Tag: Price

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Politics

Stimulating The Housing Market Is Economic Madness

image
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.
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Politics

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?

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