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Opposition to mortgage caps is worryingly shortsighted – have we learned nothing?

Mick Byrne, founding member of Housing Action Now, wrote this article for The Journal on the 25th of January 2015.

 Irish house prices are increasing at a rate 30 times the eurozone average. If you think this seems like a bubble, it’s because it certainly looks like one.

THE MOST SURPRISING, and worrying, thing about the Central Bank’s proposed caps on mortgage lending has been the public response. No media debate on the financial crisis or the current banking enquiry is complete without reference to the fact that ‘hindsight is 20/20 vision’.  We’ve been subject to several years of analysis arguing that the Irish property bubble was the consequence of weak regulation, sectoral interests and ‘group think’.

And yet, the benefit of hindsight has done little to prevent a tidal wave of opposition to the Central Bank’s proposals. Surely, after all we’ve been through, the wisdom of preventing excessive levels of personal debt, mortgage credit and real estate investment is self-evident. It seems many would prefer the regulators to remain ‘asleep at the wheel’.

Why do we think it’s different this time? 

Widely regarded economists Carmen Reinhart and Kenneth Rogoff titled their work on eight centuries of financial bubbles This Time is Different. They did so because each bubble is accompanied by a consensus that, for one reason or another, the bubble in question is, well, not a bubble.

For those opposing the mortgage caps, what makes ‘this time different’? The answer is that property prices, while increasing, are coming off a ‘weak base’. Virtually every media discussion of the dizzying rise of Irish property prices is contextualised with reference to this ‘weak base’. The argument here is that massive hikes in house prices shouldn’t set alarm bells ringing because prices dropped so much during the crisis.

These arguments have been put forward by a bewildering array of public commentators and media sources. The print media has been awash with opinion pieces and news reports on the folly of Patrick Honohan’s proposals. Needless to say, the real estate sector are also unilaterally opposed to the measure. More worryingly still, the civil society group Uplift, otherwise a very laudable campaign group, has made opposing the mortgage caps it principle cause, and even SIPTU has joined the chorus. The arguments range from it’s the ‘wrong policy at the wrong time’ to it’s the ‘right policy at the wrong time’.

SIPTU’s Jack O’Connor put forward the latter argument in his appearance on a recent RTE Prime Time show dedicated to the issue. He went on to note that what we learned from the crisis was the danger of pursuing pro-cyclical policies. What this means is that when credit and house prices are rising rapidly, policies shouldn’t add fuel to the flames by further incentivising borrowing. O’Connor was implying that we are currently in a down cycle of property investment and that, as such, the proposed mortgage caps would be ‘pro-cyclical’, this time further dampening the sector.

Dublin is the second hottest property market in Europe

The reality of real estate investment in Ireland has simply not been addressed in the debate. A number of recent reports can help us here and should provide an important antidote to the complacency around current property prices. CBRE’s Outlook 2015 report notes that Irish real estate was one of the best performing assets in the world.

Meanwhile, PWC’s Emerging Trends in Real Estate looks at real estate investment across Europe and shows that Dublin is the second hottest property market in Europe and that equity and debt markets are ‘awash with capital’. The problem, from an investor’s perspective, is that there is a huge amount of money in the financial systems and investors are scrambling to find real estate investments to put it into. Additionally, and this is important, real estate investment is ramping up despite weak market fundamentals. This situation has led some in the investment community, according to PWC’s report, to feel that debt has bounced back ‘too far, too fast’.

Finally, Eurostat’s House Price index shows that Irish house prices are increasing at a rate 30 times the Eurozone average. If you think this looks like a bubble, it’s because it certainly seems like one. Any notion that the Central Bank’s proposals are ‘pro-cyclical’ should be met with a healthy dose of scepticism.

This is about wider housing policy – not sensible restrictions on private debt

The second argument trotted out is that turning off the mortgage tap will have adverse impacts on housing. Mandatory deposits of 20% will make it difficult for first time buyers to enter the market. This will weaken demand and act as a disincentive in terms of new housing development. It will also place more pressure on an already over-crowded rental sector, in turn driving rents up.

While these are all largely true, to an extent they are non-arguments as these are the consequences of wider housing policy and not of sensible restrictions on private debt. All of these alleged consequences merely reflect the failure of Irish housing policy to move away from an excessive focus on debt-fuelled owner occupancy, to control rents in the private sector and to ease supply-side pressures by building social housing and other measures, as argued by many in the housing debate such as Housing Action Now, We’re Not Leaving and the National Economic and Social Council.

Finally, a somewhat cynical argument against the Central Bank proposals suggests that only those with wealthy parents will be able to get a foot on the property ladder. However, those with wealthy parents are at an advantage across the board, from second level and post-graduate education to health insurance. This is a symptom of income inequality and we should not be using personal debt to address this imbalance.

We know stronger regulation is needed, but we’re still not willing to rock the boat

Most worryingly of all is how widespread opposition to mortgage caps has been. When Trade Unions, civil society groups, the print media and the Construction Industry Federation are all singing from the same hymn sheet we should be very worried. It seems as if we know stronger regulation of the financial system is needed, but we’re not willing to face the fact that this means developing an alternative approach to housing which is not dependent on mortgage debt.

The real worry is not that we are ignoring the reality of current real estate investment dynamics, or that we are continuing to treat financial deregulation as a form of housing policy, but that these omissions reflect the wide variety of groups in Irish society who have, for one reason or another, an interest in property price increases.

This is groupthink, pure and simple. So much for hindsight and 20/20 vision.

Mick Byrne is an Irish Research Council Post-Doctoral Fellow at Maynooth University and participates in Housing Action Now. Follow him on Twitter @mickbyrne101

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