The housing crisis is all about the politics of debt.

Everyone agrees Ireland has a huge housing crisis. The housing “market”, if one can call it that, is completely dysfunctional. There is a massive shortage of supply, particularly in Dublin, and growing demand. Competitive firms are losing mobile workers by the day. Homelessness is on the rise. Rents are sky rocketing. Dublin house prices are back to silly-levels. The price-quality dynamic is totally out of kilter. Yet there is absolutely no reason why housing “supply” should be restricted.

There are literally thousands of empty properties around Dublin, loads of green and brown field sites, and tons of opportunities for housing development. Dublin is not San Francisco, where there is literally no where to build. The problem is that the banks are not lending. The government is intervening in a belated and piecemeal way. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices. Rising prices makes it possible to manage the debt dynamics of the state. Supply is being restricted. It’s not a coincidence. It’s an outcome of incentives.

Yesterday’s “rebuilding Ireland” report is obviously welcome. However, all the policy focus on social housing and homelessness, whilst important, completely misses the core problem, which is that the banks control the market. The banks control the supply of mortgages and the supply of loans for development. In a housing market, if you control mortgages, property and builders, then you control the outcomes. It’s not in their interest to see a rise in supply. A rise in supply would reduce prices and expose the underlying debt dynamics of the bank’s balance sheets.

This is the real structural constraint facing government.

The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.

If NAMA or the banks fire sell housing assets to solve the housing crisis, then all those under performing loans/mortgages will be exposed. The debt dynamics of the banks will be exposed. The government will be exposed. Then the ECB is exposed.  It’s a house of cards and the only thing holding everything together are rising rental and house prices. Those renting (and those who don’t own mortgages) are ultimately picking up the bill for the last crisis, of which they had no part.

Hence, the structural constraint underpinning the housing crisis is a convergence in the incentive structure to maintain sky-high rents and rising house prices. It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. But all these actors are clearly aware that rising house prices means lower debt and more wealth. The politics of debt is about the politics of housing capital.

The real policy solution is radical intervention to fire sale the assets.

Compel the banks to lend for real development. Compel builders to borrow. The objective should be to bring down rental prices and house prices. Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system. Except this time, the Irish government should say to the ECB, tough shit, you pay. Our public policy priority is ensuring proper housing for our citizens as a social right.

This policy response is obviously dreamland. But you get the point.


This blog entry is based on two research papers I am working on: “Housing Capital is Back” and “House of cards: the real politics of the Irish housing crisis”. Most of the data to empirically corroborate the claims I have made can be found either at the Central Bank (the “Financial Summary” statistics pack), and/or in the Ratings Agencies of the Irish banks.

Property development

Comments

comments

Author: Aidan Regan

I'm an Assistant Professor at the School of Politics and International Relations, University College Dublin (UCD), and Director of the Dublin European Research Institute (DEI). My research is primarily focused on comparative and international political economy.

62 thoughts on “The housing crisis is all about the politics of debt.”

  1. Did we not already try the solution you suggest? (Nothing wrong with the analysis, by the way,only the conclusion).

    As I said on the other thread, any society worthy of the name will ensure that no person or family will be left without a roof over their heads. But the idea that everyone is entitled to own it is another matter. Most people in Germany, by way of example, rent their homes. But there is legislation to ensure fixity of tenure (a term from Ireland’s past).

    What is needed is a mix of accommodation tailored to the capacity of those to pay for it whether through renting or purchasing. What we have instead is, for example, the idea of a first-time buyer’s grant, largely to circumvent current mortgage borrowing limits (i.e. a measure of capacity to pay). Handing taxpayers’ money from one citizen to another in this fashion simply prolongs the illusion that all can eventually afford to own their accommodation.

    Were Ireland not signed up to the euro, the illusion might last a little longer.

    https://www.bundesbank.de/Redaktion/EN/Topics/2016/2016_07_20_monthly_report_july.html?startpageId=Startseite-EN&startpageAreaId=Teaserbereich&startpageLinkName=2016_07_20_monthly_report_july+375348

    1. @DOCM

      I tend to agree. My conclusion is more intended to paint the stark reality behind what’s actually happening. A much more varied approach is clearly needed. Ultimately, we need a total public policy overhaul of how we approach housing, particularly in our large cities, where future employment/growth will cluster. But this is unlikely to occur whilst housing (mortgage purchasing) is considered an investment to leverage asset-wealth prices. Home owners are a core constituency of a constrained polity. That’s before getting into the role of banks. New rental-electoral constituencies may open up, and force a public policy change (away from mortgage-home ownership). 30% already rent in Dublin. I’ve rented all over Europe. Ireland is the pits on this front. Sky high prices. Rock bottom quality. If this constituency of voters (renters) is ever mobilised electorally then change might occur. Meanwhile property porn in our newspapers and shop fronts is likely to flourish.

      1. The incompatibility in housing funding models, a major, if not the major, element in national finances and economic management, between the Continent and the UK (and, ipso facto, Ireland) was evident from the outset of our decision to adopt the euro. There is now no place to hide from this fact.

        Grumpy below identifies the main sectoral – and, by definition, political – considerations that are preventing society as whole facing up to the problem. The one positive that I see emerging is that there is a recognition that there has to be a major programme of building social housing. This need not be left to the local authorities. There are many models to choose from in terms of housing associations etc. And no sale of it once built! Otherwise, it is the equivalent of pouring water into a leaking bucket.

        There has also, as you mention, to be a clear distinction between investment in housing as a social good and investment, as a private investment, for profit. The mantra “we need to build more houses” is as vacuous as it is a statement of the obvious.

        Given that countries such as the Netherlands, Denmark and Sweden have come unstuck in the area of the housing market, not to mention the US, the forces pushing housing bubbles seem unstoppable.

