Are House Prices In Our Area Sustainable?

On listening to Joan Burton’s victory speech at the weekend I noticed her say the Labour party would govern more “by the heart than by the head”. In the same speech she named housing as a priority. The two, combined, really made my ears prick up.

RETKRTLGIIf our experience of housing policy is anything to go by we should now – post economic crisis – realise that housing decisions need more ‘using the head’, not less.

Before hearing the new Tanaiste’s remarks I had been reading the CSO’s latest report on residential property prices. House prices in Dublin rose by 22%.

22%. Stands out doesn’t it? For those looking to buy or sell property in Wicklow the figures show a 9% rise in prices. Less sensational than Dublin, but remarkable all the same. Especially so if you’re looking to buy.

The question I asked myself was are incomes rising by 9%? Unlikely, I thought. A quick check online confirmed the obvious: incomes have remained pretty much stagnant over the last year (Earnings Hours and Employment Costs index).

So how can people afford to buy when house prices leap ahead of their income? The short answer is that they can’t. Well they can but perhaps not where they first had in mind. For me it’s about travelling to work, for others the deciding factor could be schools or health facilities.
Perhaps the most remarkable trend arising from the Wicklow figures is the rise in prices in Newtown Mount Kennedy, Rathnew and Wicklow town. Prices in north Wicklow have consistently been high – reflecting access to Dublin. What’s significant about the latest figures is that commuters are bidding for properties further south where housing is traditionally more affordable. As a result prices in these areas are on the rise.

Prices rise and prices fall: That’s what happens in most markets. Normally ‘You win some, then you lose some’; yet with housing it’s more a case of ‘some win, some lose’. Why is this? Surely it’s a straightforward case of ‘supply and demand’?

If residential construction in Ireland was straightforward builders would enter the market and simply build more houses. Annual price rises of 9% would be a fantasy. So why not build? Lets get out there with brick and bravado. What are we waiting for?

Sadly it’s not that simple.

On the supply side building regulations, planning laws and development levies constrain construction. These phenomena are neither negative nor new. What is standing out like a sore thumb however is the lack of bank finance to builders.

Not that we want to see a return to the reckless developer lending of the boom years. News that Irish banks are requiring builders to put in 40% of the funds themselves suggests that lessons have been learned and that for now at least the banks are thinking with their ‘heads’.

However while conservative lending might be welcome in the sense that it steers the state (and you and I as taxpayers) clear of another bank bailout; it hampers construction activity and exacerbates the rise in house prices. The ESRI say 25,000 new housing units are needed nationwide annually to meet current demand levels; due to the supply side difficulties only 8,000 were built last year. That’s why houses prices in Wicklow are up 9%.

But if the builders’ hands are tied and the banks won’t lend who’s going to start the ball rolling? Well that’s where the government can – and should – play a part.

The question is how they go about it: Supply or Demand? Head or Heart?

In the boom years Fianna Fail and the PDs preferred pushing the demand buttons: mortgage interest relief for first time buyers, section 23 schemes for investors. These demand-side measures, and others like them, supported a flawed economic ‘success story’ for the public finances. For house hunters easy access to 100% mortgages and ridiculous ‘Loan To Income’ ratios made fantasies an apparent reality.

We believed we were winners. We voted for our love of property – the Government’s ‘heart’ was in housing.

This crucially is the point that Joan and Enda need to remember. Housing is – if Burton is to be believed – a top priority. As the two sit down this week to plan the remainder of their term in office they need to think long term with the head regardless of where their hearts may pull them come election time.

The early signs are not good. The Minister for Finance favours the idea of assisting first time buyers by guaranteeing a portion of their mortgages. That’s a mirror image of mortgage interest and stamp duty exemptions which lured buyers in last time things got out of hand.

It sounds great on first impressions and many first time buyers will welcome it – and thank Fine Gael at the polls perhaps. In the long run it will only push prices up.

Here’s how: As each buyer avails of this state guarantee (yes, you and I, on the hook once again) and secures a mortgage loan another house leaves the market. The figures indicate another first time buyer will quickly take that homeowners place; unfortunately construction can’t react to fill the gap. Fewer houses than buyers means only one thing – an upshot in prices.

wicklow voiceNoonan’s plan may well win votes, but it will not solve our housing crisis. Government ministers should be using their heads to protect our future interests; election ‘goodies’ will only spell disaster.

Action must be taken on the supply side. Either the state steps in to the breach itself and begins to build or the regulations and levies on building and planning need careful yet determined review.

Has Joan got what it takes to reverse the course of Irish political history and do the right thing? Whether it’s by Head or by Heart, I hope – like many Wicklow house hunters – that someone in the cabinet cockpit sees 9% price increases for what they are and pushes the buttons necessary to steer us clear of housing crisis and economic catastrophe.

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