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Nama and the housing crisis

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The Taoiseach is committing a cardinal management error by planning to repurpose Nama as its primary vehicle for social and affordable house building as structure should follow strategy and role definition rather than precede it. 

A new national agency which could absorb relevant Nama resources would start with a clear focus and without any legacy baggage.. It should act as principal and directly engage contractors to build houses on public-owned land in the larger urban centres and,optionally, play a coordinating role in relation to major schemes in other areas. 

This approach would result in lower costs and more affordable houses than could be achieved by a restructured Nama which simply and expensively co-ordinates profit-seeking developers.

As previously suggested ("Addressing the housing crisis" , Letters 16rh August), it could be part funded by some of the €5.3 billion surplus cash resting within the Ireland Strategic Investment Fund alongside external investment and debt structured to surmount likely EU concerns about breaching national debt limits.

Even with funding in place, it will take time to mobilise resources, undertake design work, issue and place tenders. As the Central Bank has indicated, a major building programme could strain resources and this would further delay progress. To address this and respond appropriately to the crisis, the agency should, for major projects, actively seek participation from well-resourced, major overseas construction firms with appropriate safeguards on labour conditions, quality etc.

Finally, a clear indication from the Government to "the market" that it intends, as is its right, to directly supply large numbers of affordable homes should  cause landowners, speculators and landlords engaged in hoarding or gouging to rethink their greedy plans. And to reinforce this message, it should also signal that it will invoke Clause 2 of Article 43 of the Constitution in relation to private property where the common good, social justice and national housing emergency demand this.

Lead letter in the Irish Times on 21st September 2017.

Funding Solution to Housing Crisis

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As pointed out by Harry McGee ("Government's silver bullets for housing crisis have been blanks", Analysis, August 15th), successive housing ministers have singularly failed to address the housing crisis.

By only tinkering at the edges, ministers may have ignored an enormous funding resource sitting in plan view.

This is the uncommitted €5.3 billion sitting in the Ireland Strategic Investment Fund's Discretionary Portfolio and invested since 2014 in low-yielding international assets.

In the same way that the then-minister for finance directed the ISIF's predecessor, the National Pension Reserve Fund, to invest €21 billion in the failing  banks, so also could the current Minister for Finance set up new institutions to prudently invest the ISIF's massive surplus funds in major initiatives for housing in addition to health and other urgent infrastructure.

For example, a €3 billion development fund to finance social and affordable housing on public- and NAMA-owned land could easily carry an equivalent amount of debt.

This would facilitate the construction of up to thirty thousand public-owned homes for rent or sale and would be infinitely more productive than the short-term, stuttering tactics adopted to date.

Given the scale and urgency of the housing crisis, accelerated provision of these homes should outweigh every institutional, political or ideological impediment.

Letter published in the Irish Times on 16th August 2017.

Straight-forward Solution to Housing Crisis

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With the recent discovery of 26 percent extra economic growth in 2015 and taking account of EU restrictions on national debt, it should be possible for the State to directly fund a massive building programme for social housing  instead of relying on an expensive combination of rent subsidies, public-private partnerships, leasing, off-balance-sheet mechanisms and other devices as per the Rebuilding Ireland report.

Lead letter published in the Irish Times on 21st July 2016.

Hypocrisy of Banks

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Reports that AIB is planning to sell a €200 million loan portfolio beg the question as to why taxpayer-owned and foreign-owned banks are selling huge blocks of loans at discounts as high as 70 per cent and crystallising losses amounting to billions while resisting any similar broad-based write-downs of seriously distressed home mortgages. 

These discounts are additional to the €40 billion taxpayer-funded losses realised when developer loans transferred to Nama at a huge discount. Surely, to be consistent and fair, the covered banks should be required to offer write-downs to all very distressed mortgage holders especially given that they have already been fully funded by taxpayers to do so?

Letter published in the Sunday Business Post on 31st March 2013.

Debt Forgiveness Descrimination

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The Minister for State for Finance Brian Hayes has said that writing off €6 billion of debt for tens of thousands mortgagees is unrealistic.  If so, how can his Government justify Nama writing off tens of billions of debt incurred by a thousand or so speculators?

Letter published in Irish Times on 23rd August 2011.