  2. We’re still paying the price of not cramming down mortgage debt. Something we should still do and it would still go a long way to fixing this issue.

  3. I’m not sure about this:

    ” The problem is that the banks are not lending. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices.”

    The embedded link seems to refer to lending for property purchase. If the banks were lending more for this house prices would rise further, not fall.

    The central bank restrained lending, much to the disapproval of the Irish Independent at al. in response to spiralling house prices in 2014 or so.

    The key issue here is land prices. We all know NAMA exists to support them and we all know the banks balance sheets are a function of them – though less so than they were. Prior to the electorate turning against ever higher house prices a year or so ago, the Finance Minister was quite open about it being unofficial government policy to get house prices higher, and that the debt dynamics of banks and developers was the motivation (alongside that of property owning voters).

    You will probably pay 100k for a reasonable standard site around the outskirts of Dublin. That’s in the order of 1 mil per acre for what is, until you build on it, farmland.

    Agricultural values are supported by CAP subsidies and ZIRP already, but would be somewhere near 10k per acre. If you gave the farmer 5 times what the land is worth you would pay 50k an acre, and the site cost to be paid for by the eventual house purchaser would be something like 5k rather than 100k.

    That’s 95k off the cost of a semi rural house near Dublin.

    The re-zoning and local area plan system shifts huge amounts of wealth to owners of agricultural land and is financed by mortgage debt.

    It does though, support house and land prices. It is a political choice that has been made.

  4. I think Aidan’s analysis is essentially correct. The Government has placed a high floor on the price at which new supply can be provided economically in Dublin through maintaining a combination of high local authority development charges, high taxes on construction and high site costs. If the objective of housing the population was primary, then we would see the Government flooding the market with residential development sites, cutting development charges, reducing or eliminating the direct tax take on new residential construction, and reducing the indirect tax take on construction materials and services. What we are seeing now has some very good points, but taken as a whole it seems to be an elaborate workaround to avoid doing anything that would lower property prices.

  5. I’m sorry, but some of this is nuts, such as advocating that one should “ compel builders to borrow”. As for vacant houses, the vacancy rates in the Dublin area are relatively low: the large number of vacant houses in the West and North-West is irrelevant.

    There are credit constraints in terms of financing builders. I can understand the reluctance of banks to charge into this given their previous experience. In this case reluctance of banks to lend tends to restrict supply and increase house process. However with mortgage lending, more activity by the banks will increase demand and drive prices up further. Do you disagree with the mortgage lending rules enacted by the Central Bank? Is the reluctance of the banks to lend driving prices up nor down? It depends on the kind of lending. I don’t understand the structure of whatever implicit model of house prices which lies behind your argument.

    High land prices near Dublin are driven by high demand interacting with a relatively fixed supply. They are a consequence of high demand and not a cause of high prices. David Ricardo understood this centuries ago but the message is slow to get through. While there appears to be plenty of zoned land, there may be a problem with supply of suitable serviced zoned land which is ready for building on. Any fool can zone land with the stroke of a pen, and it costs little more than a brown envelope. Providing the transport, water and sewerage structures etc is another matter and here the State is largely at fault.

    Two things are needed: (i) investment in infrastructure services for zoned land and (ii) a really strong and pretty immediate tax regime with counters any tendency to hoard serviced land.

      1. OK, I now appreciate the ironic tone of your comment. I would still contend however that incentivising an increased supply of effectively zoned and serviced land in or near Dublin is a necessary condition for solving the problem. It should stop prices from rising further, and might even lead to prices being a lower multiple of incomes.

        Time to look seriously at the instruments and incentives which might work. And above all, avoid measures which add to demand.

  6. Not much enthusiasm at the MacGill shindig.

    http://www.irishtimes.com/news/politics/helping-first-time-buyers-may-increase-house-prices-1.2728304?utm_medium=email&utm_source=lunchtime_digest&utm_campaign=news_digest

    The pressure to fix the hole in the bucket may, however, be rising. It is such a matter of plain common sense that one would imagine that there could be no objection. However, irrespective of the nature of the accommodation occupied by individuals, they all have a vote. There’s the rub!

  7. Several converging crises. Banks are still ultra fragile . When will the govt sell off AIB?
    House prices are too high considering people won’t be getting much in the way of payrises. Rates are too low . Deflation calls the shots.

  8. Regarding debt now would be the time to.compare cost of lost growth (real growth) vs dislocation of writing down debt globally in 09. Debt is out of control. 12tn usd in neg yield.

  9. With regards the comments on restricted lending, I think Aidan is refering to bank lending for property development rather than purchases, found in Table’s A.14 & A.15 here: http://www.centralbank.ie/polstats/stats/cmab/Pages/BusinessCredit.aspx

    Irish bank lending for residential developments is still falling YoY in double digit figures, yet at every bus stop in Dublin one is reminded of the cash back offers on new mortgages the banks are kindly able to provide!

  10. ” It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. ”

    Then, please allow me to suggest it, because it is exactly what happened.
    The reality is the policy; no supply, high prices, even higher rents, and a homeless crisis the extent of what was never witnessed in the Irish state.

    The housing plan is not to welcomed, unless one is inclined to welcome aspiration drivel, and a further rifling of the public purse to the benefit of land holders and land speculators.

    A few figures from the ‘plan’.
    €5.8 billion to be spent on 47,000 social housing units. That is less than €124,000 per unit. Yet later in the document we hear that builders will be competitively compelled to build house for €200,000 net of site costs. So who is kidding who about 47,000 houses for €5.8 billion at an average cost of €124,000.

