The End of The Housing Crisis?

0:00David McWilliams: How are you doing there? It's podcast time. Give you a quick heads up. We're talking about the Irish housing market. Shh, don't tell a sinner. House prices are beginning to fall. The question is, how far can they fall, if at all? And what can be done to accelerate this fall? Because in a housing crisis, what we need is more, cheaper houses. So it's all coming up in a couple of minutes.

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2:08David McWilliams: How are you doing there? It is time for the podcast. The podcast today is going to talk about an issue that has been vexing Ireland and most European countries for at least the last 10 years and its house prices, John. It's been vexing us, Mac. It's been vexing us for many, many years. But again, the Irish housing crisis is 50 years old. It's not five years old. Yeah. For the last, literally for 50 years. So you go back down to the 80s. yeah we have not been building houses in the right place at the right price either the population has been eviscerated by emigration which it was in the 80s and therefore there was no housing crisis because there was no people right and then once you start getting people again we got the celtic tiger we got this huge credit build-up the banks went bonkers we know the story but it's worth actually reiterating very quickly yeah and the whole thing crashed in 2008 and what we got was It's not just a housing crash, but a credit crash.

3:09The credit disappeared from the economy. But in those few years, though, we were building a lot of houses.

3:14David McWilliams: We were building a lot of houses. We were building a lot of houses in the wrong place. Yeah. That was the ghost estate years. Yes. Yeah, yeah. In effect, houses needed to be built in urban centres. And what they were doing was they were building outside townlands, in effect. Right? Yeah, yeah. Big estates outside townlands, particularly and most unusually, in the northwest of the country. So counties Sligo, Leitrim, those sort of countries, you've got a huge increase in the housing stock and people didn't want to live there. And so they couldn't sell them. But in actual fact, those houses... They didn't have to ask beforehand.

3:50Exactly, exactly. But those houses have... Interestingly, they were entirely tax-driven schemes. It shows you that if the incentives are right,

4:01David McWilliams: people will build houses. And that's what I want to go back to, right? Yeah. Then, of course, we get the crash. that the banking system implodes. The banking system then, rather than lend money to people in the 2010s, that doesn't lend money. So there's not enough money going from the banking system to the housing market. There's not enough money from the banking system to the developers. And what Ireland does is it gives away its housing. So we brought in the Vulture Funds. Remember that idea? And they came in. They've gone a long time ago. and the REITs market that's all gone. They've moved to Spain.

4:38Did you see that story? They've moved to Spain. Actually, I was getting an alternative view of that Spanish story. Oh, yeah, yeah. Well, actually, just recap the Spanish story first.

4:46David McWilliams: So there was a woman, an 87-year-old woman, who was evicted last week from her apartment in Spain. Yeah, Madrid, wasn't it? Yeah, in Madrid. And that was as a result of a vulture fund coming in, buying the apartment block and putting up the rent. The rent was going to be more than her pension. her actual public pension and she was evicted and that of course was a massive victory for Pedro Sanchez on the socialist side because it basically said in effect the policies of the previous right wing government were capital friendly and vulture fund friendly I was sitting in Lisbon John as I told you last week doing an event with a couple of friends of mine who are Portuguese, one of whose sons lives in Madrid and they were giving the opposite, they were saying that this was an entirely fabricated story and that she already had a second apartment, this woman, to move into.

5:40David McWilliams: So she wasn't as portrayed by the left, this poor elderly woman, but she actually had somewhere to go. But again, maybe they were speaking their own politics to me. Yeah, well it certainly brought the numbers out on the street. Yeah. But she won the case and she's back in her old apartment. So basically the case in Spain is like the case in Ireland, it's like the case in britain that house prices have gone through the roof because not enough houses are being built to accommodate increases in population right and increases in population in parenthesis means immigration because that's the one that's really changing things obviously like spain there's also the problem is the cost of building houses gone up yeah and it's the same here cost materials since the war in Ukraine has gone through the roof.

