WHEN READING THE history of financial crises, an uncomfortable feeling of deja-vu arises. It’s like the horror movie scene when the expendable character decides to split off the group and descend the steps into a dark cellar alone. You want to shout: “Don’t go down there, you already know what will happen!”
Deregulated banks engaging in financial speculation. Housing prices rising to absurd levels. People leveraging everything to purchase a home with a mortgage they can’t afford. All followed by a financial collapse, a bailout of banks by the public and a long, painful period of recovery. Sound like Ireland and the 2008 financial crisis?
In fact, this is a description of the 1989 Swedish banking crisis. This kind of financial fiasco is neither new, specific to Ireland, nor is it unavoidable. But to avoid it, we first have to understand it.
The average house costs nine times the average annual salary
Right now, average house prices in Ireland have exceeded those at the peak before the last financial crisis. We now stand with the average house costing €338K, nine times the average annual salary. During the last peak average, house prices were €311K. With the market looking sillier with each passing minute, now might be a good time to take stock of where things are headed.
The 2008 crisis involved a big housing bubble, and Ireland was not alone in this. It originated with “subprime” mortgages in the United States: overpriced housing sold to people who could barely afford it or who couldn’t afford it at all.
These dubious (hence the name “subprime”) mortgages were repackaged in such a way that made them appear less risky than they actually were to prospective buyers: sliced, diced and recycled.
Once this financial house of cards collapsed, it caused a domino effect across the world. As the overpriced housing bubble popped, financial institutions were left with assets worth a tiny fraction of their original valuation. Banks immediately began demanding that governments use taxpayer money to back up their shrinking assets to avoid financial armageddon.
Most of us suffer because of these housing crises, both before and after the bubble bursts. Although we’re inundated with stories about how positive it is that property prices are recovering, this has little value to the average person.
An increased price for a house you live in doesn’t mean much unless you sell it, and then, in most cases, you simply have to buy another house in a similarly inflated housing market. New entrants to the market find that they are simply unable to afford a mortgage as prices increase relative to their earnings. For renters, it often means that rents go up as they compete with rising mortgage prices.
In short, rising house prices are largely irrelevant to those lucky enough to have already purchased, but mean a drastic increase in the cost of living for new entrants and renters.
And where does the extra money go?
If we’re investing more of our salary into housing, who gets it? It’s not going into producing more housing. There are very few properties on the market, only 2,700 in Dublin currently. The money is going into the pockets of speculators and landlords.
Financial crises and property bubbles are often linked for precisely this reason. When investors can’t find low-risk, high-return investments, they often decide to store their money in an asset instead. Housing and property is a durable asset that is attractive for this very reason, especially in a growth market.
This helps to produce a vicious cycle. The increase in the cost of housing means a larger percentage of workers’ wages is spent on housing. This puts the squeeze on wages. The profitability of other enterprises declines, and as a result, investors are even more likely to invest in housing, rather than other economic activity.
If you can’t pay your workers enough to live on, you may not find workers, and if paying them enough to live on means you can’t sell your goods then you can’t exist as an enterprise. This effect acts on the wider economy like a brick tied to a swimmer’s leg.
And then, perhaps even more tragically, when the bubble bursts the State is asked to foot the bill to keep the financial institutions afloat. Ultimately “the State” means “us”. We transfer our taxes and future taxes to financial speculators and less of our taxes can be invested in public services: our hospitals, our schools, our public transport.
We might get cheaper housing finally as a consequence of the crash, in the form of falling rents and cheaper mortgages, but we also pay the high price of job losses as the financial fallout takes its toll.
Housing bubbles are not inevitable
One might be excused for thinking housing bubbles are inevitable, like the weather, but this isn’t the case. It is possible to provide housing without going through cycles of boom and bust. The solution can be found by looking to those who lost least during the financial crisis, and that solution is public housing.
Rent prices in Vienna, for example, changed little going into the financial crisis, or coming out of it. They tracked much more closely with the general inflation trends. And the reason for this is that Vienna has 30% of its housing provided by the municipality and a further 30% in various types of not-for-profit housing bodies.
This high percentage of public housing has two very important consequences. First, it means the bulk of housing is taken out of the speculation game which financial wizards play. That means you don’t have bubbles and you don’t have pops. Obviously avoiding financial apocalypse should be considered a good thing.
The second is that the cost of living tends to remain stable, and low. This is great news for us, by which I mean people who don’t have millions of euro riding on property investment gambles. This low, stable cost of living is also good for the rest of the economy. It means that we can afford to produce goods at lower costs for export. This knock-on effect has driven even the notoriously pro-business group IBEC to endorse the state getting more involved in keeping the cost of housing low.
We are in the midst of a housing crisis which is creating record numbers of homeless people, putting enormous pressure on renters and making it impossible for most people to buy their own home. And it’s all going to lead to a bad end when the bubble eventually burst. Perhaps it is time to consider not descending those cellar stairs again.
Gavin Mendel-Gleason is the Workers Party representative for Dublin Northwest.
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