    €200 million is to be spent on infrastructure, to incentivise builders to build “15000-20000” houses, that is a €10,000 per unit subsidy into the developers pocket, providing roads, water, electricity. sewerage etc. It does not even pretend to cover the cost of primary schools, secondary schools, creche facilities, medical facilities, but shure lets give it the developers anyway, the poor souls need it.
    The biggest give-away of all, it seems to me, is public land which has been in state ownership for generations, perhaps even before the foundation of the state. This land too is to be given away, in a neatly camouflaged three card trick, whereby 25% of the land will be assigned for social housing, meaning that 75% is presumably to be handed over to developers, gratis, so that they can build houses with no upper price limit. And hose developers know how to price gouge.

    The homeless crisis, with people currently in emergency accomodation in hotels, is to be wished away, by removing people from hotels. To go where? Clearly the hotels owners have had a word.
    Perhaps, we can house the homeless on the QE 11, stationed in the Liffey. It would be nice to let these people know whats next, would it not. 117 pages of drivel, just to remove the homeless from hotels, with nowhere, it seems, to go.

    This ‘plan’ seeks to tackle the biggest housing crisis the state ever faced, while hanging on for dear FG life to the ideology that property owners are fully entitled to make millions, if not billions, on their property holding and property speculation, subsidised all the way by the state purse.

    The Fianna Fail governments of the 1930s succeeded in building in excess of 80% of all housing constructed in the 1930s, at a time when the country was utterly impoverished, the ‘hungry 30s’.
    Now the country is, by most standards, ultra wealthy, but for ideological reasons is quite prepared to impoverish a section of society, and rifle the public purse to further benefit the already wealthy, mainly property owners.

    This ‘housing plan’, in so far as it is a plan, should be consigned to the bin.

    1. +1 On the feeling that there has been explicit (if unannounced) policy to raise prices and restrict supply, at least significantly coordinated by the parties mentioned. Higher house prices suit those interests.

  11. I would have thought banks want to lend but demand is restricted due to the CB rules. A profitable business these days, gouging the public on mortgage interest rates. I know 2 couples happy to buy if they could satisfy the rules.

    Though as interest rates eventually reduce (through competition or political pressure), employment, population and wages continue to increase and the market gets used to the new deposits required, today’s prices might seem reasonable in a few years. Not that they are reasonable. Perhaps they are, perhaps they’re not. On yield they seem to be, but then we’re talking about whether rents are reasonable.

    By the looks of things we’ll need at least 25k homes a year and that’s just to stand still. And we’re looking at 2 years just to be there. on current trends we could have an extra 250k people here between now and 2020.

    Incidentally, I know the family homes are where the heart strings are but won’t the next couple of decades not be more about the 2 bed apartment? The era of the country mansion has come and gone. Family’s getting smaller. Down sizing. Divorce rate going up, more transitory work force, more demand for city living etc…

    1. That’s if you can afford a decent 2-bed! Anything half decent (or what would be considered standard in European apartment living i.e. light and storage space) is at least 400k. The problem is not that nobody will live in decent 2-bed apartment. The problem is that there is none. Most are glorified hotel rooms where you can hear your neighbour snoring.

      1. Your article is all about the demand side (lending restrictions) while the problems are largely on the supply side, namely planning and zoning issues.

        Dublin is not a dense city, and it has quite a lot of open spaces. Density first. It is very difficult to knock anything that already exists to build anything bigger and better. This is due to planning law and heterogeneous nature of ownership. Planners will not allow buildings of a height normal in similar-sized cities like Copenhagen. You cannot build single-aspect apartments. Every new apartment building must have a lift, the cost of which musst be shared even by people on the ground and first floors. There is little effective tax on derelict sites or poorly-used land. This piece from Ronan Lyons is excellent: http://www.independent.ie/business/irish/our-planners-want-to-land-us-in-trouble-again-by-not-listening-30301074.html

        Now empty spaces. There are more grass sports pitches within the M50 than one can count, there are about 10 golf courses. There is active farmland. This is desperately poor land use but anyone proposing development on it takes on a planning system which is unpredictable, NIMBY-friendly and takes a long time to navigate. High risk equals high cost.

        Finally, proper heavy-rail infrastructure (a metro) has been repeatedly put off in favour of empty railways and motorways in Clare and Galway.

    1. Delighted to know you miss me.

      Alas, I’m both working all day today, then travelling to Heathrow after work, from where I fly to Iceland tomorrow morning, so I am pressed for time. If I get a chance, I’ll post some figures from Iceland (although I can’t guarantee it). Meantime, I suggest you google the following to find lots of stats relevant to the point Che (oops, I mean Aidan) was making. They should keep you busy while I’m in Blue Lagoon.

      (a) Dept of Environment figures for the number of new houses built in ireland 1970-2016 (from their website).

      (b) Demographia Internalional Housing Affordability Survey for Anglosphere countries (published Jan 2016).

      (c) Eurostat figures for Housing Costs as a Share of Disposable Income in EU31 countries (from Eurostat website).

      (d) Eurostat figures for the the Housing Cost OverBurden Rate in EU31 countries (from Eurostat website).

      (e) The Numbeo website which has lots of stats on house prices relative to incomes for countries globally.

      (f) Eurostat figures for Severe Housing Deprivation in EU31 countries (from Eurostat website).

      (g) Eurostat figures for the Number of Rooms per Dwelling in EU31 countries (from Eurostat website).

      (h) Eurostat figures for the Overcrowding Rate in EU31 countries (from Eurostat website).

      (i) Eurostat figures on Housing Conditions in EU31 countries (from Eurostat website) – in particular in relation to the percentage of the population suffering from (1) lack if indoor bath, toilet etc (2) not enough light (3) excessive noise from outside their dwelling (4) grime (5) damp walls and floors etc Aidan mentioned snoring from next door. Eurostat figures show the percentage of the population suffering from noise from outside their dwelling the 2nd lowest in the EU.

