Bizarre article in the Irish Times on house prices

I am not speculating on house prices here, but I simply don't understand what this article by John McManus is saying.

Return of lending should curb house prices, but Central Bank still needs to act

Before reading any further, this headline strikes me as bizarre. The return of lending should curb house prices? Surely the return of lending should push up house prices? Or have the rules of economics gone upside down recently?

For example, we are told cash buyers are driving the market but, in reality, how many returning expatriates or newly minted technology millionaires can there actually be in a State our size?

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It appears that around 50% of houses are being bought by cash buyers. As well as expatriates and technology millionaires,there are many other people with cash. Primarily people who have built up savings over the years and have kept them in deposit accounts. They are getting very low returns which are taxed very highly, so they are switching to property. There are others - those who sold property at the peak, those with other investments, people who have ordinary profitable businesses.

The corollary of the cash buyer argument also has to be considered. What happens when the banks eventually start lending – hopefully after the stress tests later this year?

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Banks have been lending to house buyers for some time. They have plenty more available than borrowers want to borrow. How come the Business Editor of the Irish Times does not know this? Maybe he means "when the borrowers start borrowing"?

For now the link [between house prices and wages] is broken because of the absence of normal bank lending, which is the connection between the two. Most people buy houses with money borrowed from banks and their ability to borrow is a function of how much they earn – or how much they can afford to repay.

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This seems to suggest

1) Banks are not lending

2) When they lend, prices will fall to normal levels

I would have thought that if banks increased their lending, prices would rise.


One might argue that there have been plenty of people with cash buying houses, but now they have spent their cash, house prices will fall. I have no idea if people who had cash, have now spent it all. Presumably if there is a wall of cash chasing property, and the wall disappears, all other things being equal, prices would fall. But that does not seem to be his argument.

once the banks start lending we should see a much more conservative relationship between wages and house prices. This should act as brake on prices, as should the fact that most people’s wages have fallen or, at best, stayed the same over the past five years. Until this plays out, it is very hard to conclude anything very useful about Irish house prices.

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Once banks start lending...should act as a brake on prices?

Now though, the Central Bank must keep a close eye on the supply of unregulated non-bank finance for home buying. The emergence of a significant source of shadow or non-bank mortgage finance would circumvent its most effective weapon for controlling house prices, a cap on lending.

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OK, so an increase in lending can push up house prices.



I am completely lost.

I agree that at best it is extremely contrived. I think he means it though and that he has come up with a very clever twist. Let me have a try at interpreting what he is saying.

South Dublin is silly street, ignore what's happening there coz we're going to run out of techie millionaires. When the normal mortgage based market resumes there will be much more sensible linkages between wages and loans than we had last time round and so we won't get a repeat of the last bubble.

Or put another way, cash buyers will never create a national bubble or even sustain a localised bubble. Bubbles come from silly mortgage practices and this time round that won't happen, or if it does the CBI can step in. The maverick in this scenario are these new guys.

Thanks Duke

But the headline suggests that the return of lending will curb house prices.

If house prices are rising because of a lot of cash buyers, the return of lending will push them up further. Maybe Irish house buyers with mortgages are so sensible that they realise that the prices are not justified, and so are not borrowing.

The heading is plain silly, I agree. An increment in demand cannot possibly of its own curb prices.

But I don't think Prof Lucey's unique deposit selling moment is under threat. Rather I think McManus thinks he has come up with a devilishly clever paradox - he hasn't.

The headline should have read "Lending rules will avoid bubble..."

Fair enough. If I had read that headline, I would not have read the article any further.

The headline was probably written by a tired, lazy sub-editor who didn't really understand the article either.

The Central Bank has published its[broken link removed] figures for May 2014

There appears to be €91 billion in household deposits in Irish banks.

Presumably this €91 billion is not just returning emigrants and hi-tech millionaires.

There is €82 billion in mortgages according to this, but the the Arrears Stats say that there is €136 billion in total mortgages. The difference is securitised loans.

I read the article and was initially confused. I assume he means curb volatility of prices rather than prices themselves - that's the only way it makes sense and would fit the context of the rest of the article.

I would agree that the current level of transactions and profile of buyer is not good for a stable market. It would be far better if sensible levels of credit linked to wages / disposable incomes set the market.

Presumably there are always lots of cash buyers in the market. It's just that they form a small percentage of the overall market. When those buying with mortgages pull out, the cash buyers form a bigger proportion. We are amazed when we hear it's 50% of the total market. But perhaps we shouldn't be.

I just bought a house on the south Dublin market and here are my observations.
1) Supply is the problem - there are very few houses for sale. I am guessing this is due to people being stuck in negative equity and deciding not to sell where previously they might have considered it.
2) The banks are being very picky about lending money.
3) Demand is picking up as people like me who sat on the fence and waited for the bottom lace up their viewing boots.

So while the banks are an issue whats driving up prices is limited supply. That wont change if the banks get less picky. In fact there will be more money chasing limited supply.

There is some signs banks are being more flexible about allowing people in negative equity to sell up and carry that NE. It might partially address supply issues.

This is a location, location, location problem. Leafy southside Dublin is a pretty nice place to live.

The loss, or fear of the loss, of tracker mortgages is a major factor preventing people from moving.