Article: Why an 'artifical' shortage can also blow a big bubble

The_Conductor

Unusually well balanced article from today's Indo

His adept and assured handling of the national finances through some of our darkest years means that few would dispute the widely held view that Finance Minister Michael Noonan has been the star player in the current Government. -

One of the minister's characteristics is that he has not pandered to popular opinion in his courses of action and has generally stuck to his policies, despite the pain and public protests they might generate.

Take his seeming approval of fast increasing property prices, and by proxy, the shortage of built accommodation which is causing it. In recent months, amidst increasing calls for something to be done about the housing crisis in Dublin (Cork and Galway cities are now also beginning to experience similar inflationary shortages), Mr Noonan was drawn to state that property inflation in the cities is no bad thing.

In April, he said: "We need to get property prices up another little bit."

His view would suggest that the general inaction by this Government in failing to kick start housing development might well be a deliberate policy component in its Noonan steered "big picture" strategy for Ireland's economic recovery.

The cause of rising prices is a shortage of property and an injection of cash buyers.Despite increasing its population by 20pc in ten years, Dublin has not built a significant number of family-sized homes in that period - the latter end of the boom saw largely smaller apartments being constructed.

There are some very real advantages to be gained by permitting house prices to rise in the cities, based on the inability of the construction sector to get back into action.

(a) For every day that property prices rise (they have generally been hiking by around 1pc per month) hundreds of negative equity home owners come closer to breaking even or regaining equity in their homes.

The ESRI recently estimated that 45,000 households have emerged from negative equity since prices started rising and that, if property prices continue hiking, this will double by the end of the year.

(b) For every month that property prices rise, banks are increasing their prospects of disposing of bad loans and selling stricken homes that have lingered on their books, in some cases for five years.

(c) There's the NAMA residential property portfolio, which is all the time becoming more valuable/saleable - properties for which the Irish tax payer are in hoc for billions. So we all have a vested interest here.

But, there are also a rash of significant downsides to allowing a home shortage to prevail - by failing to enable/persuade banks to lend to buyers or builders, by failure to move the local authorities to more realistic planning and levy policies and by failing to persuade Nama to release land and properties to the market to enable development.

(a) Homelessness is surging, based on the accommodation shortage and resulting fast-rising rents.

(b) The construction industry's paralysis has an opportunity cost of tens of thousands of jobs in that sector attached, not to mention the tranche of spin-off jobs that a normal construction activity would support.

(c) Consumer spending is being hit and therefore, there is a risk to other jobs caused by fast-rising house prices because those who are forced to pay more in rent or for a mortgage, spend less in restaurants, pubs and shops.

(d) The fast-increasing cost of accommodation is also a major problem for FDI companies who must continue to be successful in attracting a workforce to Ireland. Accommodation affordability is high on the travelling FDI employee's list of concerns.

(e) Finally, there is the growing risk of another property price spill in the future.

This is because the accommodation shortage which is causing rapid price rises is just as artifical as the credit splash which caused the last bubble.

Cash buyers, who are still acquiring around half of the properties sold in the cities, present another "artificial" stimulant to prices while zombie banks, which won't lend to buyers and builders, are as unnatural as the cash splashing versions who showered them with unwarranted loans during the boom.

While the ESRI recently estimated that Dublin homes are still undervalued, there will come a time when the current accommodation shortage takes prices too far above what is warranted.

And once the factors upon which this artificially generated shortage is based are removed, prices will be impacted negatively.

Mr Noonan has said there is nothing to worry about because prices are still 47pc below peak. But such historically distorted prices are the worst tape measures.

Alternatively, an international affordability index long ago estimated that Dublin prices had moved into the "moderately unaffordable" category. The economies of Dublin, Cork, and Galway, are resurgent but they do not justify 1% to 3% per month price inflation.

Mr Noonan and his Government's policy is a double-edged sword that cuts both ways. Let's hope it doesn't swing too far in the wrong direction.

Indo Property

Villa05

They generally do 1 article like this to 100 articles cheerleading the rises just to point to someting when it all crashes again

MouseTail

The article makes no mention of the Construction Strategy which Imo is a well thought out plan to increase supply.

