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House Prices and Employment – The Central Bank is NOT the Bad Guy!

Link Blog | March 23, 2016

House Prices are Back on the Agenda (Again!)

The Central Bank has recently had to defend its mortgage lending rules which stipulate that people buying a house require a deposit worth 20% of the property’s value and are restricted to taking out a loan equivalent to 3.5 times their income (or combined income in the case of a couple). This rule applies to the vast majority of mortgages, with some loosening of requirements for first time buyers.

The reason the Central Bank instituted these rules was to take the steam out of a Dublin property market which saw a near 25% rise in prices in 2014 and to that end they have been successful. Prices, which were slated to increase by 10% in Dublin at the start of the year, rose by only 3% in 2015, with falls in prices recorded more recently. However, the new rules have met with fierce opposition especially from people stuck in an ever more expensive rental market.

The argument goes that hard working people looking for the security of owning their own home are being penalised. The Bank’s rules are a big problem for people trying to raise funds for a deposit (the average house in Dublin requires a deposit of about €40k) but the problem of affordability in Ireland is not its creation. Consider, that if house prices had gone up by the same level in 2015 as they did in 2014 the average house price would not be €330k but closer to €400k, dwarfing the benefit of lower deposit ratios, further increasing people’s monthly mortgages and leading us into an all too familiar pattern of house price inflation and indebtedness.

The Central Bank has done its job, but they are not in the house building game. What is required to make houses more affordable (and rents for that matter) is an increase in supply. This does not however mean we should continue to build outwards into the commuter belt. We have options. Firstly, there are huge amounts of zoned land available for development in Dublin which lay unused. The owners of that land should be taxed now (not in 2019 as planned) to ensure it is put into productive use. Secondly we should encourage the renovation of spaces above shops and offices in city and town centres. This has a double benefit of reducing accommodation costs and helping local business by bringing customers quite literally to their doorstep. Finally we have to build up. Building higher, utilises space more efficiently, thereby reducing costs and allows for the more efficient provision of public services.

When the crash of 2008 came we were told that Ireland had become uncompetitive in terms of attracting international investment and jobs – in large part because of high wages. However wages are a function of the cost of living, and the expense of accommodation is an increasingly large part of the monthly outgoings of Irish people. There is little comment on how accommodation costs affect our ability to create jobs and the effect it may have on people already in employment (something we are seeing manifested in strike action across the country).

Put simply, we need new solutions to the problem of housing in Ireland. These problems have knock on effects on investment, job creation and quality of life and they have been allowed to remain for too long. Once affordability is addressed, we should then have the space to revisit the Central Bank’s rules.

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