Bubble, bubble, toil and trouble?

We are a nation obsessed with the price of bricks and mortar. During the heady days of the Celtic Tiger, people would marvel that they were ‘earning’ more through the increase in the value of their home than in their wages. Having peaked in 2007, prices cratered and many of the same people, mortgaged to the hilt, were acutely aware of just how deep a ‘negative equity’ hole they were in.

The run-up in prices in the decade to 2007 was a textbook ‘bubble’, fuelled by a toxic mix of easy credit, frantic speculation and suspended belief. When the bubble burst, prices more than halved and the number of homes being bought and sold – along with the credit to finance them – dried up.

Flash forward to 2014, and there is much talk of another ‘mini-bubble’ in house prices, centred around Dublin, and South Dublin in particular. While it is true that the price of homes in Dublin enjoyed double-digit growth in 2013, there is little evidence that suggests this is in any way a bubble comparable to the pre-2007 period.

Firstly, credit is still scarce and the market dominated by cash buyers. Secondly, while the number of transactions is increasing, it is still far below where it should be if the market were back to normal. Thirdly, prices are now roughly in line with international measures of affordability relative to rents and incomes. Fourthly, prices – both in Dublin and nationally – are still only a little over half their peak 2007 level despite the increase in 2013. Even after their 15% rise in 2013, Dublin prices are still further off their peak than the rest of the country, having fallen further in the first place. This is not a bubble!

What we have is a supply shortage: despite all the helter-skelter building since the turn of the century, there is a relative scarcity of family-sized homes in Dublin and other urban centres of employment. There are a number of reasons for this, not least the debt hangover that still affects the construction and banking sectors. Building is slowly starting to recover, but remains far below where it needs to be to meeting the housing needs of our growing population.

So why is more not being done to build houses and help young families get a place of their own?

After the turmoil of the last 6 years, there is an alignment of interests to support rising prices, even if this means that a cohort of prospective buyers are getting priced out of the market, or can’t get a loan in the first place. Having seen much of their paper wealth evaporate, property-owning middle age ‘middle Ireland’ is quite happy to see prices recover vigorously. The younger age cohort who bought at or near the peak are looking forward to erasing their negative equity, and perhaps trading up if they need to do so. The banks are keen to see higher prices because it means they will lose less money on repossessed houses. For these reasons, the government is also happy as more of their potential voters are winners than losers as a result of rising prices while the banks are less likely to need fresh injections of capital.

In fact, there are two supply shortages: credit and homes in urban areas. While boosting credit for family firms and small businesses is vital to our economic recovery, and more freely available mortgages will ultimately be necessary for a return to normality in the housing market, it’s important that policymakers get the sequencing right. If more mortgage credit comes on stream before the housing shortage is addressed, there will simply be more money chasing the same number of houses, further driving up prices and putting family homes out of reach of ordinary families. Of course, some may be quite happy with that!

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