  12. There is no shortage of housing outside (most of) Dublin and some of Cork and Galway cities.

    I had a look on daft today to see what is for sale in Ireland.

    -Sub €150k there are 6,900 units (6,100 houses, 800 apartments)

    -Sub €100k there are 3,500 units (2,900 houses, 500 apartments).

    Many of these are in places within 5 minutes walk of an urban centre. Under Central Bank rules these are within reach of of a single person on average earnings of €35,000 after a few years of saving.

    Of course most people who commentate on this stuff aspire to live in a Dublin postcode which is low and even. This, however, is only 10% of the housing stock in Ireland. Most people in Ireland live happily somewhere else and face very reasonable housing costs by international standards.

    Otherwise the rest of the piece is simply evidence-free opinion, particularly this part:

    “The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.”

    Evidence is thin enough but this excellent paper suggests that negative equity is not a particularly important driver of mortgage arrears (http://www.centralbank.ie/publications/Documents/02RT14.pdf), household income and lax standards at origination are much more important. Second, in practical terms it is very difficult for banks to repossess properties so in some ways the value is immaterial.

    Third, over the last year or two banks have actually been engaging in writebacks. This is where they had set aside money for loans that they thought would go bad but ultimately did not (http://www.rte.ie/news/business/2016/0303/772247-aib-results/). Reliance on emergency funding in the Irish banking sector is essentially nil, the sector is profitable again and the vultures hovering around the European banking sector at the moment do not have their eyes on Ireland.

    1. @Examiner

      Dublin postcode? County Dublin? Your 10% figure relates to where?

      Greater London with an area of 1,572 square kilometres had a population of 8.54m in 2014, up from 7.3m in 2001 while Greater Dublin (county) with an area of 921 square kilometres had a population of 1.34m in 2016 and 1.12m in 2002.

      While the area of County Dublin comprises 92,200 hectares, about 30,000 hectares are farmed. So the urban density is higher than the 1,455 persons per sq. km suggested by the data. This compares with London’s density of 5,432 persons.

      1. I am referring to Dublins 2, 4, 6, 6w and 8 and suggesting that there are about 200,000 dwelling units in these areas.

        Commentators on housing issues overwhelmingly live in Dublin and many if not most aspire to owning a property in the area referenced above.

        Generally speaking you do not find people living in Mayo complaining about small houses. They instead focus on poor broadband, post office closures, etc.

        Housing shortages are an extremely urban issue masquerading as a national one.

        1. Invest in high-speed trains and an integrated rail infrastructure. Rapidly reduce transport costs. Move to Mayo. I’d probably vote for that. The aspiration to own property is Dublin simple a function of the fact that’s where the jobs are.

          1. Yes, in many sectors there are no jobs outside Dublin. But there is still plenty of employment per se.

            The overall employment rate is a little bit lower outside Dublin than inside, but not much by international standards – compare Calabria to Milan.

            Find me any country where housing cost per square metre is not substantially higher in the city which is the capital and/or financial sector. You will struggle.

          2. Agreed. But I don’t see your point? Are you suggesting there is no housing crisis in Dublin, where the vast majority of people live and work?

        2. @Examiner

          County Dublin’s population was at 15% of the 26-county population in 1911 and is now 28.5%.

          FDI services tend to cluster in principal cities whereas a manufacturing plant like Eli Lilly’s employing about 500 was built on 112 acres in open countryside near Kinsale in the late 1970s — factory projects like that are getting scarcer.

          Few young people could afford to buy a house in the postcodes you cite. As for apartments, about a decade ago the Gas Works apartments were completed near the Google headquarters and for prices over €400,000 I saw myself that bicycles had to be stored on balconies!

  13. My comment is very critical of the opening blog posting.

    I think that the post identifies a major problem. It then goes proposes a solution which may have been appropriate 7 years ago and is now 7 years too late. It is a solution which there is zero chance of the Government implementing even if it could implement it, which it probably can’t. As such it not just “dreamland”, it is a total waste of time.

    “Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system.”

    The post proposes causing a slump in property prices with fire sales, forcing banks to take losses to the extent that the state needs to intervene, and then forcing the state to play chicken with the European institutions. All this is proposed at a time when the economy is recovering, our reputation as a stable economy has recovered, our willingness to underpin our financial system (rightly or wrongly) has benefited us, and the property market has stabilised. This policy prescription had merits at the heighth of the crisis when we got screwed,and indeed I supported it, but there is no merit to it now. We have bought the solution we have at a great cost. Just because you regret paying so much for something does not mean you should throw it away.

    The post also does not look at whether the policy prescription is at all achievable. For instance: “The real policy solution is radical intervention to fire sale the assets.” What form would this radical intervention take? What powers does the Government have to do this when it does not own the loans? What would the legal restraints be on the Government interfering with others in this regard? What would be the political and social consequences of a fire sale destroying businesses and throwing people out of homes in the interim?

    “Compel the banks to lend for real development. Compel builders to borrow.” How is this to be achieved? How can you make a bank lend or make a developer borrow? You can’t of course. Apart from the legal impossibilities, how would it be practically achievable at the same time that you are radically destabilising the banking system, the property market and the national finances? Or are we to wait another 7 or 8 years?

    In summary, my problem with the post is that it identifies a major problem, but then fails to identify the constraints on addressing that major problem and further fails to propose any remotely sensible solutions to address the major problem. If the research is limited to identifying the major problem then I suggest it should limit itself to just that, and should steer clear of proposing un-researched solutions which may detract from otherwise sensible research.

  14. I note from reading comments that parts of the opening post were ‘tongue in cheek’. I hope I have not wholly misunderstood the opening post. A lesson I have learned over time is that it is dangerous to make ‘tongue in cheek’ statements in writing as one never knows how such statements will be read.

