The Value Of Nothing

Property prices in Ireland
Property prices in Ireland converted to 2011 currency. The red line shows the pre-boom average. ©RonanLyons.com

So house prices in Dublin have reached half what they were at the height of the boom. That’s a good sign. If they halve once more they’ll be back to what they were pre-bubble. Look at the graph (ganked from the very interesting ronanlyons.com) if you don’t believe me. Converted to 2011 money, an average house cost about €100,000 for decades. At the height of the boom it peaked at nearly four times that. Well over a third of a million, for an ordinary home.

Just one question springs to mind. What the hell were we thinking? Houses costing the price of a house, plus three other houses? Cars didn’t quadruple in price in just a few years. Food didn’t, even drink and cigarettes didn’t. During boom times, market prices are supposed to fall behind rising incomes. Otherwise they wouldn’t be called boom times, they’d be called mysterious outbreaks of rampant inflation. But during ours the cost of housing left incomes for dead. Clearly, the housing market is a deeply flawed one – almost an object model in fact of how capitalism goes wrong.

In theory the price of something is set by supply and demand, which is both efficient and ethical. Well let’s pretend it is for now, it works well enough for most things. Why does it go wrong here? Because the supply and demand of housing is almost irrelevant to the housing market.

What does a house cost? It’s an interesting question. A house in an appropriate location can be a very important asset, so in general people will spend the absolute maximum on a house they think they can afford. That’s clearly unlike wine or cars or dinners or phones. So in short, the answer to the question “How much does a house cost?” is “Whadya got?”

Or more precisely, what can you raise? If easier money is available therefore, people will borrow more. They’ll pretty much have to, as prices will rise to meet the available credit. Of course they have the option of only borrowing as much as they would have before prices went strange, but if they do they’ll get a much worse house than they could previously have afforded, while those willing to avail of the softer terms will get the shorter commutes, the better school catchment areas, the safer neighbourhoods. Competing for their and their children’s futures, it is hard to blame them for taking all that the banks and other financial institutions offered.

Speculation happens in such runaway markets of course. People will buy houses in the hope of selling them at a profit, just as if they were buying shares or gold or currency. Capitalism teaches that there is absolutely nothing wrong with that. The vast, vast majority however are buying houses because they need a house. And while some postponed purchasing in the hope that prices would come down, far more rushed into buying out of fear that they would not.

There are other factors, but we shouldn’t overemphasise them. People had become better off, yes. But did your income double? Mine sure as **** didn’t. The euro facilitated the boom because such an influx of credit would otherwise have exploded the currency, but it didn’t cause it. Houses were said to be “historically underpriced”, but even if you can bring yourself to believe a thing could be consistently underpriced for decades without anyone noticing, could it seriously be by a factor of two, even four?

And there was net immigration, that could have been expected to fuel the market. After all prices go up when demand outstrips supply. Only… Supply vastly outstripped demand. People were building houses up the sides of cliffs.

There are no two ways about it. We had a housing price bubble because we had an oversupply of credit. The blame rests squarely with the financial institutions that offered these loans. That is, all of them. Major banks should have known better and could have resisted. Had just a couple of lesser institutions been left to their excessive lending the larger banks would have lost custom, yes. But they would have survived. And minor institutions could not by themselves have super-inflated house prices.

But these lending practices were adopted by the whole industry, and quite literally they forced people to pay too much – far, far too much – for houses. There is a clear case for debt forgiveness therefore. There is also a case for punishment – though of the lenders who made the irresponsible loans rather than the borrowers who had little choice except to take them. And by punishment, I seriously mean prison sentences. There must surely be some law against business practices so reckless that they ruin individuals, families, even a whole country.

Isn’t there?

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6 thoughts on “The Value Of Nothing

  1. I love charts that illustrate this point. Similar charts are buy-rent ratio and buy-build cost ratio. All that’s missing is to draw a huge cartoony bubble holding up that aberrant tent. That way when financiers and politicians talk about putting house prices back on the up trend you get to point out that the way to do that is by pumping more air into that rascally bubble.

    The more natural corrections are to let house prices plummet or let inflation (including wages) ramp up in order to catch up with the aberration. They both hurt, but they cure. More importantly, this admission makes it easier to focus attention on those who need it and spend the money in the most humane manner. Instead most measures today are about keeping that bubble up, which invariably involves some form of giving money to people who should be sitting somewhere along the “sacked-jailed” spectrum.

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    1. Letting inflation happen is out of the question – unless of course Germany gives up on the euro. It’s gonna have to be house price plummeting. Good; I’d sooner houses were worth less than my money was, I don’t own a house.

      OK I don’t own any money either, but it still seems the more rational solution.

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  2. If you don’t own any money then inflation is just the thing for you! People sitting on piles of cash lose the most when inflation hits. The problem with inflation for those on the bottom is if and when wages do not keep up. But if wages keep up (I know what you’re going to say, you don’t have wages! bear with me here), then people hoarding their wealth as cash lose some of that wealth. Ben Franklin called it a de-facto progressive tax, or something to that effect.

    So yeah, inflation on the face of this new structural unemployment would be pretty bad and not as good a solution as letting house prices fall. But still, if applied across the board and if it spurs employment then it would be a better solution than fighting inflation to preserve the wealth where it is at present. I know how combative the solution sounds but it does crank the economy in the right direction, as opposed to the deflationary pressure currently experienced in many, but not all, nations.

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