Household and Property Tax

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It is not too late to convert the household charge into a window tax. Using a three-bed semi with eight windows as the benchmark, the rate would be €12.50 per window. This would be more equitable than the proposed flat charge, easy to assess and check and very transparent.

Letter published in the Irish Times on 2nd August 2011.

Property Tax and House Prices

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If the mooted property tax is value-based, how can taxpayers value properties in a volatile market in the absence of reliable data? For example, my home was worth about €900,000 at the peak; is worth €650,000 by reference to local asking prices; is worth €360,000 based on a multiple (15x) of local rent levels; and valued at €175,000 based on a pre-boom multiple of five times current average earnings.

Leaving valuations aside, how collectible is a property tax given that over 4% of mortgages are more than 90 days in arrears, many more mortgages are interest-only, thousands more are receiving mortgage interest supplements and over 300,000 households are moving into negative equity having possibly paid substantial stamp duty on their purchases?

Letter published in the Irish Times on 28th June 2010.

Moral Hazard

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The Honohan Report said there was a ''moral hazard'' involved in the blanket bank guarantee, ''though this argument does not appear to have been made''.

The chairman of Nama and the Financial Regulator have recently suggested that it would not be possible to assist people with distressed mortgages, due to ''moral hazard''.

So where is the moral hazard for the politicians, administrators, bankers, developers and related professionals who created the financial crisis, but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bailouts, courtesy of taxpayers?

Letter published in the Sunday Business Post on 27th June 2010.

Moral Hazard is only for Little People

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The Irish Times reported (26th May) that the Financial Regulator has said that there were no "silver bullets" to assist people with distressed mortgages due to "moral hazard".

Where is this moral hazard for all the politicians, administrators, bankers, developers and related professionals who created the financial crisis but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bale-outs courtesy of taxpayers?

To my mind, the Financial Regulator has crossed a line by destinguishing between "moral hazard" for developers/bankers (not needed) and for "the little people" (needed to teach people lessons) and thereby seems to have aligned himself with the former happy campers in the Galway tent.

Paying for the Boom

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By my reckoning, house builders and landowners made exceptional profits of about €37 billion over the ten years to 2006 as a consequence of inflated house prices. This excludes windfall profits for commercial property and those made by financial institutions, who lent far more than strictly necessary, and other beneficiaries such as brokers, insurance companies, solicitors and auctioneers. Although the Exchequer gained from additional stamp duty and VAT, it also provided tax breaks which were largely unneeded and merely boosted profits.

Having made huge gains and plunged hundreds of thousands of home owners into negative equity, surely it is only fair to look for some payback from the boom's main beneficiaries. Given that the country is confronting a deficit of €20 billion, what would be morally wrong with introducing a special tax to claw back these excessive profits instead of raising taxes, cutting public services and social welfare, and increasing exchequer borrowing?

Letter published in the Sunday Business Post on 29th November 2009.

Who are Government & Nama Trying to Fool?

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Supplementary documentation published by the Department of Finance alongside the Nama Bill about property yields contains some extraordinary statements (starting on page 10):

  • It indicates that property yields (rents as percentage of prices) are higher in Dublin (7.25 percent) than in other major European cities and that Dublin's yield is well above its 20-year average of 5.6 percent.

  • It then states that as "yields move towards their long term average this would indicate an increase in property prices". To re-enforce this view, it expects the exceptionally large difference between property yields in Ireland and key euro interest rates to narrow as a result of rising interest rates or rising property prices!!!

Whilst acknowledging that property prices have fallen by almost 50% in the past few years, the document completely ignores the possibility that the exceptional yields may be anticipating a sharp decline in rents. It not so long ago that the Irish banks offered unprecedented double-figure dividend yields before they were obliged to suspend dividends and their shares collapsed.

Furthermore, the Government could be accused of conspiring with Nama by not implementing legislation to permit downward rent reviews for commercial leases, as has happened already in the residential sector. This has the effect of artificially underpinning high property yields and thereby supporting property prices for the benefit of Nama, the banks and their developer friends. 

Hopefully, the European Commission is taking note of the Government's and Nama's approach to property valuation and their use of taxpayers' hands to catch falling knives.

Role of Nama

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Why is the Government proposing to use Nama to prevent a decline in property prices at a time when Ireland has the second highest cost of living in the EU?

