We're being seduced by property porn again – will we ever learn?
LAST week the "glossy brigade" was out in force. Papers were full of bright, impossibly blue skies, over "imposing" homes many of which "boasted" this feature or that attribute. Yes, the glossy brigade, Ireland's property pornographers, who pedal lifestyle fetishes to the middle classes are back at a newspaper close to you.
LAST week the "glossy brigade" was out in force. Papers were full of bright, impossibly blue skies, over "imposing" homes many of which "boasted" this feature or that attribute. Yes, the glossy brigade, Ireland's property pornographers, who pedal lifestyle fetishes to the middle classes are back at a newspaper close to you.
Amazingly, just six years after a property crash, which destroyed much of the economy, chatter about house prices appears to be back, or at least, out of social quarantine. Any day soon, expect a new TV programme on house hunting, the joys of home makeovers or the allure of trading up.
Why do we allow ourselves to be taken in by this nonsense? Every spring since the crash, the estate agents and the property industry have tried to re-launch the property market with puff pieces, hard selling and gimmicks.
Yet underneath the hype, the evidence from the housing market, published yesterday tells a significant story.
Since the pre-Christmas spinning about property, in February prices fell for the third month in a row. Prices are down 2.6pc on the year.
So much for the talk about the recovery in the domestic economy which spilled out from the huge marketing push of so-called "Ireland Inc" in the US around St Patrick's Day.
The reality is the house price index has just experienced its largest monthly decline since January 2012. House prices fell 1.6pc between January and February.
But when you look a bit closer, you see a tale of two markets. In Dublin, property prices fell 0.3pc in February but are up 3pc on the year. Outside the capital, prices continued to slide, falling 2.1pc month-on-month and a nasty 6.1pc decline since this time last year.
The Dublin market is showing the early signs of decoupling from the rest of the country. Outside Dublin, house prices are still weak and in the past two months have weakened further.
There are simply too many houses in the wrong part of the country where people don't want or can't afford to live at today's prices. So what will happen? Prices will continue to flatline or fall.
The first thing to appreciate is just how dramatic the fall has been. Overall house prices are down by just over 50pc across the board and in Dublin prices are down 56pc from peak to trough.
If you want to see the recession, look no further. Because so many people were convinced by the 'glossy brigade' to see housing as a wealth generating exercise, the flip side of the fall in houses prices is a massive increase in debts relative to assets.
Billions of euros of household "wealth" have been destroyed by this collapse in houses prices, yet the debt remains. And the more house prices fall outside Dublin the more the debt relative to assets rises. And what the banks are about to do – which is to accelerate house selling in order to clear their books – is going to make the situation worse. In economics, this is called the paradox of deleveraging.
When the bank and the home-owner sit down as is now envisaged in the personal insolvency process unveiled last week, the bank tells the client to sell the property. This makes the individual debtor's balance sheet better. But this is only the case if he sells and no one else does. But what happens when the banks are sitting down with everyone and telling them all to sell (repossession by another word) at the same time?
Obviously all prices fall. Therefore the very act of trying to pay back debt quickly puts the debtor in a position whereby he has more debt relative to his assets rather than less debt.
This is likely to be the ultimate consequence of the Government's efforts to bring the housing/banking crisis to a close. Prices outside Dublin, where the vast majority of new houses in new estates were bought during the boom in counties surrounding the capital, are likely to fall further.
In contrast, some parts of Dublin – south Dublin and older areas in the capital – are witnessing a mini-boom where there are not enough properties and there is no more space to build. We are seeing what might be described as the 'Knightsbridge and Kensington' effect in this part of the Dublin market. Over the years in London, even in severe property slumps, Knightsbridge and Kensington tend not to lose their value, or if they do, these areas rebound quickly.
But the question for the country and the economy remains: is this a good thing? Is a recovery of the housing market in Dublin a good development?
The unambiguous answer is no. Property destroys economies, good money chases unproductive investments and banks revert to type.
We all know that is going to happen. We have seen this before. The banks will start at the usual again, despite the slump, as they compete with each other to lend to 'sure bet' customers again. As trophy house prices rise, they will begin to look for less and less collateral and will, yet again, get involved in the property racket. Leopards don't change their spots.
In order to prevent this two-tier market developing and the banks again driving up property prices, the central bank could act. The key to house price rises is collateral. If the banks lend a percentage of today's price, then the rise in prices becomes self-reinforcing. Each rise begets new larger loans and so on.
What if instead of lending against today's price, the banks were forced to lend against the average house price for the last 30 years.
House prices would never rise dramatically. There would be no boom or busts and the housing market would never again distort the economy.
Now's the time to do it, when the property cheerleaders are still relatively muted and when the collective memory is still traumatised by the last boom.
If Dublin decouples from the rest of the country on a permanent basis, it will reinforce wealth divisions, with one section of the population struggling with too much debt and not enough income.
Another smaller, but influential part of the population will find their wealth underpinned by rising property prices. If that were the upshot of the past six years of economic trauma, it would be a lamentable result for all of us.
Report by DAVID MCWILLIAMS - Irish Independent