Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Worrying about soft or hard landing misses the point

Earlier this week, the ratings agency S&P issued a report on Ireland. That report included a diagnosis of the housing market that was interpreted as predicting a “soft landing”. Sure enough, many scoffed – remembering similar predictions from the mid-2000s. You could be forgiven for thinking of Michael Gove’s infamous line, just before Brexit, that “people in this country have had enough of experts”.

Whatever our opinions on ratings agencies and how they performed in the run-up to the Great Recession, the S&P report should not be dismissed as external analysts making the same mistakes all over again. Rather, our reaction to the report might tell us more about ourselves than the rating agencies. In particular, we need to ensure we are not fighting the last war. To explain, what happened the Irish housing market 1995-2012 was a classic credit-fuelled bubble and crash. It is understandable – indeed important – that we should be very careful not to make the same mistake again.

But those steps have largely already been taken. The Central Bank mortgage rules effectively bring the Irish mortgage market back to the system it had, quite successfully, under the Building Societies from the mid-19th century all the way through to the 1990s. Lenders and borrowers must link mortgages, and thus housing prices, to the real economy, as measured by savings and incomes. What is happening now is a scarcity of housing driving up the price of housing. There is strong demand but not enough supply. The big difference between the 2010s increase in prices and the 2000s one is that, then, sale prices roses but rents did not (or at least not nearly to the same extent). That is a classic sign of a bubble.

Now however, rent and sale prices are rising almost one-for-one in line with each other. This is why it is important to distinguish between bubble-crash cycles and more regular boom-bust cycles. Don’t believe anyone who tells you that they can end boom-bust cycles. As long as humans are humans, their confidence in the future will ebb and flow and those changes will drive rises and falls in economic activity.

We can be more confident, though, about bubble-crash cycles. I need to be careful here, too, as I wouldn’t feel comfortable in stating that we can stop them entirely. But we can make sure that the mistakes that happened 1995-2012 – in particular allowing people to borrow too much relative to their income and to the value of the property – don’t happen again. This is why there should be no link between S&P talking about supply and demand in the Irish housing market now and headlines from 12 or 14 years ago. If you’re fighting a different war, it makes no sense to be thinking about how you might have done better in the last one.

Up to the mid-1980s, there was effectively no “Dublin premium”. Granted, properties in the capital may have been a bedroom fewer and a smaller garden. But the price paid in Dublin was effectively the same as elsewhere. Since the 1990s, though, a growing Dublin premium has emerged. If current trends continue, it is likely that Dublin property prices will be twice as expensive as those elsewhere in the country by 2020. This is a hugely important trend that has, by and large, been missed by the vast majority of commentators and policymakers in recent years.

Suppose you could draw a straight line from 1995 to 2012 and ignore the credit bubble and crash. What would stick out then in a graph of housing prices? It would be that, over the last few decades, prices have risen above inflation – especially in the capital. This is a new phenomenon but not one unique to Ireland. Our high-income peers have also seen prices increase steadily in recent decades after typically a century of ups and downs but no overall trend. Detailed research into this reveals is that zoning restrictions have limited the ability of housing supply to meet demand.

In Ireland’s case, things were fine in the housing market… as long as we didn’t have significant population growth. If there’s little or no new demand, it’s easy for supply to meet that target. The last generation has shown – credit bubble and extraordinary tax breaks aside – that housing supply is fundamentally incapable of meeting demand in Ireland. Where supply has come on stream, it has typically been new housing estates on greenfield sites at the edges of cities or further down the national road network.

This is completely unsustainable. We already have far more family homes than families in this country. But we do not have nearly enough homes for our households of one or two persons. These smaller households are now the majority in this country. But apartments form only one in seven of our housing stock.

The recent bubble should not distract us from the huge challenges that lie ahead.

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