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View from Dublin: the pros and cons of house-building

By Richard Curran

The housing market is getting more confused than ever. Luminaries such as the Irish Fiscal Advisory Council (FAC), the OECD and outgoing finance minister Michael Noonan, all waded in on the debate this week about whether there is a bubble.

The FAC seems to think that when it comes to housing we are damned if we do and damned if we don't. If we don't build a lot more houses, then house prices will continue to rise. This could lead to a bubble.

However, it also warned that building a lot more houses could spark a construction boom which could overheat the economy, prompt misspending of the Exchequer receipts from that boom and land us in trouble by repeating the mistakes of the past.

It seems the only purely rational economic response is to do nothing, presuming politicians, bankers, regulators, developers and punters will all simply repeat the same mistakes of the past.

This seems overly pessimistic. The OECD had a similar view this month, warning about the hazards of overheating the economy and a house price bubble.

Take a look at the evidence. The number of new mortgages drawn down in the first three months of this year was 6,939.

This was up 27% on the same quarter a year earlier. However, Q1 2016 was particularly low and the figure is up just 14% in the last two years. The value of mortgages drawn down in the first three months of 2017 was €1.39bn.

Ten years ago, at the height of the boom, there were 38,236 new mortgages in the first three months of 2007, with a total value of €7.8bn. That puts a bit of context on it, but it may not be the best comparison. After all, you can't decide if you are going a little bit crazy by comparing yourself with the most insane person ever.

Last year, the average first-time buyer mortgage amounted to €173,000. This year it is €193,000.

So, the value of mortgages and the numbers being taken out are growing sharply.

But it is from such a relatively low base, and the only way to deal with it is to build more houses.

All you had to do was show up in front of a mortgage broker to land a mortgage 10 years ago.

Even with the recent relaxation of Central Bank rules, it isn't that easy to get into mortgage trouble.

There are strict controls in place on the multiple of salary being lent and with the absence of 100% mortgages, even if house prices level off or slid back, negative equity from new lending can still be avoided.

It may be spooking the FAC to hear Simon Coveney's target is to build 25,000 houses a year by the end of next year.

They are looking at the implications of such house-building activity on wages, jobs, influx of foreign workers and how the government of the day might recklessly rely on the proceeds to fund current expenditure.

The bigger question is whether these 25,000 houses per year will actually be built or not. I doubt it.

Share buyback price must be right

Share buybacks are a handy way of giving money back to shareholders by supporting the value of their shares. Companies buy back their own stock in the market which supports the price and thereby helps investors in the short-term.

But it isn't always the best use of company money, especially if the company keeps buying into a falling market. This is all well and good where management is confident that profits will rise and the share price is ultimately undervalued.

Take Ryanair as a company that has used share buybacks very effectively. It spent €150m after the post-Brexit referendum slump. It announced a €550m share buyback in November, having completed a €886m programme in June. Profits are growing. The share price is rising and the company is on the up.

Contrast this approach with drinks group C&C. Its annual report said the company spent €23.2m on share buybacks in the year to February and roughly a further €18m on March 31 based on the average share price paid of €3.64. Bear in mind it reported a net loss last year.

A challenge for C&C is what to do with cash if it cannot find suitable acquisitions. It returned €66m to shareholders last year. But surely the price of the share purchases matters.

A year ago it was buying its own shares at €3.93 and €4.05. This month is it buying them at €3.39 and €3.40. The stock is trading at around €3.31 this week.

Its main markets of Ireland and the UK are stable, according to management, but the US has been hit by increased competition in flavoured beers and other drinks. C&C chief executive Stephen Glancy has predicted that the US competition is a "fad" and it will pass.

The obvious question for any company involved in regular share buybacks, is where might the share price be if the company wasn't buying its shares on a regular basis?

Wall Street went mad on share buybacks in 2015 and 2016 but has eased somewhat this year. In 2015 and 2016, US firms spent $1.2trn buying their own shares.

Warren Buffett isn't overly keen on the idea. He suggests that the difference between whether share buybacks are value-enhancing or value-destroying depends on the price paid for the shares. He believes companies are not concerned enough about how much they are spending on their own stock.

Sage advice from the sage!

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