Too late to stop a Dublin house price bubble?

And on it goes. The latest house price data from the CSO indicate the two Irelands continuing to diverge. On one hand we have Dublin (and to some extent the rest of the urban areas) growing like gangbusters, while on the other hand the stagnation intensifies in the rest of the state. This is clear in both house prices and in other economic aggregates.  Our geospatial policies are, and have been for decades, next to non existent.  Governments have been too timid, too fearful of shortterm backlash, to put in place a meaningful strategy for growth around designated poles accompanied by real policies for the remaineder. Instead we have the irish version of Laissez Faire – Lackadasical Fear.

While those outside Dublin might bemoan their lot, in reality they should be grateful to sit this one out. Rising house prices are not a good thing.  Repeat, rising house prices are not a good thing. We should know this now. High residential costs are a bar to most economic activity, at least that which does not revolve around rent seeking (rent in an economic sense, not just property rent). The beneficiaries of rapidly rising house prices are the banks (again), landlords, those with cash in hand for purchases, and the property industry. Losers are, again, the first time buyers and the economy as a whole. Those in negative equity may feel somewhat ambivalent – on one hand the negativity is reduced, but so long as there is any then they are trapped.

The peak in house prices in Dublin was earlier, by a few months, and higher, by about 10% than the peak nationwide excluding Dublin. This is typical of booms – one area moves ahead and pulls the others along. In the case of the propery boom buyers and investors forced out of the Dublin (and to a lesser extent Galway and Cork ) markets moved out to the exurbs and beyond, bidding up prices and further exacerbating the problem. Dublin prices started showing a year-on-year increase in early 2013, and that has accelerated massively. House prices in the rest of the nation have started to show year on year rises since the beginning of this year. House prices nationally now stand at around 150k, in Dublin at around 180k. This should be set against a national average earnings in the mid 30k. A look at the real house price to real disposable income (from the Fed of Dallas database) suggests that a) we are above pre bubble norms, at .65 vs an approx average up to the late 1990s average of .5 and b) this is ticking up. Recall that this is nationwide data – the situation for Dublin is probably worse.


What we do not wish to see, and do not need to see, is these prices following the Dublin path. Dublin prices have been rising by double digit figures for nearly a year now, and in fact have accelerated. The average trailing 12 months year on year increase period in Dublin prices has risen each of the last 9 months – from 1% to 3% to 6% and now stands at an unsustainable 12%.

By contrast incomes have been more or less static, and will continue to be so. House price rises in the capital are in other words massively outstripping the capacity to service them. And this at a low point in the interest rate cycle. This cannot end well

I have previously expressed concern, as have many others, at this. What is of most concern is that the government are seemingly insouciant. They have in fact dismissed concerns of a bubble, and have put in place mechanisms to stoke prices.

Dublin prices are rising for a combination of reasons. There is scarcity of supply. Banks will not lend to developers (wonder why) and developers who can build are suspected of hoarding. Zoned land is not available to build on due to lack of services, and services depend on land development levies. Little imagination has been shown in designing and building a city fit for families. Social housing has been slashed to the bone forcing those in that target demographic into the private rented market. Mortgage credit continues to contract resulting in the paradox that as only the best borrowers will get credit they may overbid. Overall it is a mess, a gigantic morass of non-joined up thinking. Welcome to Ireland

We may not be in a formal bubble in the Dublin region. A bubble is when prices systematically deviate from their fundamentals. There is a supply shortage at present which underlies much, but not all, of the rise in prices. Where a bubble would emerge would be if as supply eases the rate of price increase does not ease or even fall back. Worse again would be if mortgage lending were to pick up, allowing the reigniting of a credit led house price boom

Government can and should do something about the danger of a bubble. It is in their hands to use the system to encourage building. Making planning permissions ‘use it quickly or lose it’ ; introducing a land value tax; removing the principle residence capital gains tax exemption; increasing the serviced land availability ; increasing density while forcing family friendly approaches from developers and local authorities; increasing spend on social and affordable housing, etc. None of the problems that are underlying the Dublin housing boom are insurmountable in and of themselves. What seems to be a problem is the paralysis that overtakes Irish governments of all stripes as they come into the second half of their tenure in office. With one eye on the election they will not take any action that may offend anyone (that counts). This ill serves us. The consequences, of a further generation of overmortgaged persons, would serve us worse. Sometimes, turning back and admitting that mistakes were made is the right thing to do. Time for courage.

This is a version of my Irish Examiner column of 28 June 2014

4 thoughts on “Too late to stop a Dublin house price bubble?

  1. Thom Hickey

    Thanks Brian. Pleased to have found your blog. Well argued. Lackadasical seems too soft a term for the frozen minds running policy! Regards from Thom at the immortal jukebox (plugged in now!)

  2. Kevin Brady (@KevinBrady7)

    Excellent article once again Brian. You seem to be the only high profile economist drawing attention to this national scandal. Please keep up the good work in exposing the insanely over-inflated Dublin house prices and perhaps this time it might be different….

  3. Pingback: It may not be a technical house price bubble but it sure looks like one.. | Brian M. Lucey

  4. Pingback: 37 reasons Irish house prices are too high.. | Brian M. Lucey

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