  15. A timely and well-argued, if somewhat provocative, post and some very insightful comments. Many thanks to all.

    But one ends up with a feeling of despondency when the tacit collusion of so many politically and economically powerful and influential rent-seekers is revealed. And the largest, deepest and widest concentration of rent-seekers is comprised of the vast majority of owner-occupiers (either owning outright or with a serviceable mortgage). Most will be vehemently opposed to any policy initiatives that might curtail the build-up of the economic rent implicit in the rising prices of their properties. Woe betide any politicians securing to retain or secure popular consent to govern who might threaten directly this steady accumulation of economic rent. The irony is that most of the members of this concentration of rent-seekers appear to be reasonably content to accept egregious rent-seeking by a range of powerful special interests at their expense. Part of the reason may be that there is a significant overlap between this concentration of rent-seeking property-owners and the broader based special interest groups. In addition, the rent-seeking of these groups often performs a crude form of income and wealth redistrbution among the higher income deciles.

    The detrimental impacts of this pervasive rent-seeking are diffused across those in the lower income deciles who, for a variety of resons, lack the political heft to force the necessary changes in policy. In other advanced economies many citizens who are being exploited by this pervasive rent-seeking are seizing the opportunity to express their disgust and anger – for example via Donald Trump’s presidential candidacy in the US, the Brexit vote in Britain and the rise of populist, nationlist, xenophobic parties across Europe. But not in Ireland. The so-called left and pseudo left (who would claim to be channelling the disgust and anger of voters who are losing out) are either as adept at the rent-seeking of those they disingenuously excoriate or so eager to get in on the act that officially authorised rent-seeking is probably more prevalent in Ireland than in any of the advanced economies.

  16. If John B Keane was alive today, would he be writing “The Site” instead of “The Field”….

    Something has to be done to address the immediate housing needs but is there a whiff of Irish Water about this?

  17. I’m not sure I agree with the notion that Irish banks don’t want to lend on property. The stock of pre-crash mortgages is rolling off. The banks need new loans to rebuild their asset base. Bank of Ireland’s stock of net loans to customers fell from €136 million at the end of 2008 to €85 million at the end of 2015. As older, less profitable tracker mortgages roll off, the bank would love to replace them with new mortgages at a 3%-4% interest rate (variable or fixed). That is very good business for the bank.

    When it comes to development loans, anecdotally it seems the banks are still being very cautious which is natural given what has happened here in recent years. So perhaps this is the area for policy to focus on to stimulate new building.

  18. Good to know there is at least one media commentator aware of what is going on and of the challenges ahead.

    http://www.independent.ie/opinion/columnists/dan-obrien/population-growth-points-to-real-challenges-for-our-housing-plan-34900850.html

    Would it be possible for those parts of the original post that are ‘tongue in cheek’, and not to be taken seriously, to be highlighted in red? Its not always obvious to the rest of us.

    Come to think of it, a lot of the world’s problems in the past century would have been avoided if Karl Marx had done that.

  19. With respect Aidan do you not think there are other factors at play here, other than “greedy bankers”.

    1) The decision taken to close down all the bed sits or have them converted into studio apartments. Previously a building may have contained 10 bed sits and three shared bathrooms. After conversion the building now contains 5 independent studio apartments. Apparently 10,000 bedsits were lost. (anecdotal source, not verified)

    Therefore this means there is a reduction in the number of private dwellings available. Rental costs for these new dwellings have increased as the standard of quality has also increased. Previously tenants who were on the margins of society were able to afford a bed sit, now these people are knocking on the doors of housing agencies as they are homeless and cannot afford the extra costs in rent.

    Is this the fault of banks, or is it a Govt Dept of the Environment “ideology” which has severely backfired?

    Of course in Marxist Socialist Ireland …. its the fault of the bankers.

    2) There is a second ideology at work in senior Govt circles, and that is not to have a repeat of the 2008 financial crash. The Dept of finance has implemented severe financial disincentives to landlords, taxation on a loss. The primary aim of the state is to push small time landlords out of the market. The state then implements further measures, 27 months must pass before a rental increase. The amount by which rent can be increased is already being discussed.

    So the state determines by how much rent can be increased, and by how often, and then the state ensures there is taxation on a loss for landlords.

    All financial advisors I have spoken to have advised AGAINST investing in Irish property, to invest 250K – 300K in a market which is rigged against the investor is stupid, particularly when there are other investment options which offer greater return for less risk.

    “Of course this is all the banks fault.”

    3) Zero Accountability of destructive tenants, all rent disputes have to be adjudicated by the PRTB, which have long investigative lead times, only to then agree that the Landlord is owed rent. Imagine having to wait 18 months to be told by the PRTB that the tenant has failed in their duty and they owe you 18 months rent.

    I know of one landlord in Cork, dealing with a very difficult tenant, the apartment is being flooded deliberately, causing water damage to the premises below. Insurance claims rising rapidly, landlord cannot get access to have the leak fixed, rent has not being paid for months. Court action has to be taken with bailiffs.

    “Of course it is all the banks fault”

    4) Recently Sherry Fitzgerald commented that in their experience, for every one investor which buys a property, there are two selling up to get out. Given the above facts, it is not hard to see why.

    “Of course it is all the banks fault”

    5) In a market which is mainly provided by the private sector (ie. no provision of council housing anymore) it is profoundly stupid that the state act in a very hostile manner to landlords.

    “banks to blame again of course”

    6) Given population growth and increase in family breakdown along with the possibility of shortening the length of separation time to qualify for a divorce, it is almost certain that there will be a increased need for more homes. Putting more pressure on a limited housing supply.

