Negative equity

I’ve been on vacation for the last week and I’ve got to hear a lot more radio than normal. The dominant theme has been the sudden decline of the Irish economy and the effect of that decline on the housing industry.  It’s clear that reality has come later to some people than to others. The Government announced that they would issue the Annual Budget in October rather than in December, due to declining revenues and changing economic circumstances. Funny thing is, when the opposition parties said much the same thing last year, during the election, they were accused of talking down the economy and , dammit, a lack of patriotism.

During the week on The Last Word, Matt Cooper interviewed a property developer who is offering an interest-free loan to buyers of his properties. Why not just drop the price of the properties instead, asked Cooper. Couldn’t be done, explained the developer, because selling a house below 300,000 euro would be selling below cost.  And what cost would that be ? Why, the cost of the land to build the house in the first place – which, for most developers, is the single most expensive component of a house. Alas for developers, they are going to find out what many homeowners already know – just because you paid a fortune for a house (or even just for the land under it) doesn’t mean it’s still worth that fortune.  

In a similar vein, Tom Parlon was on the Pat Kenny show yesterday morning canvassing for the government to help subside first-time buyers. Tom is president of the Construction Industry Federation [the builders lobby group] but before that, he was the minister in charge of the country’s building , as minister in charge of the Office of Public Works. Tom can see the problem very cleary – the banks have stopped handing out 100% mortgages so it is very difficult for first-time buyers to scrape together the deposit to buy a house. Tom gave the example of a first-time buyer attempting to buy a house costing €300,000. [The banks, since the credit crunch and the impending recession, have become unreasonable and are now only loaning money to people who can pay it back, and have shown some ability to save money too. It’s like 1996 all over again! ] If the bank will only loan 80% , that leaves the buyers with the task of stumping up 60 grand. Tom would like the government  to ‘help out’ [i.e. give out free money] the buyers with the deposit. Ah bless – in Tom’s haste to help out the underprivileged, he forgot another option – if the builder dropped the price of the house, the deposit required would magically drop too.

It’s funny how things change. Back when Tom was a minister, and a member of the free-market loving Progressive Democrats, he was dead against state intervention in the housing market. Almost exactly 5 years ago, I mentioned Tom’s reaction when the Labour Party suggested that the price of land zoned for development should be fixed [i.e. capped] by the state¹. 

The provision of quality affordable housing to all citizens is the ultimate goal that the State wants to achieve, and I fully support that. But I believe that weakening private property rights as a means to achieve this goal would be a great mistake.
Such an approach is gift-wrapped in an ideology somewhere left of Stalin, which has no place in a modern dynamic open economy like Ireland.

It looks like the novelty of the open market has worn off a bit for Tom. It’s odd that he should mention Stalin at all. Before he was a minister, Tom used be leader of the Irish Farmer’s Association, an organization dedicated to ensuring that Irish farmers extract as much money as possible from the Common Agricultural Policy [CAP]. The CAP is synonomous with quotas, subsidies and extreme state intervention – in other words, an agricultural policy even old Joe could have been proud of.

¹ Tom’s quote was contained in a post I made in 2005 about the sugar industry, another shining example of subsidised agriculture. Back in 2003, Tom got a head start on everyone when the then government announced a plan to decentralise government departments. Alas for tom, most of the civil servants never moved anywhere, but he [and most of his party] was decentralised himself out of Leinster House in the 2007 general election.