Saturday, 23 June 2018

Ann Pettifor’s strange ideas on house prices in Ireland.

Ann Pettifor (AP) claims in an article in the Irish Times that high house prices in Ireland are to a significant extent caused by shortage of land. See under her heading “Inelastic land”. (Title of her article: “Irish house prices sky-high due to finance not scarcity”).

Well now there’s a slight problem there, which is that the population density of the Irish Republic is about one seventh that of England. But house prices in Dublin are not much different to London!

Or if you want a more extreme example, the population density of Australia is around one hundredth that of England, but it’s the same story: house prices in Sydney are not much different to London. Thus high house prices in cities (where most people live nowadays) clearly has a lot to do with the attractions of, and economic benefits of “agglomeration”: i.e. everyone living and working close to everyone else. The fact that the supply of land for the country as a whole is finite is irrelevant: certainly in the case of Ireland and the UK.

Her second main explanation for high house prices comes in two parts. She claims Irish (or more generally EU based banks) have been lending in an irresponsible manner. Second, she claims banks shift money around the world to an excessive extent.

Clearly the 2007/8 bank crisis was largely down to the latter bank irresponsibility. The solution to that is better bank regulation: in particular, bank capital ratios need to be raised. Martin Wolf and Anat Admati (economics prof at Stanford) advocate raising the ratio to 25%: way above it’s present level. Plus Sir John Vickers (chairman of the main UK investigation into banks after the crisis) now says that the rise in capital ratios he proposed in his report was nowhere near adequate.

As for money moving around the world, it is widely accepted that the fall in interest rates over the last twenty years or so, which has cut costs for Western house buyers, is to a significant extent down to the flow of savings from less developed countries. Witness for example the vast amount of US government debt held by China.

The latter movement of funds from less developed to more developed countries brings benefits all round: savers in developing countries get more interest on their savings, and home buyers in the West can buy  their houses for less.

So does the decline in interest rates (which comes to the same thing as an “easy availability of money for mortgages”) explain high house prices in Ireland (and indeed high house prices in the UK)? Well clearly given a SUDDEN fall in interest rates, home buyers would quickly rush out and buy more houses, and/or bigger ones. House prices would rise and initially builders would not be able to meet the additional demand. But we have not had a SUDDEN fall in interest rates: the decline (to repeat) has been fairly gradual over the last twenty years or so. (Actually there has been a gradual decline in interest rates for the last five hundred years – see article entitled “The ‘suprasecular’ stagnation” published by Vox.)

Given the latter twenty year GRADUAL decline in interest rates, it would be reasonable to assume that builders have in fact kept up with demand. So what then is the explanation for rising house prices? Well if builders are not making fabulous profits, which they aren’t, the only possible other explanation is rising costs.

Certainly building costs have risen: they have run ahead of inflation in most Western countries. Improved thermal insulation requirements have raised costs.

Another factor, at least in the UK, is the totally absurd price of land with “planning permission” as it’s called in the UK: i.e. land where permission has been obtained to switch from agricultural use to commercial or residential development. That land is now about a HUNDRED TIMES the cost of agricultural land in the UK: i.e. roughly a million or two million pounds per hectare.

And it seems things are about equally absurd in Ireland. According to this article, land for a single house in Ireland costs between €150,000 and €500,000 in the case of “infill” development. That high price can only be down to the above mentioned agglomeration effect or scarcity of land with planning permission.

And if you want evidence for my above theory that it is COSTS that are holding builders back, see this Financial Times article entitled “Central London housebuilding collapses under price pressure.” Incidentally, while the title of that article refers to “central London”, the article makes it clear that the same problems apply the Greater London area. Presumably that bit of economic theory applies in Ireland as well.

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