    “Of course it is all the banks fault”.

    7) The cost of actually building a house, planning application fees, VAT on materials, stamp duties etc All of these are determined by the state, and act negatively in provision of the number of new houses / dwellings built. This only increases the final sale price.

    “But of course it is all the banks fault”

    8) Draconian personal income taxation implemented by the state against it’s own citizens, which prevents them from being able to buy a property. Attempting to save money is almost impossible as well, due to almost zero interest rates and penal taxation of 40% DIRT.

    “Of course its all the banks fault”

    9) Dublin requires to push more into high rise developments, this has been carried out successfully in other cities where attractive well functioning buildings have been constructed leading to greater economies of scale. But Dublin city council vetoes the proposal every time because of some stupid reason about the city skyline. Hong Kong / Shanghai, Washington DC all have far more attractive skylines than Dublin.

    “Of course it is all the banks fault”

    I myself am a landlord, a private investor, I provide a high quality dwelling with my tenant. I also charge a rent which is almost 400 euro / month less than the market rate. I would also state that my tenant is most professional, as are the majority of tenants.

    However it is appalling to witness the hostility of the state + media against small time private land lords, the feeble lame excuses, extremely primitive thinking which is causing enormous damage to the private rental market.

    But when I put my head on my pillow tonight…. I can rest easy…. because it is all the banks fault, and the various institutions of the state (which have enacted and are in the process of enacting more destructive policies) are totally blameless.

    1. @sporthog

      You’ve set up a straw man, which is all to easy to knock down. I don’t mention greedy bankers once. Banks are acting perfectly rational. They have a balance sheet problem. They have too much mortgage debt. The only way they can manage this debt problem is to ensure house prices rise, and ensure existing assets are sold at the highest price possible. This is not Marxism. It’s common sense.

      The problem is a structural constraint related to the politics of debt. Remember that massive housing bubble that burst? Well the debt hasn’t gone away. It’s just been moved around. The government, NAMA, mortgage-home owners, and the banks, all have an incentive to see prices rise. This incentive structure is what ultimately shapes the housing market, and the public policy response to it. The “rebuilding Ireland” report is just tinkering at the edges.

      Further, and not touched upon in the post is the extent to which housing capital (and associated wealth effects) shape policy preferences of voters. Previously it was always assumed that labour market income shaped preferences. Increasingly, it’s the wealth effect of housing. Imagine the government announced tomorrow that they intended to reduce the price of housing by 20%. You’d soon see the incentive structure I touch upon burst out into the street.

      1. Aidan,

        Even if you sold every single dwelling in Ireland at a small profit, massive profit or just a break even price. There would still be a housing shortage.

        Agreed, nothing unusual about selling to get your money back, or make a profit.

        Agreed, the debt has not disappeared, I am still paying down my debt each month as are a lot of others, probably yourself included.

        But while we can agree that a rising market can incentivize some (or many), the points I made above are facts which act as a disincentive to increase supply. IMO…. the Irish State has implemented very destructive policies (WRT housing) against it’s own citizens.

        Enacting policies which cause prices to rise in the short term, but have long term damaging effects is not the best option to recoup money to pay back borrowings.

        Unfortunately it is those who are financially the weakest who suffer the most. Young families which are struggling. That is not to say everybody deserves a free lunch, but still.

        When I look across Irish society (other than housing situation) and the changes occurring, I see destruction in many areas. I am frightened over the ideologies which are coming into force. Home ownership is rapidly becoming a thing of the past.

        Personally…. I do take comfort in the fact that I have provided a quality home to a quality family at 25% below the market rate and will continue to do so for the foreseeable future (hopefully). Unless of course the state decides to dispossess me of my rental property, in which case I will have to sell up (@ market price, incur a loss or a profit) and make a good family homeless.

      2. The stock of residential mortgages is decling at about €2bn a year. New lending isnt enough to offset what is being paid down. These are the good loans btw, by definition.

        Banks do not have ‘too much’ mortgage debt. They would LOVE to at least stabilise their loan book with good-quality lending at what are by now the highest margins in Europe. This would help to cross-subsidise the trackers and non-performing dross that will take a generation to clear up.

  20. The CSO gave up tracking agricultural land prices in 2005 and today there is no official data on agricultural and development land.

    About 40% of Irish owner occupiers do not have a mortgage and that is high in Western Europe.

    Land policy is a key aspect of long-term housing policy and a deal between the IFA and the Government in 2001 gave farmers 23% of the cost of the national roadbuilding budget of €18bn compared with land acquisition costs of just 12% in England, 10% in Denmark, 9.4% in Greece and 1% in Iceland.

    Tom Parlon, who was IFA president before becoming a government minister in 2002, said in 2003 on proposals to cap the price of development land:

    The provision of quality affordable housing to all citizens is the ultimate goal that the State wants to achieve, and I fully support that. But I believe that weakening private property rights as a means to achieve this goal would be a great mistake.

    Such an approach is gift-wrapped in an ideology somewhere left of Stalin, which has no place in a modern dynamic open economy like Ireland.

    Any measure giving the State the power to control the value of private assets would have major negative ramifications for thousands of property owners and would be a jump back to the dark days of the 19th century.

    http://www.progressivedemocrats.ie/press_room/115/

    About 70% of typical Irish farm family household income comes from a welfare programme known as CAP.

    The average price of a hectare (2.47x acre) of ag land in Ireland is €23,000 (Farmers Journal) , €18,000 in Germany and €6,000 in France.

    In the UK investment in property and in particular buy-to-let residential units has far outpaced other asset classes in the past 20 years.

    Investment in land is likely to grow and unlike France and Germany, a purchaser of ag land in Ireland doesn’t have to be a farmer.

