Irish property (again), the Austrian Theory, and other small notes
Sunday, February 4th, 2007I’ve been following threads about Irish property prices at places like http://www.askaboutmoney.com/showthread.php?t=31710 (sadly a closed thread, perhaps because the owners/moderators did not want to be blamed for the inevitable), http://www.thepropertypin.com/forum/, http://forum.globalhousepricecrash.com/index.php?showforum=16 and http://www.boards.ie/vbulletin/showthread.php?t=2055033806. There is also the highly recommended site, www.itulip.com, which offers a more US-centric view of the property market, but highly relevant to the Irish market as well.
It’s obvious to me that either Irish property experiences a ‘bust’, a serious drop in prices, or else the Irish economy suffers from high inflation for an extended period of time. Either way, we are between a rock and a hard place - neither is good for the country. In practice, the damage has already been done, and it would take a better person than me to see a solution without further compounding the issue. Thousands of people cannot use their houses as permanent ATMs without somebody paying further down the line; of course, it’s often a different set of people who pay the piper. This period between 2001 and 2006 must surely eventually be seen as the huge disaster it is for the country, once the dust has settled.
Just today, I’ve been reading http://www.fff.org/toc/monetarypolicytoc.asp, a document extolling the author’s belief that the current protectionist/inflationary policies put in place by governments and central banks are what are fundamentally responsible for these boom/bust cycles (this is known as the Austrian Theory of the Business Cycle). I am becoming a lot more inclined to believe this.
There is a comment in part 12 of the document which (for me) describes the issues with housing perfectly:
It is the essence of inflation that it affects some prices before others, that its final effects are different from its impact effects, and that production is affected differently at different stages of the process. In an inflationary boom, it is this unequal incidence of the inflation which gives rise to the maladjustments, which eventually produce the slump. Entrepreneurs are encouraged by artificially cheap money to embark on enterprises which can only be profitable provided costs do not rise. As the new money works through the system, costs do rise, and their enterprise is thus rendered unprofitable. For the time being, trade seems good but when the full effects of the inflation have manifested themselves there comes a crisis and subsequently depression.
In this case, one can see the entrepreneurs as normal people who buy a house, either to live in or as an investment. If we consider profit for investors as the rental return after accounting for tax breaks/upkeep/empty periods, etc., this was only profitable both if interest rates did not rise, and if the capital value of the property rose over time. The second item should not be the case forever (even if it works for a while during a housing boom), as there is not a fixed supply of housing; eventually the cost of housing should reduce to its cost of building, plus marginal profit for the builder; this should be true as long as there is sufficient housing stock and land to hold the people in the area (which there is).
Some of the recent reports are that the government are just now beginning to buy large numbers of housing for so-called ‘affordable housing’. To quote from the article:
Homes will be made available at an estimated 30 per cent discount on market prices, to eligible buyers. This is the first time the AHP has intervened directly in the market to buy houses from private developers. The arrangements for selling these will be finalised shortly and will be advertised widely, the minister’s spokesman said.
The funny thing is that this happens just as market forces are beginning to push down the prices. Government sponsored protectionism? No, never! And note that this helps builders, not people who bought at the height of the property bubble, and would like to sell to newer buyers…
One last point to make is that any government intervention at this point would reinforce the idea that people are not responsible for their own actions. Irresponsible actions in lending and borrowing could become seen as win-win, with the obvious negative repercussions down the road.
Well… Silicon Valley/San Francisco in particular… I’ve heard it suggested that MTV sometimes seems more like a retirement villa these days, whatever the truth is in that.
