The Minister for Finance wants us all to start buying houses again, and soon, because NAMA’s going to put a price floor underneath house prices in Ireland. The Minister tells the Sindo faithful:
“You can now buy in confidence that the price is realistic.”
This is bonkers, for a few reasons.
Prices of houses have some way to fall yet. There is the small matter of yields, the smaller matter of a vast oversupply of good quality property, and, oh yes, there are no jobs. Furthermore, international evidence on housing collapses like ours puts the recovery period at 4 to 7 years. Even dating things generously, we are only into the start of year 3 of the downturn in the market. Prices have some way to fall yet.
Let’s leave reality aside for a second. I’m an economist folks, a trained professional. Don’t try this at home. First ask: why would price the government pays for loans put a floor under prices falling in the marketplace? Clearly there’s a notion that NAMA will soak up some of the excess supply in some sense, but clearly that’s not going to work unless NAMA is hoovering up very dodgy loans, which will default for sure, and so take possession of very particular land banks somewhere very specific, and sit on those land banks for a considerable time, and flag that these properties won’t come onto the market for some time. Such a baffling series of actions will reduce supply enough to cause a stalling and eventual reversal of price falls.
In the end, the Minister’s argument is a sort of reductio ad absurdum: it reduces down to the nation’s largest (eventual) landowner telling everyone the price of land will go up, and so is tautologically absurd. This circular position of course ignores all the other elements of the individual house buying equation: expectations of future income rises, availability of credit, expectations of the cost of borrowing going up, uncertainty in the job market, and, of course, future tax increases to pay for NAMA itself, never mind the problems on the ground I alluded to at the start of the post. Oddly, the Minster’s statement echoes Governor Honohan in the FT this week, reassuring Ireland’s international creditors that the Irish government would never, ever, default on its debt. Only problem is, Prof. Honohan knows what he’s talking about.
Why am I spending 500 words of good midterm marking/chocolate egg eating time on this? Because I worry that this argument could start snowballing, and I’d like to feel I did my bit to stop that from minute one. We have enough dodgy arguments in Irish political and economic discourse at the moment.
Update, there’s a discussion of this over at ubereconomy, take a look, and comment there instead of here.