Surely, it should be encouraging lower prices as these would result in cheaper houses, lower shop prices and more competitive commercial and industrial rents. Instead, taxpayers are expected to underwrite a multi-billion punt on Nama to ensure that property prices don't fall and that the country remains uncompetitive.

Lead letter published in the Irish Times on 26th August 2009.

House Prices

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Five years ago you published a letter from me about house prices (28th October 2003) which stated that "rising interest rates could move many recent and future buyers with large mortgages into negative equity and expose their lenders to defaulting loans. It could also mean that many houses acquired as investments might be offered for sale to lock in gains or to cut losses. This would further depress prices. Can nothing be done to prevent this calamitous event from happening?".

Clearly, very little was done. If a mere letter writer could foresee this crisis, why didn't the Government?

The best thing the Government can do now to assist the beleaguered building industry is absolutely nothing! House prices should be allowed continue their rapid descent to a point where people and lenders become confident that they have finally reached a reasonable and sustainable level.

There should be no dig outs or artificial schemes as these will merely defer decisions by those who would wish to purchase a quarter of a million houses over the next five years. The return of affordable housing for all would be real shot in the arm for society and the economy.

To consolidate this, the Government must introduce much-discussed controls on the price of building land and, in conjunction with the Central Bank, implement measures which curtail inflationary lending for house purchases.

Letter published in the Irish Times on 10th September 2008.

Stamp Duty and Building Profits

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Instead of tinkering with stamp duty, the Government, as advocated by your correspondent Mr X (3rd December 2007 and July 2006), should immediately implement the Kenny report to limit profits on building land. It should also dig up the All Party Committee on the Constitution's progress report on private property which, no doubt, it will find buried under a tent in Galway.

The magnitude of profits made by the building industry are mind blowing. Over the ten years to end 2006, 608,000 new houses were completed and average annual prices increased by 199% from €102,000 to €306,000. On this basis, the cumulative value of new house sales over the decade was €131 billion.

During this same period, building costs increased by 61%. If land and other costs and profits had only risen in line with building costs over the decade then the average price of a house would have hit €164,000 in 2006 and the cumulative value of sales over the ten years would have been just €86 billion, a difference of €45 billion. After allowing for VAT of €8 billion, the residual difference of €37 billion is largely attributable to profits for land owners and builders.

On this basis, about one-third of future mortgage repayments by house buyers will be used to pay for these extraordinary profits. It should not be ignored that financial institutions have also profited as they have lent far more than strictly necessary. Likewise, the exchequer, through stamp duty, and a raft of service providers including brokers, insurance companies, solicitors and auctioneers have benefited from this windfall.

In addition to being burdened by excessive borrowings, many recent purchasers have had to purchase lower grade accommodation, live in less accessible locations, work harder and longer, and demand higher earning to pay their inflated mortgages. This has disrupted communities, reduced leisure time and living standards, and impacted on national competitiveness and long term growth prospects.

It is ironic that having sought a reduction in stamp duty on the grounds that it would stimulate the market, builders have ignored the fact that dropping overblown prices would have a much more significant impact on demand.

Lead letter published in the Irish Times on 7th December 2007.

Tax, Property & Tribunals

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A few themes have emerged in recent days.

Firstly, the failure of the Government to address findings of the Oireachas report on private property and land prices as eloquently explained by James Pike (27th June). In effect, the Government has presided over a housing land grab by speculators which has contributed hugely to the surge in house prices and has resulted in an additional debt burden on hundreds of thousands of voters for decades to come. It is not too late for the Government to take concrete action on this before the next election. However, if it only becomes an election promise, nobody will believe it.

Secondly, the axiom that the more people earn the more taxes they pay clearly does not apply to Ireland. Instead, millionaire earners can hide behind Government-inspired tax shelters and avoid tax while Sean Citizen pays the full whack. To add insult to injury, Sean has to compete in the housing market with investors whose purchases are being part-funded by his taxes. From a national viewpoint, this  taxpayer-subsidised property bonanza has enabled many investors to use their tax-relieved gains to leverage massive investments abroad which bring absolutely no benefit back to the nation. Why should someone earning €50,000 pay tax at 42% while an earner of €250,000 might only pay at 20% on income and capital gains? Surely, a top rate of tax should do what it says on the tin. If all personal tax allowances are eliminated, a new top rate of, say, 35% on income and capital might give the same return to the Exchequer as the present inequitable regime. If individuals wish to make investments, let them do it through companies where the tax rate is only 12.5% and let the distributions be taxed at the standard rate.

