When it comes to sorting out the housing crisis, the Government really has two choices. They can try to bring down the price of houses to a level people can afford or they can help people buy houses at their current unaffordable prices.
Affordability is hard to define but for Irish purposes it equates to the limit put by the Central Bank on how much a bank can lend you, which is 3½ times your gross income. For two people on the average wage, this is about €245,000. This is not a million miles away from the average house price in most places other than south Dublin, but if you are a single-income or low-income family, you are not buying a house any time soon.
The Government would argue they have done a bit of both with the action plan for housing and homelessness published this week, but the true picture will not be clearer until the details of the measures to help first-time buyers and house builders are unveiled at budget time. Of the two options, bringing down house prices is by far the hardest one. Assuming you could actually come up with a way of doing it that did not borrow from the Khmer Rouge handbook, it would still be deeply, deeply unpopular.
The losers would include pretty much everybody who has a house. People would see their positive equity eroded or their negative equity increased. The precarious buy-to-let sector would be decimated. Builders and developers would be ruined and the banks would be bust once again.
Strange though it may seem, a policy that underpins high house prices is the rational political choice in a representative democracy. Consequently, you should not expect the measures announced this week to bring down the price of houses to any significant degree. If you are in any doubt, you should know that one of the bigger developers, Cairn Homes, has welcomed the plan. Turkeys don't vote for certain Christian winter festivals.
Downward pressure
It’s not that the Government couldn’t bring down the price of houses. The main levers at their disposal are social housing and rent controls. These are viable long- term solutions to home ownership and if they are provided in sufficient quantities at the right price, they exert downward pressure on prices.
But the targets for social housing set out in the plan will not put a tooth in the problem. The plan calls for the construction of 125,000 houses by 2021, of which only one in five or fewer will be social housing built by the Government.
The rest will presumably be provided by the private sector, and we can take it as read that they don’t plan selling these houses for any less than they are selling them at the moment . They argue they are not even making money at current prices.
If prices are not coming down and wages are not going up and the Central Bank won’t let banks lend people more than they can afford, you get the sort of stalemate that prevails in the Irish market. The Government, to its credit, is trying to solve the problem by providing a limited amount of cheap housing but the bulk of its effort seems to be going into subsidising the building industry either directly or indirectly.
The measures to be announced in the budget in October are expected to include a €10,000 package for first-time buyers and other measures to increase the profitability of house-building. At best, this will allow more people to buy houses at current prices and also allow more builders to build profitably at current prices. At worst, it will trigger a jump in prices.
No costing has been put on this part of the plan but if, for argument’s sake, you assumed that half of the buyers of the 100,000 houses that will be built by the private sector got the money, it would be €500 million over five years.
It represents a massive subsidy for an industry that is fundamentally uncompetitive because it has overpaid for land and is now sitting on sites, refusing to develop and playing chicken with the Government. Those who worship market forces would argue these builders should all be made go bust and the price of land should drop, allowing profitable house-building by new entrants. In a socialist version of this fantasy, the State would then spend €500 million building 200,000 council houses.
It doesn’t really matter because neither of these things are going to happen. It may not be the Government’s intention but the housing plan looks like a massive State bailout for an industry that is being protected from the consequences of its mistakes. Sound familiar?