin have reached half what they were at the height of the boom. That’s a good sign. If they halve once more they’ll be back to what they were pre-bubble. Look at the graph (ganked from the very interesting ronanlyons.com) if you don’t believe me. Converted to 2011 money, an average house cost about €100,000 for decades. At the height of the boom it peaked at nearly four times that. Well over a third of a million, for an ordinary home.

Just one question springs to mind. What the hell were we thinking? Houses costing the price of a house, plus three other houses? Cars didn’t quadruple in price in just a few years. Food didn’t, even drink and cigarettes didn’t. During boom times, market prices are supposed to fall behind rising incomes. Otherwise they wouldn’t be called boom times, they’d be called mysterious outbreaks of rampant inflation. But during ours the cost of housing left incomes for dead. Clearly, the housing market is a deeply flawed one – almost an object model in fact of how capitalism goes wrong.

In theory the price of something is set by supply and demand, which is both efficient and ethical. Well let’s pretend it is for now, it works well enough for most things. Why does it go wrong here? Because the supply and demand of housing is almost irrelevant to the housing market.

What does a house cost? It’s an interesting question. A house in an appropriate location can be a very important asset, so in general people will spend the absolute maximum on a house they think they can afford. That’s clearly unlike wine or cars or dinners or phones. So in short, the answer to the question “How much does a house cost?” is “Whadya got?”

Or more precisely, what can you raise? If easier money is available therefore, people will borrow more. They’ll pretty much have to, as prices will rise to meet the available credit. Of course they have the option of only borrowing as much as they would have before prices went strange, but if they do they’ll get a much worse house than they could previously have afforded, while those willing to avail of the softer terms will get the shorter commutes, the better school catchment areas, the safer neighbourhoods. Competing for their and their children’s futures, it is hard to blame them for taking all that the banks and other financial institutions offered.

Speculation happens in such runaway markets of course. People will buy houses in the hope of selling them at a profit, just as if they were buying shares or gold or currency. Capitalism teaches that there is absolutely nothing wrong with that. The vast, vast majority however are buying houses because they need a house. And while some postponed purchasing in the hope that prices would come down, far more rushed into buying out of fear that they would not.

There are other factors, but we shouldn’t overemphasise them. People had become better off, yes. But did your income double? Mine sure as **** didn’t. The euro facilitated the boom because such an influx of credit would otherwise have exploded the currency, but it didn’t cause it. Houses were said to be “historically underpriced”, but even if you can bring yourself to believe a thing could be consistently underpriced for decades without anyone noticing, could it seriously be by a factor of two, even four?

And there was net immigration, that could have been expected to fuel the market. After all prices go up when demand outstrips supply. Only… Supply vastly outstripped demand. People were building houses up the sides of cliffs.

There are no two ways about it. We had a housing price bubble because we had an oversupply of credit. The blame rests squarely with the financial institutions that offered these loans. That is, all of them. Major banks should have known better and could have resisted. Had just a couple of lesser institutions been left to their excessive lending the larger banks would have lost custom, yes. But they would have survived. And minor institutions could not by themselves have super-inflated house prices.

But these lending practices were adopted by the whole industry, and quite literally they forced people to pay too much – far, far too much – for houses. There is a clear case for debt forgiveness therefore. There is also a case for punishment – though of the lenders who made the irresponsible loans rather than the borrowers who had little choice except to take them. And by punishment, I seriously mean prison sentences. There must surely be some law against business practices so reckless that they ruin individuals, families, even a whole country.

Isn’t there?

A Golf Game and a Massacre

It is an absurd conspiracy theory. I do not believe for a moment that any deal was made on a golf course between the Taoiseach and Sean Fitzpatrick of Anglo-Irish Bank. It’s ridiculous to hold up this chance encounter as the smoking gun that proves they were in cahoots.

You don’t need meetings to work out which side bread is buttered on. Cogs in a machine don’t have to talk to each other. Government had been working in the interests of Anglo-Irish in particular and reckless property speculation in general for years before that. That was where all the money was coming from. The money that was keeping them in power. Not to mention the percentage that was finding its way into their own personal lives, apparently by sheer osmosis. The reason we need to get Fianna Fáil out of government forever is not that Brian Cowen was a naughty boy. It’s because the whole FF political machine has become rotten to the core. There’s not much to add to that, so let us turn to the strange things going down in America.

Well I guess we’re not going to be using the phrase “grammar Nazi” so much in future.

When someone attempts to kill a Democrat Congresswoman, especially in this brittle political climate, the natural assumption is that they’re a gun-hugging Tea Party extremist. Confusingly however, Loughner appears to be just a plain nut. One must be careful not to blacken the name of the insane – he has not, it seems, ever been diagnosed with a mental illness – but his personal ravings have that familiar paranoid sound.

Which is sort of a disappointment really. When someone goes on a killing spree it would be nice to have an explanation. We want something bigger and more important than one young man’s distorted fantasies to share the blame. The weird upshot of this being that Loughner’s insanity actually seems to make him more personally responsible.

But as no one is obviously to blame, everyone is going to blame everyone. Loughner provided plenty material for this; his book collection covered the gamut from the Communist Manifesto to Hitler’s Mein Kampf, allowing any pundit of any stripe to construct the story of their choice. I have no doubt at all that someone is going to look straight into a TV camera and say that Loughner shot the Democratic Governor because he is a liberal. Probably on Fox.

Indeed if anyone other than the shooter himself can bear any of the blame here, it must be Fox News. Not because it’s the station that promotes right-wing demagoguery, but because it’s the station that promotes paranoia. Fox likes to claim it’s just responding to a liberal bias in the other television networks. (Funny how the didn’t seem liberal until Fox came along.) If they do have such a bias though, it is the one that most educated Americans have, invested in the progress and improvement of their own country. Rupert Murdoch’s investment is a financial one only. He came to the well of American public discourse and saw that he could make a buck out of poisoning it.

By the way, has it ever struck you how all of Fox’s main conservative hate-makers – Glenn Beck, Bill O’Reilly, Sean Hannity – have a Catholic or an Irish background? I’m not sure what that means exactly, but it disturbs me.