Belfast Telegraph

View from Dublin: Housing market still stuck in boom and bust

Leo Varadkar
Leo Varadkar

By Conall Mac Coille, Davy Chief Economist

Ireland's housing market has long been a game of snakes and ladders.

Those who purchased homes during the Celtic Tiger era have been the losers in this perennial game of boom to bust, stuck in negative equity, or with mortgage payments they cannot afford.

Too often, simple, seductive measures have been promoted that offer the Government the illusion of action but without any real prospect of solving the problems in the housing market.

There has been no shortage of bad ideas: mortgage interest relief, Section 23 tax allowances and 100% loan-to-value mortgages.

At best, these initiatives can be described as a naive attempt to make housing more affordable, bridging the gap between incomes and the current level of prices.

However, history has taught us any initiative that gives buyers or builders more money will always be inflationary, with little lasting impact on housing supply.

So it was disappointing to see Taoiseach Leo Varadkar, speaking at the MacGill Summer School in Glenties, adding to the chorus of voices criticising the Central Bank's lending rules.

Sign In

According to reports, he said: "One aspect of mortgage rules that is very tough is the fact that you are expected to show you are saving at the same time that you are renting".

I can't imagine how any well-run banking system can give out mortgages to those with no history of saving.

One popular anecdote in recent years was that 15 to 20 workers from one of the well-known tech firms in Dublin's 'silicon docks' found themselves viewing a house for sale close to their office.

I can well imagine them angrily gesturing across the river at the Central Bank, muttering that were it not for the nasty lending rules, they could all buy the same house.

Too many people still fall victim to the contradiction in this argument.

The common critique of the lending rules is that the 3.5x loan-to-income threshold stops would-be buyers from affording a home.

I have sympathy with those who find themselves outbid by €10,000 or €20,000 for a property, but they need to remember if the rules were relaxed, their competitors in the queue would also be able to borrow more, merely pushing prices higher.

Thankfully, coming so soon after the last crash, there is broad acceptance the mortgage lending rules are a good thing and should be a permanent feature.

A more constructive debate is now emerging on reducing build costs, either through relaxing overly zealous building standards (particularly on apartments), or via smaller homes that buyers can afford.

However, the public is still susceptible to other easy answers to fix the housing crisis.

Earlier this month, the Residential Tenancies Board (RTB) drew attention to the fact rental inflation had slowed to 6.4% in 'rent pressure zones', as evidence the measures are working, despite this rate of increase being considerably faster than the 4% limit the zones were intended to impose.

The RTB's latest data shows rent price inflation in Dublin accelerated to 8.5% in March - double the 4% limit.

Clearly, landlords are circumventing rent controls by taking advantage of the exemption for renovated properties, or by simply ignoring the 4% limit.

The response from the RTB has been to tighten up on qualifying renovations and on powers of enforcement.

It's even possible the RTB might be successful in preventing some landlords circumventing the rules and upping rents, but it won't cure the underlying problem.

Earlier this month, the RTB revealed the number of houses rented out to tenants fell by almost 2%, or by just under 6,000, to 307,348, in 2018.

Faced with rent controls, small landlords have decided to exit the market, reducing the supply of accommodation.

The same trend is evident in mortgage lending data. The first half of 2019 was the weakest for buy-to-let mortgage lending in five years, with just 303 new loans through April to June.

The RTB also cited a survey indicating half of all tenants suggested they felt "fairly secure" in their tenancy, with 28% "very secure". They really shouldn't. Like it or not, if landlords are prevented from upping rents towards the market price, they will be more likely to sell up.

This was all very predictable. The experience in US cities has been that rent controls have led to a limited, dilapidated stock of rental accommodation.

The same thing is happening in Ireland. The stricter criteria on renovations will also reduce the incentive for small landlords to invest in properties.

The solution to the lack of rental accommodation must involve a more professional sector, with increased institutional investment compensating for small landlords exiting. However, with the opposition keen to place the Government under pressure ahead of the next election, so-called 'cuckoo funds' are an easy target.

Belfast Telegraph

Popular