ANALYSIS: Some very specific lending, regulatory and planning changes need to be made to avoid another property crash in the years ahead
THE CRASH has shown the destructive nature of a property bubble and banking crisis. While there was an international background, very specific Irish beliefs and conditions were behind its severity, as Nyberg has shown. Given the damage caused to our competitiveness, economy and sovereignty, our banks, environment and to individuals’ finances, we must now erect strong defences against any continuing vulnerability to a similar future disaster.
This is not just a question of bashing bankers, burning bondholders, roasting regulators and punishing politicians. It goes far deeper. The relationships between the zoning and planning process and the profits to be made from development also influenced the intensity and duration of the bubble.
We must change fundamental beliefs and the way we organise much of our governance and decision-making. In addition we need independent structures for reviewing, auditing and reporting on the appropriateness of key policies and on the execution of those policies.
In particular there is a range of changes that affect housing and housing finance that should be introduced.
Low interest rates, lower taxes, higher incomes and easier availability of loans stimulate demand and lead to higher house prices until a supply response brings them back in line with long term value.
There are two key roles that the State must play. It should ensure that automatic regulatory stabilisers severely restrict the supply of finance to prevent unsustainable short-term spurts in demand and consequent price inflation until there is a supply response.
It must also have measures in place so that, as in the case of every other commodity, the market is convinced that a readily available supply can hit the market to take advantage of higher prices. Remember car prices did not increase just because there was plenty of easy money.
It may sound like heresy, but increasing house prices are fundamentally bad for the economy.
The house prices to incomes ratio should remain within a narrow range.
If there are signs that it is deviating from the long-term average – perhaps by 20 per cent to 25 per cent – certainly far before the deviation reaches 150 per cent, the Financial Regulator must introduce restrictions on property finance that apply to all lenders, both domestic and foreign. This assumes that incomes have remained internationally competitive. If not, action should be taken even sooner.
The Financial Regulator should also introduce criteria for the valuation of houses for mortgage purposes based on capitalisation of the net rental value of the property. In the absence of other collateral, all lending over 80 per cent to 90 per cent of this valuation should be treated as unsecured and would be subject to higher capital adequacy requirements.
Alternatively, all lenders based and regulated here would be required to take out additional security, by way of mortgage indemnity cover, from a highly rated insurer based outside Ireland, for the excess over 80 per cent of the valuation.
Such action should be backed up by reform of the housing market, particularly in the areas of zoning and planning. As the agricultural price of the land on which the average-sized dwelling stands is less than €1,000, virtually all the site price depends on the implied value of the building permission where the house is located.
While overall political direction is required, zoning and planning have such a large effect on house prices and the economy that an autonomous body, reporting to the Dáil, similar to the Central Bank, should be responsible for all strategic planning decisions.
Decisions should not be influenced by short-term electoral considerations or patronage. The body’s remit should be to restrict all housing developments that impose high servicing and other costs on the economy, as well as on families faced with moving into areas with minimal services and having to endure the cost and strains of lengthy commutes.
On the other hand, its mandate would require that at all times there would be a substantial supply of zoned and serviced land, in all key urban areas where it is most needed, and expensive infrastructure is already in place.
In order that no perceived shortage will arise in future, or that any interests can corner the supply and ensure that there will be competition between site owners, a supply adequate for at least 20 years should be maintained. As part of achieving this objective, aside from zoning new land, the rezoning of brown-field sites and significant areas of existing lower density housing would be prioritised.
The final reform that is required is a revision of our bankruptcy laws. No economy or banking system could function if everyone could walk away from their debts. Banks would always lose money and no sane person would trust banks with their deposits.
After the collapse of the bubble and increased unemployment, there are many in debt to levels that are impossible to escape from. This includes those who borrowed for purposes other than buying a home. The key reform required is a reduction in the period before a bankrupt may be discharged.
In general cases, in the absence of evidence of reckless or dishonest financial behaviour, the period might be reduced to three or in some cases two years.
With similar provisos, in cases in which the debt is almost exclusively due to a mortgage for a home taken out during the worst excesses of the bubble, a court might be permitted to discharge a bankrupt within one year, and in exceptional cases immediately, particularly if mis-selling or misrepresentation could be proved.
Taken together these measures would ensure that both house prices and rents would remain more stable and in line with incomes. Consequently housing would be more affordable for both purchasers and renters. Above all there would be a systemic improvement in the stability of the banks.
Such actions would make it clear that we are determined to manage our economy and finances in a sensible manner and are worthy of remaining core members of the world’s largest and most successful economic area.
Wednesday, April 27, 2011
Measures to avoid a further property disaster - The Irish Times - Tue, Apr 26, 2011