Thirdly, the tribunals trundle along on a wave of perjury and forgetfulness. In any other civilised country, the full weight of the law would be thrown at these issues and instead of "slaps on the wrist" we'd see guilty people making "perp walks" and enjoying State-funded hospitality. If the authorities lack resources and expertise, they could seek support from the prosecuting teams used in recent high-profile financial trials in the US. Where is the anti-corruption agency promised years ago by the Taoiseach and where is the long overdue legislation to protect whistle blowers? Probably being dusted off as election promises (again).

What is common to these themes is a complete failure of Government to govern fairly. Instead, it has pursued a policy of making the wealthy richer and ignored the fact that, as Fianna Fail backbenchers are belatedly discovering, the rich account for few votes.

Lead letter was published in the Irish Times on 30th June 2006.

Property Prices

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Do the estate agents selling their businesses and the banks selling their properties know something their customers don't?

US vs Irish House Prices

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Last week, the Federal Reserve Chairman Greenspan described the US housing boom as an economic imbalance that could end badly for its economy. He hoped this will be dealt with by "adjustments in prices, interest rates and exchange rates rather than more-wrenching changes in output, incomes and employment".

He could easily have been speaking about the Irish situation. Given that our State has no control over interest and exchange rates, does this mean that we must await downward shifts in prices, output, incomes and employment to restore balance?  The fact that prices have moderated doesn't lessen the problem.

As the Government patently failed to control prices (especially of land) on the way up, can we be any more confident that it will manage a downturn any better?

House Prices: The Real Financial Scandal

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It is a pity that outrage over AIB's overcharging and NIB's transgressions is not being directed also at the fact that house buyers were obliged to borrow €17 billion last year to acquire overpriced houses. Arguably, if house prices had been, say, 10% lower, these new borrowings might have been reduced by as much as €2 billion and interest payments would have been lower for new and recent borrowers throughout the life of their mortgages.

Having ceded control over interest rates to the European Central Bank, the Government tried, and failed, to contain house prices by tinkering at the edges - mainly by encouraging the building of even greater numbers of overpriced houses. It has ducked real issues such as land prices and hoarding, excessive lending, inflationary tax incentives, profiteering, overcharging and tax gouging. As a consequence, hundreds of thousands of house buyers will be making excessive loan repayments amounting to billions of euro for decades to come.

Given that house prices have escalated to such a degree, containment of price inflation is no longer adequate. It is small consolation to see a slow down in price increase when current prices should never have been reached in the first instance. Instead, what is needed is a substantial reduction in house prices to bring them back to levels that make them sustainable when interest rates rise and economic growth moderates.

To start this process, the Government should immediately establish a Task Force to implement key suggestions in the All Party Committee on the Constitution's progress report on private property. If the Government fails to unwind the house price problem in an orderly way, then its much-beloved "market forces" will do the job with consequences that will be many orders of magnitude greater than the current financial scandals.

Lead letter in the Sunday Tribune and published in Sunday Business Post on 8th August 2004.

House Prices & Interest Rates

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The likelihood that the Bank of England may increase interest rates for the first time in three years should be a salutary warning to the overheated Irish housing market. Where the "Old Lady of Threadneedle Street" goes, other Central Banks are sure to follow either sooner or later.

In the current low-interest climate, many first-time buyers are very stretched to meet mortgage repayments. In a higher rate environment, their capacity to meet larger repayments is unlikely to increase and, depending on other economic factors, may even fall. If interest rates should rise by 2% over the next three years, then repayments on a 90% thirty-year mortgage at 3.5% p.a. for a €300,000 house would increase by 23%. On this basis, house prices would need to decline by about 18% for the monthly repayments to stay at their current level.

Rising interest rates could move many recent and future buyers with large mortgages into negative equity and expose their lenders to defaulting loans. It could also mean that many houses acquired as investments might be offered for sale to lock in gains or to cut losses. This would further depress prices. Can nothing be done to prevent this calamitous event from happening?

Letter published in the Irish Times on 28th October 2003.

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