This – This – Will Fix The Economy

Estate agents insist that property prices in Dublin have stabilised. I remember the first time they said that, back in 2007. And they’ve stabilized regularly ever since.

But you can’t exactly disagree. In a way, house prices are always stable. A house is always worth… about a house. A person can eat a lot or a little food, own a hundred cars or none, but houses tend to stabilise somewhere around the level of one per every two adults. Because try as you might, you can’t live in much more than one house at a time. Logically then, housing ought to be one of the most stable commodities on the market. It’s actually the rest of the economy that has been vigorously swung around this anchor point. During the housing boom, wages may have gone up on paper, but in house-buying terms they plunged through the floor.

Which gives me an idea… We need a new currency, right? The euro, well, it’s lovely and all. I like the colours, and the handy map on the back. But the thing is, we just can’t really afford it. Using the euro is like having a currency on the gold standard when the world is desperately short of gold. You can’t have a functional economy when the standard unit of exchange is hen’s teeth.

And what do we have plenty of? Why, houses! Too many houses, not enough euro banknotes. Think about it.

Of course you can’t put houses in your wallet or bring them to the shops. There will still have to be tokens. But the base currency unit should be fixed to the value of the standard house – say the sort of small two-bedroom starter home that was produced like popcorn during the boom. Notes should be denominated in fractions of a house. That way, the price of a home can never run away from you. Save up 1,000 of the new thousandth-of-a-house notes, and you can exchange them for one standard house at your nearest branch of NAMA.

It won’t stop people charging more than the standard house price of course, for bigger residences in better locations. But the existence of a perfectly adequate house at a fixed price – well, a price that money is fixed to – should act as a powerful stabilising influence. You’ll be able to look at a property ad and say “Well it’s a good house. But is it really worth two houses?”

Stimulating The Housing Market Is Economic Madness

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A house, earlier today

Hell’s anteaters, but I am tired today. I’ve gotten out of practice at the art of staying out late and expressing emotions.

But I wanted to talk about NAMA‘s new mortgage incentive scheme, and why it’s nuts. For the interested overseas reader I’ll briefly recap: NAMA is a body set up to manage assets, mainly property, of lenders and investors who were bailed out by the State. Put bluntly, it owns a great number of houses that nobody ever needed, or ever will need.

Among them there are some decent saleable properties, they’re just not moving because the property market is moribund. Actually, moribund is a euphemism. The property market is as dead as a dodo with a doornail in it. So NAMA’s idea is to incentivise purchasers with a special mortgage bargain.

They reason that people aren’t buying because they fear house prices have further to fall, trapping them in negative equity. The scheme, which they’ve hammered out with some of our (rescued) lending institutions, is that your repayments will be reduced if the market value of your new house drops. Well, until it drops to 80% of your purchase price; below that the loss is all yours. So it’s sort of an insurance policy against the market falling. A financial derivative, if you will.

But why is NAMA doing this? If the idea is to get the property off state hands because we badly need the money, it’s just robbing Peter to pay Paul. There will be a further drop in house prices – zero doubt about that – and under this scheme the loss is going to be taken by the taxpayer. Again.¹ They say they’re doing it to “kick start” the market, as if the scheme was a sort of financial defibrillator. The image that comes to my mind though is of early electrical experimenters trying to bring corpses back to life.

There is one simple reason why the house market is moribund: The people who need houses can’t afford them. So it’s a market, why don’t prices just come down? Because those who have them, generally speaking, paid far more than they can now get. They’re naturally reluctant to sell at a loss and so hold on to their property in the hope that the market will soon bottom out, maybe even begin rising again.

They are only fooling themselves of course. Prices are still very much higher than pre-boom norms and must come down significantly. The trouble with NAMA’s scheme is that it will only help them fool themselves. If they believe that prices are now only about 20% away from bottoming out, they’re going to sit tight and wait for the rise. That would be the exact opposite of the intended effect.

I think NAMA hope that they’ll fool the buyer more than the seller, encouraging them to believe that we are close to the bottom of the market. That could raise demand to meet prices as they are now, so becoming a self-fulfilling prophecy.

And a hugely counterproductive one, because we need to get house prices down to realistic levels before we can (a) actually afford them, and (b) rebuild a stable, reliable economy. Propping them up at or near their current levels is defying the market, trapping a bubble of false value in the economy – one that will threaten to collapse like an old mineshaft running right beneath our feet. We can’t rebuild on such foundations.

 

  1. Well I say the taxpayer. As taxes probably aren’t going to go up much, it’s public services and those who depend on them that will actually take the brunt of it.

But I Regress

Income Tax rates by Country based on OECD 2005...
It's insane how low our direct taxes are

Incentives for property investment? There are times I want to go into government buildings with some sort of brain detector, see can I find anything. The reason why the property market is moribund is that property is still insanely overvalued. Urging people to invest in something overvalued is not only what got is into trouble in the first place, it’s surely a form of fraud.

Insanity is repeatedly doing the same thing while expecting a different outcome.

This budget is going to make me worse off. This is not what I object too though. What gets me is that it will make people who are better off less well off than it will make me. This is something to do with it being a “jobs budget”. They don’t want to create a disincentive for the poor to work by taxing the rich too much.

I think they do their economics by voodoo and shibboleth. They have raised money today by every means conceivable except raising income taxes, because raising income taxes is a Bad Thing. The result is that we have a highly regressive budget that hurts the poor far more than the well-off. Certainly it could be counterproductive to pile on excessive taxation. But is it not even more mad, in the midst of economic disaster, to have some of the lowest direct taxes in the developed world?

My mother, confused about why she’ll be able to afford less fuel this winter, asked me “So why can’t they tax the rich?”

I thought for a minute, and replied “Mainly, because they’re rich.”

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But I Regress

Income Tax rates by Country based on OECD 2005...
It's insane how low our direct taxes are

Incentives for property investment? There are times I want to go into government buildings with some sort of brain detector, see can I find anything. The reason why the property market is moribund is that property is still insanely overvalued. Urging people to invest in something overvalued is not only what got is into trouble in the first place, it’s surely a form of fraud.

Insanity is repeatedly doing the same thing while expecting a different outcome.

This budget is going to make me worse off. This is not what I object too though. What gets me is that it will make people who are better off less well off than it will make me. This is something to do with it being a “jobs budget”. They don’t want to create a disincentive for the poor to work by taxing the rich too much.

I think they do their economics by voodoo and shibboleth. They have raised money today by every means conceivable except raising income taxes, because raising income taxes is a Bad Thing. The result is that we have a highly regressive budget that hurts the poor far more than the well-off. Certainly it could be counterproductive to pile on excessive taxation. But is it not even more mad, in the midst of economic disaster, to have some of the lowest direct taxes in the developed world?

My mother, confused about why she’ll be able to afford less fuel this winter, asked me “So why can’t they tax the rich?”

I thought for a minute, and replied “Mainly, because they’re rich.”

Enhanced by Zemanta