There is a bailout coming, we saw the makings of it for a long time, first there was the talk of the central bank about the underlying strength of Irish financial institutions, the constant lobbying for something to be done for the property & construction sector, then articles stating blatantly that a bailout would occur if there were problems. Now we have read that the government are going to make plans to help first time buyers because mortgage funding is not as readily available as it used to be.
Let us start on the right foot, first time buyers never had it easy to begin with (I actually did an article on this exact topic before – click here). They were either being hit with stamp duty, the need for deposits or other issues. Now the Government are looking to bail out people who haven’t even bought property yet and that is an error.
There are a few tenets that must be considered in any intervention, firstly is it timely, secondly is it cost effective, and thirdly is it for the common good. In terms of timing I would say now is not the time, as the market takes a turn for the worse there is no point in creating a scheme that would inject money into an asset class that looks set to fall further, it would be better to create the idea, get the people who would use it approved but ensure that it can only be used at a certain point in time to be announced by the government (although ideally the government would actually not intervene in any way).
Secondly a scheme like this will not be cost effective, the reason is that introduction of it will skew true values, if people are suddenly able to get (for instance) a 30k help out fund it would not surprise anybody if suddenly first time buyers were paying 3ok more than they might have! We saw this before with the raising of stamp duty bands to 317k several years back, overnight all properties shot up to 317!
Thirdly, is it in the public interest? I would wager no, in fact, helping first time buyers with a stimulus package is vastly unfair to those who never got a hand up and who struggled in the past, indeed if the government want to get their hands into housing they would do well to encourage local authorities to enforce the affordable housing percentages as actual houses rather than just taking the payoff which is what many of them have done thus far.
Is there any way that we could fix housing without costing millions today? I suppose that there are some options, if the government wanted they could offer people a certain value for properties that are sitting idle, instead of paying for them they would instead offer the seller a ‘tax allowance’ for the price, in other words, rather than giving a person 200k they would give them a 200k ‘tax free allowance’ over the course of 15 or 20 years.
This would mean they don’t pay out any money today, instead giving up certain forward earnings. The people who got this ‘allowance’ would have rid themselves of a property they don’t want and with their increased spending money they would likely not save it all, therefore the money would make it into the economy again and circulate.
The government could then decide that if you want rent allowance that you have to take one of the properties of their choice (namely ones they just commandeered) and that would then make a savings, so instead of paying a certain landlord 1,000 per month they could offer the place that is (in effect) costing them only 450 per month. They could even afford at that price to get people to move to areas in need of some additional population by offering to split the difference between the old cost base and the new one. This would mean that a person would get an extra 250 per month as a relocation allowance but it would still be a savings of 250 per month versus the old cost!
Unemployment is not a regionally dependent activity, especially for the long term unemployed, and for people who may not have any hope of re-entering the workforce the ability to move to better accommodation (newer built) might be an incentive as well.
One could argue that a plan like this would result in thousands of people queueing up to get rid of their property and give it to the government, however there would need to be a cap on the plan and only property up to a certain cost could be considered although naturally if a person was willing to take the amount offered they could enter a house from anywhere.
I’m no economist, I don’t want to have anybody believe that I am, these are just some ideas based on objective thinking and an effort to not fall back on ‘instant bailout’ as an answer. Ludwig Von Mises on the other hand was an economist, and a very eminent one at that he said of interventionism ‘It doesn’t accomplish its stated ends. Instead it distorts the market. That distortion cries out for a fix. The fix can consist of pulling back and freeing the market or taking further steps toward intervention. The state nearly always chooses the latter course unless forced to do otherwise. The result is more distortion, leading eventually, by small steps toward ever more nationalisation and its attendent stagnation and bankruptcy’.
The newly acquired properties could also be used to clear housing lists -something no government has achieved yet. And all of this could be done with little in the way of up front cost (but let us not forget that it would mean a reduced tax stream in the future). The bad part of a plan like this is that it would mean a loss of tax revenue in the future, but this doesn’t have to be a plan that runs into the billions, and furthermore with inflation taking a present value today and writing it off over time is probably more effective, 100 million today is going to be worth more than 100 million in 15 years time.
Every element of this idea has a flaw, as does any bail out plan, the real truth of the matter is that the government should not intervene, let the market find its own level and resolve itself. The other real truth is that thus far the ideas being put forward are so economically horrific that even the concept discussed here seems a preferred solution.
We cannot reward risk takers when their investments fail, it is irresponsible and a moral hazard in the making. Having said that, if the government are determined to flex their abilities on the market we can only hope that they do so in an innovative manner, and one which does not solve a problem for the few at the expense of the many, currently the answers we are seeing will have to be paid for sometime, by somebody, and no matter how they put these plans together that somebody is you.