There is something awful that might be about to happen, namely the current Government are considering a special type of loan for first time buyers in order to help them get onto the property ladder. It probably comes across like a contradiction, saying that ‘helping first time buyers is a bad thing’ when most of us feel that it is not, however, it is not so much the fact that first time buyers are doing anything wrong, more so, it is about flawed economic planning that will hurt generations of tax payers.
Property prices have not reached their market clearing level as of yet, what that means is that property is not selling at a speed and price that is conducive to that of a healthy market. Supply (at least for now) outstrips demand by quite some way, if we look at the current overhang as put forward by some lobbyists the number is 30,000 units (CIF), that is actually the number of properties that have not sold, it doesn’t mean it is the number that are empty. We would feel this is not necessarily accurate as the Census enumerators found 270,000 empty households in 2006 and that doesn’t take into account other property that has come on stream since then. Likely the number is much larger than many commentators currently believe.
So, a little exercise, if there is one can of beer and a money supply of €10 seeking it then the price of a can of beer will be €10 right? If there are 10 cans of beer with €10 worth of a market seeking it then likely the price of a can will be €1. Supply and demand is a simple relationship, and yet hugely complex as well. In fact ‘price’ is not as simple as ‘buy land, build house, sell at profit’ so much actually goes into determining price that it would baffle most of us (myself included).
What might go into the ‘price’ of property? Well, there is of course costs, those costs are things such as acquisition of the land, the materials, the labour (and all of these are costs whose prices are not simple either!). Then there are various taxes, local council levies, and a plethora of other things. In a speculative market people undertake risk (i.e. building projects) on the basis of increased values covering the opportunity cost of the undertaking as well as other costs that may arise. When a market is rising this risk is rewarded and thus firms and people go for more and more, however, when it turns the inverse is true and you lose.
This means that property prices have to fall to a point where there is market demand, and not, as many believe, to a point where it ‘suits the seller’ or any other party. The sole determination is as follows: ‘At what price will demand for this product (in our case property) be found?’. A fun example is as follows: I want to sell you a glass of water, just a standard one out of the tap. I’ll do this twice, manipulating demand in order to show how my finite supply will command different premiums.
Example 1: We are here in Ireland on an average day, in this example we both accept that you have a need for water despite our summer having provided so much of it already! My glass of water is of acceptable quality, not spring water, or sparkling either, just regular ‘corporation lemonade’ grade. I try selling it to you for €10 and to all of your friends too, nobody buys, then I drop the price to €9 and the same thing happens, the fact is that until I lower the price to that at which a person will have a demand I will continue to go around in circles (I’d pay 20 cent personally).
Example 2: We are in the Sahara Desert. You have not had any water in days, I’m still selling a standard glass, but we both know you need it, today the new price is €100 and you will pay it.
A bit black and white yes, but that example holds true that supply and demand while simple depend on many things, in our example the factor of water supply in Ireland versus that in the desert. And people can get to grips with this. The problem arises when you start to get into more complex fiscal decisions such as that of ‘special loans’ and all of the complexities that come with them.
If we all accept that property prices are falling then the likelihood is that supply outweighs demand, however, as long as there is some chance of getting Government assistance the people selling developments will resist clearing prices, it is a natural decision because nobody wants to realise a loss. The danger though is the potential distortion being proposed by many politicians and being pushed for by lobbyists.
I must state now that lobbyists ‘create’ hot-button issues, and they remove our focus from solutions onto issues that affect their interest groups. The influence of special interest groups is strong but their calls must be resisted, they represent the good of a focus group, not of general society but the most common tack is to find a way to make it seem like their issues affect you and therefore you need to back them.
So, at last, with some of this knowledge in hand we can take a look at ‘government top up mortgages’ and consider some of the fundamental flaws. Firstly, prices have not reached market clearing levels, so buying into anything right now is basically buying into an asset that will fall in value for some time. That translates into this: The Government will purchase negative equity on your behalf. And that would be o.k. if the people who wanted the house had to take the brunt of it but they won’t. Instead the entire tax base will shoulder the burden.
All I can say is this: if you want to take out a mortgage on my behalf, at least have the decency to ask.