    According to Eurostat the number of farm holdings in the EU 28 plunged 27% in 2003-2013 and Ireland was strangely the only country to have experienced a rise.

    http://www.finfacts.ie/Irish_finance_news/articleDetail.php?EU-farm-numbers-plunge-27-in-decade-Ireland-only-riser-390

    The French keep public records of land sales and leasing transactions.

    1. @Michael

      Very interesting. I wasn’t aware. So if I read you correctly there is no reliable official data on the value (market price) of agricultural land in Ireland? Or the CSO just stopped collecting it in 2005?

      I’m interested in this from the perspective of wealth-income ratios. In Piketty and Zucman’s analysis, agricultural land has declined to less than 30% of national income in most western European countries, and replaced by housing capital:

      Land: http://www.gabriel-zucman.eu/files/capitalisback/F50

      Housing: http://www.gabriel-zucman.eu/files/capitalisback/F47

      If I Ireland was included in this analysis, would we buck the norm, and see agricultural land increasing in value over-time, and therefore having a much more significant impact on increasing the overall wealth-income ratio?

      http://www.gabriel-zucman.eu/files/capitalisback/F18

      1. @ Aidan

        The last published agricultural land price data from the CSO was in respect of Q1 2005.

        The StatBank has data for 2003 and 2014 – the latter with an average price of €26,691 per hectare. It hasn’t been published in a release as I assume the CSO is in beta mode.

        1960-1974 was a golden period for landowners on the perimeter of Dublin when prices rose 530% in 9 years and there was no capital gains tax.

      2. There was a CSO survey done on household wealth for 2013: http://www.cso.ie/en/media/csoie/releasespublications/documents/socialconditions/2013/hfcs2013.pdf It shows that land accounts for about a fifth of household wealth. The data is not perfect as it excludes a lot of financial wealth.

        Be very careful not to confuse stocks (wealth) with flows (income) as you appear to have done in the above post.

        Irish agricultural land is a very peculiar asset as it changes hands on the market extremely rarely. The average farm holding in Ireland is in 3.5 non-contiguous parcels. In most parts of the country its main value comes from area-based EU payments or else grants for forestry.

        1. @ Examiner

          Stocks and flows indeed but at least in the countryside compared with your poor counterpart in an urban area, you have an asset with maybe potential for conacre or selling a site, if not the land itself.

      3. agricultural land prices are high in Ireland because very little of it comes up for sale. Because of the SFP, farmers who’ve retired are under no pressure to sell because they have an automatic income. Now, it might seem that the obvious solution is abolish the SFP, but it’s worth thinking about the consequences of that. A market-led land economy will very quickly result in depopulation of the countryside (ref France) and consolidation and expansion of farms. So fewer, larger farms. Okay, obvious advantages there – economies of scale, more efficiency and therefore more profits. But environmentally disastrous (destruction of hedgerows etc) (which is why there have been schemes like REPS). It’s possible there’s an alternative future in growing high quality food for local markets if we thought it was possible to break free from the globalised world of cheap food being transported around the world. But that requires a massive cultural shake-up.
        btw, that “welfare” called CAP referred to earlier. Remember, most payments are pretty small. Big payments go to a small number.

        1. Sarah, part of the reason little of it comes up for sale is that in Ireland agricultural property is a capital tax shelter.

          The dramatic boost from agricultural value to “site” value results from a choice to artificially restrict the supply of a good (land, to build on) via zoning etc, but failing to balancing things out by also artificially restricting the price of the good.

          If you ask some of the lecturers who read this blog to ask their first year students about this, without mentioning real estate, my guess is that any of them that couldn’t predict an artificial boost to prices should transfer to the Geography course or something.

        2. Sarah,
          There are more recipients of Single Farm (i.e. CAP) Payments over 80 years of age than there are aged under 35.
          That is the nub of the land problem and the cost of the high cost of housing. Land prices are kept artificially and permanently high.

          Almost 30 years after self employed PRSI was introduced to allow farmers and other self-employed to pay towards a State Pension. The can continue to get this pension AND a Single Farm Payment reducing the need to transfer/sell their farms.

          Seemingly, if one was to read the Irish Independent, the main issue affecting the rural parts of the country is bad broadband not lunatic policies such as above.

          It gets even better though, if you were getting a SFP on a certain date and planted the land for a forestry grant, you can continue to get both payments and if you’re old enough a State Pension,

          1. That’s precisely the point I was making. Old retired farmers are under no pressure to sell because they can survive quite well on pension + SFP. Don’t exclude too the huge sentimental attachment to the land. This is an entirely separate market from land that could be zoned for building. I’m talking about agricultural land specifically.
            But what’s the solution?
            But then I’ve been arguing for years about “vulnerable pensioners” fleecing the country.
            Don’t get me started on their free travel, + that for their “companions”. Costing Irish Rail a fortune.

        3. @ Sarah Carey

          France has had a significant rural depopulation trend from the 19th century.

          There can be merit in paying farmers for watching the grass grow but when the payments are seen as coming from a remote place like Brussels, no politician would dare ask about the pros and cons of almost €2bn in welfare annually including about 230 farmers who each receive more than €100,000 each.

          France has a scheme which ensures the entry of young farmers to the industry and shock horror, you can become a farmer without your father or grandfather having being one. :mrgreen:

          Denmark produces four times the Irish output of potatoes and the typical Irish farmer buys vegetables from Tesco!

