Re: Re: The Building Boom Is Over!

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There is however a clear rationale for the govenment to assist liquidity in the banking sector at the current time as this crisis is entirely finance related. A purchase by the NTMA of asset backed securities would be welcome once loan to value ratios were respectable say 75% maximum and be limited to properties that have environmental outperformance.

I disagree; the last thing the government should be doing is assisting people in any way to take on historically unprecedented levels of debt in order to buy assets which are almost guaranteed to decline in value. In fact it would be highly irresponsible. I agree that the problem is finance related; but the problem was created by increased liquidity (“inflation is fundamentally a monetary issue”) and it needs to unwind itself. The actually amount of money slashing around western economies is still absolutely enormous by historic standards. Credit creates money as sure as printing bank notes does.

The reason a period house in Dublin costs 5 times as much now than it did 10 years ago isn’t because it offers 5 times the utility it did or that the demand (population) has increased 5 fold or that the median or mean income is 5 times what it was. The reason is simple: there has been an unprecedented increase in the amount of money (created by credit) globally in the last 5 or 10 years. The reason the prices of everything haven’t risen similarly is because of the Chinese, other emerging economies and commodity producers were happy to take all the excess cash and effectively bury it in a hole in the ground (aka “building foreign reserves”) and in return send super tankers full of cheap consumer goods and oil back to us. That is not sustainable.

The big problem with bubbles in particular assets is that they tend to cause people to divert their attentions from productive economic activity into attempting to participate in the party; it actually disincentivises working. I simply cannot see why anyone thinks it is normal to be able to sit on your arse watching TV in an “average house” in Ireland and become 20 or 30k wealthier every year.

Despite the above, I’m reasonably optimistic about our economic future generally. However I believe we have a long way down to go in terms of property prices. Property index derivatives in the UK are currently pricing a 40% drop over the next 3 years. There’s probably an element of backwardation in these prices but I’d always trust the markets more than the opinion of analysts. We need to take it on the chin; property is a cost for most economic activities (perhaps not a very popular opinion on an architecture site) and for most individuals. The government should simply do nothing and let the prices correct themselves; this will be painful for a small minority but beneficial overall.

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