Prices not inflating a property bubble – hot air, chatter and speculation are….

Some 20 years ago a college friend gave me a lift to a party in south Dublin – via the most circuitous route I’ve ever taken to a social event.

Whenever we approached a side road, she turned down it. We must have trundled the length of a dozen of them: me with pen and paper in hand, my friend with her neck swivelling every few seconds.

She was on the hunt for that pot of gold at the end of the rainbow: a ‘For Sale’ sign outside a suburban semi-detached. Pregnant with her second child, she and her husband were keen to leave their starter home – but a supply scarcity was anchoring them to a house too small for their needs.

And so to the present day, where property supply in south Dublin remains inadequate to meet demand. Some things never change. That’s why blood-chilling predictions about being back in property bubble land are surfacing. But in south Dublin, too many buyers have always chased too few properties. It’s close to jobs, schools, hospitals and leisure amenities. Ireland has more scenic and soulful areas, but they lack that winning combination.

I visited relatives in rural Co Limerick in June, who asked: “What’s all this we hear about a recovery? There’s no recovery here.” Nor is there in rural areas. But recovery is undeniably in the air in Dublin. House prices are rising in the capital faster than anywhere else – in the year to July, they were 23pc higher than the previous year, according to recent Central Statistic Office figures. This compares with just under 5pc higher in the rest of Ireland.

Is a property bubble inflating? First, another sort of bubble is needed – a credit bubble. That’s why Bertie’s boom got boomier: banks were cajoling customers to avail of cheap money. Fortunately, there is no current danger of another credit bubble as bank lending remains knuckle-draggingly low.

However, statistics are muddying the waters. Price rises are originating from such a low base that any increase appears to be stratospheric. If the value of a house halved to €200,000 and has now climbed to €240,000, it is still €160,000 down on boom-time prices. However, the jump is 20pc. Measured from a collapsed base, the increase appears to be breathtaking.

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Roughly speaking, in a normally-functioning property market, 5-6pc of the total housing stock is sold at any one time. Currently sales are running at just 0.5pc or so. That’s because a swathe of home-owners can’t or won’t sell. These include people on tracker mortgages – who wants to surrender that plum?; people whose earnings are cramped by higher taxes and lower wages; and people in negative equity (more than 200,000 properties occupied that stressful zone at peak collapse).

The pressure is led by demand for family homes in the gold-fields of south Dublin, where supply is tight. Why would owners with a choice in the matter sell now, with prices still down by more than 42pc nationally since peak? Meanwhile, young couples with mortgage approval can’t compete with cash buyers in the market waving their ready funds.

Last month, Dr Kieran McQuinn of the Economic and Social Research Institute (ESRI) said house prices were undervalued – reaching the conclusion by assessing various market fundamentals. He said the collapse had led to a necessary price correction. And nobody disputes they were at an unsustainable high, creating a swathe of paper millionaires. “Almost inevitably, prices have over-corrected,” he added.

Clearly, prices are set to continue rising. And while some correction is helpful, disproportionate correction is harmful.

“We’re at the start of the signs of a classic cycle. Whether it becomes a bubble depends on policy actions over the next few years,” Goodbody chief economist Dermot O’Leary told Morning Ireland on RTE Radio 1 yesterday. “The issue we have here is totally different to the boom years. That was too much demand, this is too little supply.”

The answer, then, is to create more supply. The number of green field sites in Dublin is limited, which drives up prices. Let’s incentivise developers to release them. As for ongoing tax breaks for property investors – I’m obliged to go Stateside to register my reaction. Puh-leese. As it stands, if an investor buys before the end of the year and holds the property for seven years, he or she is excused from capital gains tax. The break was introduced to kick-start the market for investors at the peak of the crisis. But enough already.

Keeping the property market healthy requires sensible agreement about the appropriate price-tag for a house. To that end, economists can consult spreadsheets, input fundamentals and print out some answers – useful, of course. But in the midst of the discussion about property correction, some mindset correction would also be helpful: remembering a house is first and foremost a home, and not an investment.

Martina Devlin

Irish Independent
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