| The Irish Property market needs strong supply side measures |
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| First time buyers are becoming a rare breed as house prices go through the roof and continued economic progress means that we must look at the house market differently not wait for it to slowdown. |
"The most difficult thing to explain about the Irish Housing Market is the notion of affordability. This is especially true for first time buyers. The relative price of housing has changed permanently. If people can't get into the market then the market is too high" said Dr. Peter Bacon, economist with Bacon & Associates. "The issue of affordability is specific to certain professions and therefore the emphasis must be focused on the approval process." Bacon was speaking at the ACCA Spring Lunch where he emphasised that the solution, to the current Irish housing crises, is not simply a matter of pulling down the general level of house prices. This would, in effect, bring a whole new set of problems he said, as would the notion of increasing wages to enable first time buyers to get into the market.
Bacon's second report on House Price Developments, released in May 1999, calls for supply side measures to overcome current house market strains. Using the ladder analogy, Bacon suggested that the house market is like a climbing ladder, where there is a difference between the top and bottom rungs. The answer is not to bring the ladder down but to provide new rungs. This can be done in several ways said Bacon. "On the material side, there should be a change in the type of house available and houses should be built differently from the traditional style. This is especially true for the big cities, like Dublin, where living standards have converged to European standards. The density must increase. It is not solely a case of building more houses but in building houses that are spatially different," he said.
Financial innovation should also play a key role in solving the house crises even though it is more difficult to find suitable financial solutions. There are two options according to Bacon. One option is a shared equity scheme, which at the moment is practically non-existent in Ireland. This scheme allows the lending company and the buyer to jointly own the house in an agreed proportion, e.g. 30-70, each making the repayments on the portion they own and each gaining in proportion if the house is sold. Bacon advocates that there is scope in Ireland for a much larger initiative of this nature. The second option suggested is to examine the deciding factors in mortgage finance for new buyers. This he believes is very viable now considering the continuing budgetary impact of decreasing tax rates and the impact on the economy of our entrance to the euro.
Bacon emphasised that densities, design and additional supply must be addressed first and then we can look at financial innovation. Bacon stressed that supply side measures must be dealt with as demand was set to continue in strength into the foreseeable future. The question was raised about concern over a similar situation developing in Ireland as in the London house market crash of the late 80's. Bacon dismissed a repeat of the London property crash based on several significant facts. He highlighted that the favourable demographics of Ireland, with a swelling in the 15-24 age category, would ensure continued strong demand, the forecasts of continued economic growth in Ireland and the fact that London's property bubble burst because it was led by the financial side. In relation to the issues raised by the OECD Report especially mortgage tax relief (being increased), Bacon stated that fiscal measures would only have a temporary impact and that there was need to enhance supply measures and not deflate demand.
Bacon's final message was one of practicalities. He stated that the speed of implication of the necessary changes was most important given that the planning cycle is sluggish. |
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| Article appeared in the May 1999 issue.
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