  21. Have we not moved on from attributing all ills to the Big Bad Banks?

    1. How can the Banks and NAMA flood the market with residential dwellings?

    At Q1 2016 the Banks had 1,784 residential properties in their possession.
    https://www.centralbank.ie/polstats/stats/mortgagearrears/Documents/2016q1_ie_mortgage_arrears_statistics.pdf

    NAMA only has exposure to 11 unfinished Estates in the Dublin Commuter belt (8 in Dublin, 3 in Wicklow, 0 in Meath, 0 in Kildare). This is down from 81 in 2013 and 51 in 2014.
    https://www.nama.ie/fileadmin/user_upload/2015_Annual_Report_presentation_-_FINAL_08.06.16_for_website.pdf

    Due to political and societal immaturity, it is nearly impossible for lenders to repossess residential properties from defaulted borrowers. Coffeey, Burgers & Deeter have done sufficient work on this at this stage.

    The market outside Dublin, for the most part, is already well stocked with below cost properties which are struggling to sell.

    2. What would a fire sale achieve? When a Bank forecloses on a property it appoints a receiver – that receiver’s obligation is to get the best price possible for the Lender thereby minimizing the shortfall owed by the property owner (the Borrower).

    3. As was pointed out above, equating the collateral value with the book value of a loan shows a misunderstanding of how loan assets are valued. Regardless of the fact it is an extremely arduous task for Lenders to realize the collateral in the event of a default.

    4. Why can’t developers Borrow? They can’t provide enough equity, the cost of mezz debt is prohibitive (in their eyes), Banks will no longer fund 100% of developments (which should always be the case).

    Comments:
    The main problem with housing supply is the amount it costs to build and sell a unit.
    – Land costs are too high,
    – Development levies & contributions are too high (why is it only new stock that has to pay for Luas, Metro North, Dart etc when existing stock also benefits from it?)
    – Compliance costs are too high and don’t really provide any more comfort (BCAR),
    – Standards are too high (not everyone can afford a passive house or dual aspect apartment – similarly not everyone can afford a rolls royce but they do just fine with a mondeo without a sunroof),
    – Part V costs place the cost of new social housing onto new units (why should existing stock not have to fund local social housing?),
    – Infrastructure is poor & costs are lumped onto the developer (and consequently the purchasers) rather than the council & utility companies (who will, on completion, gain lots & lots of new long term customers).
    – Density is too low – Dublin does not have a beautiful skyline. Build up. What’s more important, the thousands of people who’d love to live in the city center or the few who live on the Dublin mountains and have panoramic views of the city?
    – Developers, builders & architects are crap – great at building boring semi-d’s but have no idea how to design & build apartments with amenities.
    – Capacity – is there sufficient expertise left in the country to complete the large number of units & infrastructure needed?

    1. Unintentional hilarity in the new housing document. No one in officialdom can figure out why those in heavy arrears won’t engage with an extremely borrower-friendly system.

      “The Government is concerned that the majority of borrowers facing repossession are not engaging with their lender, the
      courts or available State supports – even though many of those who are before the courts could be helped by a Personal Insolvency Arrangement or other sustainable mortgage restructure. There is no clear information on the reasons why people are not coming forward to engage. Anecdotally from those working on the ground, among the main reasons identified are that people are fearful that engagement will lead to repossession; that people are unaware of the solutions available; and fear of engaging when the borrower cannot afford financial or legal advice. “

  22. I venture to suggest that Andy has put his finger on the nub of the matter.

    “Due to political and societal immaturity, it is nearly impossible for lenders to repossess residential properties from defaulted borrowers.”

    Residential properties are bought on credit and they are the collateral for the loan. If a car can be repossessed, so also can a residential property. This has nothing to do with the broader social issue of putting a roof over everyone’s head but with the functioning of credit markets.

    This confusion of thought stymies every other move to sort the the crisis out e.g. the proposal to allow tenants of local authority housing to buy their houses at greatly reduced (i.e. subsidised by other taxpayers) prices.

    It is decidedly not the fault of the banks.

    Membership of the euro will speed up the maturing process, especially in circumstances where many hardworking, taxpaying individuals, contributing to the economy rather than being a drain on it, are facing up to the prospect that they may never have the means of owning their own property.

    1. “It is decidedly not the fault of the banks.”

      Really? Maybe it was all the fault of the pixies! Yeah. That’s it. A 12-year long 350% private property boom and a 50 % parallel increase in median income. And we do not have a significant private residential mortgage debt problem? A mortgage credit problem? Our GDP at a mystical 26%? And the employer’s group sh*tting themselves over a meager increase in the min wage. Gee, ain’t we the lucky little Leprechauns then!

      Where in God’s Holy Name are the adults in this country?

    2. Data on mortgages in arrears courtesy of the Central Bank.

      https://www.centralbank.ie/polstats/stats/mortgagearrears/Pages/releases.aspx

      Banks are, of course, only as healthy as their assets i.e. their loans. This dictates the pace of new sustainable lending.

      In Ireland, post-crash, we collectively, as taxpayers, own most of them. Their general state of health is therefore of direct concern. We cannot, as is politically very popular, be supporting it and undermining it at the same time i.e. by seeking the contradictory aims of debt forgiveness and sustainable lending.

  23. The Central Bank provides useful data on mortgage arrears but why not ask the banks to provide a breakdown on BTL (buy-to-let) arrears to identify the number of properties in County Dublin where rents have risen and there is a shortage of accommodation i.e sellers’ market?

    28,000 units or 20% in arrears amounting to €6bn and 15,000 have been in arrears for over 2 years.

    In Q1 2016 there were 141 orders for repossessions of BTL.

    According to Central Bank research in 2014, 70% of BTL mortgages that had been in arrears for 90 days or over, were funded by tracker mortgages — meaning the interest servicing cost plunged from 2008,

    Most of BTL mortgages originating in 2005-2008, typically for a 10-year period from the Bank of Ireland, were trackers — in effect, the interest cost is much lower than what was expected at the outset.

    The ECB’s benchmark rate peaked at 4.25% in mid 2008.

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