Dublin Opinion

In the past ten years the construction of houses and other dwellings has far outstripped demand, yet prices have grown at unprecedented rates.
From 1996 to 2006 the number of occupied households in Ireland (dwellings with one or more residents), increased by 346,300 units. At the same time, 611,961 new dwellings were constructed. This leaves a surplus of 265,661 units.

Every year since 1997, more houses were built than were subsequently occupied. Now, under even that most basic rule, supply and demand, the cost of housing should have dropped - in other words, the 1996 figures of €75,000 as the national average for the price of a house, and €85,000 as the average for a house in Dublin, should be the high water mark for sellers. With far more house built than occupied, it’s a buyer’s market.

Not so.

In 2002, six years after our water mark, the price of houses had tripled, but the demand had not.

Four years later, prices had again increased, as had the surplus in housing. In fact, the amount of surplus dwellings more than doubled, with absolutely no downward effect on the cost of a home.

It is a truism in Irish society that the demand for housing in Ireland has been the driving force behind the price increases - yet, where is the evidence? The ten-year increase in occupied dwellings of almost 346,300 is the largest single increase in the history of our State. Yet, the construction of 611,961 new dwellings is also the largest increase in any ten-year period.

There is a problem in assuming that demand has caused the rise in prices. It has to do with the fact that people do not buy houses. People buy mortgages. Then they buy houses. The increase in the size of mortgages is the real story here. It is that which has affected to a large degree the price of houses - people have been able to buy more credit in the past ten years (and just because they can buy it, doesn’t mean they can afford it). Another significant factor has been rampant land speculation (on which, see here).

So. Why have mortgages increased in the past ten years? According to Niall O’Grady, marketing director for the Permanent TSB, the rise in house prices can be explained thus:

Without doubt the dramatic price growth which has taken place over the past decade has had solid foundations; low interest rates, strongly supportive demographic trends and an outstanding employment fuelling economic performance. In isolation any of these elements would have supported a strong housing market. Together they created the circumstances which have led to the exceptional growth in prices we have become familiar with.”

Absolutely no mention of the dichotomy between a huge surplus in housing and equally huge increases in prices. But of course, Mr. O’Grady isn’t talking about what caused the increase in house prices, but what caused the increase in credit allowances for the Irish working population - with subsequent knock-on effects for the housing market.

Still, banks and other financial institutions will give mortgages up to what people will put up with - and in Ireland what we have seen in the past twelve months is the tapering off of what people can absolutely stretch themselves to buy. It is this that has caused the slow-down in the housing market.

Not stamp-duty uncertainty. And certainly not a surplus of housing (we’ve had that for ten years).

The slow-down in house purchases is really a slow-down in the mortgages market. What we have witnessed since 1997 is a boom in that market, and now that boom in mortgages is finally coming to an end.

The houses did not cause the rise in prices: that was why the huge surplus in housing never affected the price. It was in part the mortgages market, and those associated with the mortgages market, that created the price bubble, whipping up a bidding frenzy and a “get in quick” pyramid mentality. I do not know whether that bubble will burst this year, or next year, or the year after, but burst it will. And when it does, the housing on which the vastly overpriced mortgages were secured, will follow.

Even two years ago, bank lending policy was seen as a major factor in house price increases. The introduction of 100% mortgages had stimulated demand. In August 2005, RTE reported that

Douglas Newman Good’s Keith Lowe said the introduction of 100% mortgages had led to a ’substantial’ increase in the numbers of first-time buyers actively searching for homes in the second-hand market during the last few weeks, which is usually a quieter time for the market.”

The next month, September 2005, the IIB had the audacity to say that SSIAs and immigrants were fueling the mortgage price boom, and not their mortgage lending policies. Again, from RTE:

A study by IIB Bank’s mortgage division has said that migration is boosting demand for housing in Ireland by far more than is usually thought to be the case.

Economist Austin Hughes said booming immigration might require as many as 25,000 extra homes a year. Citing travel statistics, he said there may be far more ‘guest workers’ that migration statistics indicate.

Hughes also said SSIAs could boost demand for housing by around 16,000 in the next couple of years, as many people appeared to view SSIAs as property savings accounts.

He added that interest rates could remain at current levels until at least September next year. The study was prepared by IIB Homeloans for its mortgage brokers.”

The idea of anyone suggesting that interests rates would remain static for a year seems laughable now, but just remember, these be the think-tanks with the fancy names that are speading the guff that it is the public, and not them, who are stimulating demand at these ridiculous, and dangerous, prices.

Note also the tactic of using ridiculous reports such as “travel statistics” to suggest that we need more houses. Someone is trying to sell us a whale’s vagina.

The introduction of 100% mortgages kept the mortgage boom going for almost eighteen months after they were first introduced. Now, both are coming to an end. along with the future hopes of an awful lot of mortgage recipients.