Those who bought in the boom are victims, not fools
Debt forgiveness for homeowners in negative equity is not only fair, it is in everyone's interest, writes Marc Coleman
http://www.independent.ie/opinion/analy ... 53786.html
Sometimes, we really do forget the bleedin' obvious. For instance, I once spent 20 minutes looking for a badge I needed to gain access to an important press conference. I eventually found it: dangling around my neck. Stupid or what?
Gross mismanagement of the housing market caused the current recession and banking crisis. That's obvious, right? So as sure as day follows night, it's obvious that a comprehensive plan to put our housing market house in order is essential if we want to restore household balance sheets -- in the same way as bank balance sheets have been restored -- and avert a double-dip recession. So far, the penny hasn't dropped yet.
With little understanding of the size, scale or urgency of the task -- nor of the gains if the right decisions are taken -- past and previous governments have dithered and dallied on the housing market.
And in some cases, policies have even been counter-productive. The time for tough capital requirements was not 2009 and 2010 when the horse had bolted, but four years beforehand.
Sure, some government policies have helped, such as extended mortgage-interest relief for those who bought overvalued properties and abolishing stamp duty. On the other hand, the threatened household charge could undo that good work, burdening those who have already paid a fortune on stamp duty.
Unless we want a depressed household sector to slide back into a domestic double-dip recession, we need a cohesive and all-embracing plan for the housing market.
In 2008, recession was the unavoidable consequence of a property bubble and failed banking regulation. This time, it can be avoided, not just by governments tackling overspending but also by doing for residential mortgage holders a fraction of what has been done for banks: a recapitalisation of their balance sheets.
This approach is being hampered by a stupid misguided morality, however. It's a morality that goes something like this: those with excessive residential mortgage debt made their own bed and should lie on it. For investors, the argument might have some truth (even here, it is still counter-productive).
But when one considers how political patronage and governance was driven by the residential property market, it becomes clear that those suffering now are not victims of their own stupidity but of an entire system encompassing estate agents, solicitors, builders, local councillors and government politicians.
Driven by greed and power, our political classes warped our understanding of land and housing in a way that would have made Bull McCabe seem sane. In a nutshell, the reason that the debt and negative-equity crisis needs a systematic policy response is because they were caused by systematic policy failure.
What we need is nothing less than a clear comprehensive plan and it should have three broad pillars.
Firstly, credit conditions must normalise, so that the considerable demographic power of the economy can be harnessed, allowing young people with jobs to start borrowing. As well as confidence, this will restore multiple bidding and that will help towards arriving at a sustainable equilibrium for house prices. It will also boost exchequer revenues.
Secondly, we need a credible debt-forgiveness strategy: The fact that much residential mortgage debt was caused not by "moral hazard" but by systematic policy failure is now being grasped in Spain and the US.
With it is coming the realisation that debt forgiveness is not so much a matter of humaneness but of dire economic necessity -- a logical urgent remedy from government to a problem caused by government in the first place.
Such a policy is consistent in another sense as well. If bad commercial mortgage debts are taken off bank balance sheets, at least some bad residential mortgage debt should be taken off the balance sheets of working families. Some say this is a case of those who didn't buy during the boom bailing out those who did. Again, for investor buyers there is some argument here -- but not for most residential buyers.
Those who bought between 1997 and 2007 paid enormous amounts of stamp duty so -- far from being 'bailed out' -- a policy of debt forgiveness would merely be returning to them money obtained by the Government under the false pretences of a viable and sustainable housing market.
The third plank of any housing policy must be to tackle negative equity. There is little point in confining tax incentives to pension contributions when their value is more than offset by a huge liability in housing equity.
Banks should come up with innovative products that can free young couples from the trap of living in shoeboxes for the rest of their lives and the Government should extend pension tax relief to such products, so that the State takes on some of the burden it did so much to create.
The most pernicious argument against all this is that homeowners had a "choice". If it weren't so offensive and ignorant, this argument would be laughable. Politicians spent decades stymieing a high-quality, long-term rental accommodation market in this country and did so precisely so that young buyers would have no choice but to buy overvalued houses from their friends and political donors.
Proper urbanisation was also stymied so that buyers would have no choice but to buy houses in sprawling estates zoned for development on land owned by the friends and donors of politicians in places that no one really wanted to live. And when demand skyrocketed as a result of this manipulation, a blind eye was turned by the authorities as bank lending and house prices skyrocketed.
But the urgency of the economic case for action is now so great that such stupid arguments can just be brushed aside.
As far as the external economy goes, IBEC's Danny McCoy may be technically right to say that a double-dip recession is not on the cards. Exports may drive a kind of jobless growth, as they did between 1987 and 1993.
But that growth is of little use to our future unless it is turned into durable growth, domestic consumption and job creation, as happened between 1994 and 2004.
Recapitalising the banks will be of little use in stimulating the economy if those that we need to borrow to generate spending cannot or are too fearful to do so due to having a millstone of residential mortgage debt and negative equity hanging around their neck.
Marc Coleman presents 'Coleman At Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm
Time to break up the Nama land bank and market 1/8 acre plots for people to buy to design and build and allow the architecture and small construction sectors to get some oxygen.