Oh no not again. Stefan Gerlach, Chief Economist at BSI Bank in Zurich says the bubble is back:
The country lacks a efficient housing rental market and these bubbles just keep coming back:
This may not be a problem in countries with well-developed housing markets, where there are plenty of rental properties available from professional landlords. After all, in such markets, renters can find housing with security of tenure at price levels that are predictable, even as they evolve gradually over time according to market conditions, thereby ensuring that landlords have incentives to maintain the properties.
But in countries where rental markets are small and function poorly – often a result of a widely held belief that all families should own their homes – financial stability and access to mortgage financing are closely linked. By limiting the riskiest borrowers’ access to finance, rules on mortgage lending can trigger a fierce political backlash.
Ireland is a case in point. In January 2015, the central bank sought to protect financial institutions from another catastrophic bubble by restricting their lending to high-risk borrowers. As a result, annual growth in property prices fell from a little over 20% to just below 5%. But the construction industry, worried about its profits, has been harshly critical of the rules, as have ordinary people who have been denied credit, and thus must struggle to find suitable housing in a small rental market. Politicians, no surprise, have jumped on the bandwagon, to capitalize on the popular mood.
As the pressure on Irish regulators to relax lending rules intensifies, so do concerns that they will succumb to it. One hopes that they will continue to resist. Would-be borrowers do indeed face genuine challenges as a result of these regulations; but that is nothing compared to the pain that a collapsing bubble would cause.
In any case, Ireland’s experience with housing bubbles carries a deeper lesson – one that virtually everyone has missed. A housing system that can so easily produce such large and damaging bubbles is fundamentally flawed. While restrictions on lending may be useful, they are not enough to bring about an efficient and stable housing system.
Many in Ireland might find that conclusion overly pessimistic. Maybe they are simply hoping that, this time, the luck of the Irish will hold. Perhaps it will, and this time really is different. But there isn’t much evidence of that.
Is it just about lack of markets or also about too much greed in the system? We are increasingly moving to a kind of world where nothing is enough. The vast inequality is leading fewer people owning more and more of the world. This frenzy keeps pushing housing prices up and up. The regualtor notices and tries to undo some damage. With moving houses being such a big struggle, those left out try and buy their houses as well. Here they realise that the regulation has gone against them and a backlash against regulation follows.
These debates are hardly anything new and have affected us for a long time. But it is this rising greed factor which ensures the bubbles have become such a regular phenomenon leading to booms and busts…