There may not be a bubble. But we are caught in a slow-motion housing squeeze. The market is emerging from a complete melt-down – an economic heart attack, which stopped new building in its tracks and froze activity. Now the re-emergence of new buyers – driven by a rising economy and the availability of loans – has created a problem.
There aren’t enough houses to buy – for first-times, trader-uppers or potential buy-to-let investors. Demand is slowly returning to some kind of normality, but supply just isn’t there. The whole process of revving up new house-building takes time.The inevitable result is rising prices.
The political problem is that there is no quick fix. Central Bank governor Philip Lane said this week that if prices kept rising, Central Bank restrictions on the amount people could buy as a multiple of their income would eventually kick in. Prices are rising at 11 per cent, and incomes at maybe 3-4 per cent for many, so he is correct. But while the Central Bank is just doing its job here, pricing yet more people out of the market does not seem like a good basis for housing policy.
Extraordinary surge
The latest data shows, on the face of it, an extraordinary surge in mortgage lending. The value of mortgage approvals in March alone more than doubled compared to the same month last year. The actual level of mortgage drawdowns was up 39 per cent in March on an annual basis. There are a lot of people turning up to house viewings with an approval letter in their pocket, and so far only a minority of these are finding properties and drawing down their loans.
Look under the bonnet here, however, and we see the context. Mortgage approvals are growing, but from a tiny base. The first quarter is normally a bit slower in terms of new lending, but the total of 7,000 new loan drawdowns in the first quarter of this year compares to about 20,000 in the first quarter of each of the years between 2005 and 2008. And this is after subtracting the remortgaging and top-up loans from the boomtime figures – and counting only drawdowns for first-time buyers, people trading up and investors.
Now of course 2005 to 2008 was bananas time for mortgages and we never want to go back there. But on any measures housing transactions in Ireland remain low – the lack of supply and rising prices has left people stuck, whether they be potential first-time buyers, or trader-uppers or downers.
The point is that even this restrained level of demand cannot be met by housing supply. Goodbody Stockbrokers economist Dermot O’Leary estimates on the basis of the latest figures that new entrants to the housing market – first-time buyers and potential buy-to-let investors – totalled more than 20,000 over the past 12 months. House completions are estimated at 18,500 but with a significant number of these being self-builds – and questions that official data may overstate new housing supply – there is a large gap between houses on the market and new buyers.
There is probably close to two new buyers for every one new house on average – and obviously a lot more for properties in popular locations. The housing squeeze, in other words, is getting squeezier.
Supply and demand
The political focus will be on what can be done. But rising prices are based on the most fundamental factor in economics – supply and demand. There are simply too many buyers chasing too few houses.
As the financial systems starts to return to normal and incomes rise, availability of mortgage finance is slowly returning.The banks are under pressure to approve new loans – and so they should when affordable – but they know that as things stand many will not be drawn down.
The Government is caught here whatever way it turns. Withdraw the help-to-buy scheme and it will cut another group out of the market. Leave it in place and it will boost demand, effectively providing a subsidy to builders.
The Central Bank, likewise, is caught in the middle. Whatever it does on the mortgage lending rules is unlikely to stem the gallop of new mortgage lending and the rise in housing demand.
Meanwhile a rising population and rising incomes will continue to underpin demand. Unemployment is back to 2007 levels, the population is growing and immigration is on the rise – both Irish people returning and non-nationals. The average age of the population is increasing, but remains under 40 and household size is on the up. All the demographic ingredients are there to underpin housing demand.
Brexit hit
The answer is the obvious one. More supply. Minister for Housing Simon Coveney is trying to push this and supply is rising. But demand is going to keep rising, too, and unless the economy takes a big Brexit hit it will keep going. And many of the old problems remain. Planning laws, particularly in urban areas, need to be overhauled. Finance for new builds remains an issue. VAT should surely be abolished on new homes. And we seem to lack a mechanism to deliver large tracts of new social housing.
If economic policy is about improving people’s well-being, then the lack of adequate houses at all levels is one of the biggest issues we face. The only route as it stands to slowing rising house prices in the short term is if more and more people are priced out of the market by Central Bank rules or soaring price tags. This does not seem like a good way to proceed. More supply is coming, but like many areas of national policy at the moment, the strange semi-interregnum as we wait for a new taoiseach means this is just not getting the kind of focus that it needs.