The_Conductor

Villa05 wrote: »

They generally do 1 article like this to 100 articles cheerleading the rises just to point to someting when it all crashes again

Unfortunately- I have to concur- articles like this in the Indo happen once in a blue moon........ That said- it is balanced, and well written.

Idbatterim

one other major con of the rising price of property is like the boom, it creates massive demand for never ending pay increases which makes us uncompetitive... Another reason Germany is obsessed with inflation...

On Noonan agreed that he is a pair of very capable hands IMO. Just look at Irish rail, Haddington Road agreement, if FF were in power now, they would be writing out the pay cheques again, the mere hint of unrest had them asking "where do we the taxpayer" sign?

gaius c

Idbatterim wrote: »

one other major con of the rising price of property is like the boom, it creates massive demand for never ending pay increases which makes us uncompetitive... Another reason Germany is obsessed with inflation...

On Noonan agreed that he is a pair of very capable hands IMO. Just look at Irish rail, Haddington Road agreement, if FF were in power now, they would be writing out the pay cheques again, the mere hint of unrest had them asking "where do we the taxpayer" sign?

There's no money to do it anyway. Don't mistake his high-stakes gambling for capability. They just want to get past the stress tests, do a semi-giveaway budget and call an early election to ensure they are back in before 2016.

Villa05

MouseTail wrote: »

Construction Strategy which Imo is a well thought out plan to increase supply.

Had a quick google of this plan, Looks like a typical political response, Task Force, mortgage insurance, talking shop on how best to improve supply which includes NAMA with their vested interest in keeping prices high.

I see it as yet another problem, no solutions

MouseTail

Villa05 wrote: »

Had a quick google of this plan, Looks like a typical political response, Task Force, mortgage insurance, talking shop on how best to improve supply which includes NAMA with their vested interest in keeping prices high.

I see it as yet another problem, no solutions

It includes a substantial release of NAMA properties where supply is tightest.

jay0109

MouseTail wrote: »

It includes a substantial release of NAMA properties where supply is tightest.

Thats hardly a revolutionary strategy....they could'nt keep them under lock and key forever

gaius c

MouseTail wrote: »

It includes a substantial release of NAMA properties where supply is tightest.

Would this be the same NAMA supply that we were told doesn't really exist and even if it did, releasing it would have little to no effect?

quadrifoglio verde

gaius c wrote: »

There's no money to do it anyway. Don't mistake his high-stakes gambling for capability. They just want to get past the stress tests, do a semi-giveaway budget and call an early election to ensure they are back in before 2016.

I can't see there being an early election. Property prices rise, bulk of property owning population are happy, they spend their money, more jobs are created etc. Have a semi-givaway budget this year and next. As it stands, the economy is going from strength to strength. Why call an early election? kenny wants to be taoiseach for the 100th anniversary of 1916, if he thinks they'll be returned to power in 2015, he'll think they'll be returned to power in 2016 anyway and continue with it as is.
As things start to get better, which they appear to be doing, fg have a better chance of doing well in the next election

MouseTail

Can't see an early election myself either. I can see it being strung out til April.

El_Dangeroso

FG stated last year that they wanted to have the election after the 1916 rising centenary celebrations.

gaius c

El_Dangeroso wrote: »

FG stated last year that they wanted to have the election after the 1916 rising centenary celebrations.

They might want to but they can't.

The next Irish general election must take place no later than 3 April 2016

Link

Easter rising dates

24–29 April 1916

iguana

gaius c wrote: »

They might want to but they can't.

Link

Easter rising dates

But Easter in 2016 is March 27th.

gaius c

iguana wrote: »

But Easter in 2016 is March 27th.

Did occur to me but even Zanu FF would be sheepish pulling off a wheeze like that.

El_Dangeroso

gaius c wrote: »

They might want to but they can't.

Link

Easter rising dates

Got it from here:
http://www.independent.ie/irish-news/fine-gael-plans-date-for-next-general-election-29051657.html

Easter rising commemorations are always on easter.

iguana

gaius c wrote: »

Did occur to me but even Zanu FF would be sheepish pulling off a wheeze like that.

As the post above says, Easter Rising commemorations always happen at Easter, not the actual date of the Rising.

gaius c

Great...
We're stuck with the minister for property price rises for another year and a half so.