6:28David McWilliams: Any sort of commodity-based stuff has gone up. Energy costs have gone up. Yeah. The amount of workers, skilled workers, one of the big problems in Ireland, we're going to come back to talk about Ireland, was that after the crash, I don't know if you read The Spinning Heart by Donald Ryan. No. Very interesting book. And it talked about what basically happened in small-town Ireland to what there always was the small contractor. And the small contractor would have been employing as a subbie tradesman, would have been a decent subbie, would have had a relationship with a bigger contractor. But when the crash happened, all those guys, plumbers, electricians, brickies, brickies mates, builders in effect, left the trade and they haven't come back.

7:17So there's a shortage of proper builders everywhere, number one. And number two, your Bet Noir data centres are being built at an extraordinary clip, and they're paying people better. So loads of the tradesmen have abandoned constructing the houses because it's a pain in the hole.

7:35David McWilliams: And they're actually going to work for the Googles and building data centres. So there's lots going on. Which makes a lot of sense, but yeah, I mean, it has a huge knock-on effect. But what's interesting, though, in Spain is that, and you read about it all the time, there's these villages in rural areas that are completely abandoned so all the the young spanish are leaving the countryside and heading to the urban areas well spain explain is just a fascinating country because it has the same sort of dynamic as as ireland and the uk in terms of housing the other problem is that again after the crash here the quality of the bills of those houses that were built quickly in the boom was reassessed.

8:17David McWilliams: And now what we have is a significant, which is probably good for the quality of the buildings, but we have a significant cost associated with increasing quality, whether it's fire regulations, and yada, yada, yada. And all of this is pushing up prices, right? So up until now, the news on the housing front has been unambiguously bad. But in recent months, it's turned. And the question now, has the Irish housing market turned? We're not out of the crisis, but something very interesting is happening. So when you say it's turned, how do you mean? So in the last few months, Irish house prices have stopped rising quickly.

8:55National house prices are up 3 % this year, but they were up 6 % last year. So it's half the increase in house prices. Yeah, but it's still increasing.

9:03David McWilliams: Yeah, but it's very important. It's very important to look at these ideas, right? Sellers are adjusting down what they think they can get. So there's a change in the psychology of the market, right? And also, sales prices are only up 1 % in the last few months, right? So what this means, it's the slowest in six years. So something is happening in the housing market, which we want to come back to, and see, is this the beginning of a new phase in the housing market, right? These are big shifts, you know? The premium that buyers are prepared to pay over the asking price has narrowed from about 7 % to 2.6%.

9:44And again, so buyers in their back of their heads kind of said, well, if it's going to cost 400 grand,

9:52David McWilliams: I'm probably going to have to cough up another 40 grand so I'm not gazumped by somebody coming behind me, right? Yeah. That, again, has changed. buyers are no longer worried about being bullied by somebody coming in behind them because the fear of being outbid has diminished. And again, this is the role psychology plays in markets. So once the psychology changes, and I want to talk to you about this. I've said before in the podcast, when economists see a price, we see a number. When normal people see a price, they get a feeling. And it's that feeling that drives markets. It's the feeling, if you are a first-time buyer, it's, am I going to be outbid tomorrow?

10:40David McWilliams: Do I have to actually go and pay more today? And that sort of feeling in the market change everything. So if people are confident, they're going to pay more. If people are anxious, they're going to pay less. And this confidence pushes people to do that extra bit. And the question is, why are people now changing their perceptions of the housing market, right? Because we forget that this, it's a weird thing to say, but, you know, so much of economics sells itself as being factually based, numerically based, numbers based. But actual fact, the vibe, the mood is so crucial to everything, you know?

11:21But there's so much going on in the world at the moment that, you know, I'm not surprised that anxiety has set in at this stage.

11:29David McWilliams: Well, the interesting thing is, right, the change in people's perceptions has changed the market completely. In Dublin, according to Daft, and Daft is a really good source of all this, sales prices fell in Dublin 5.2 % last year. So while in the country they're still rising, they've actually fallen in Dublin. And that's a big, big deal, right? And that's the largest annual fall since 2014. So this is a change, right? And this fall has accelerated over December. Prices dropped in Dublin 2 % between June and September in Dublin. So what you're looking at is a dynamic that is worthy of explanation.

12:14So are you saying that, you know, they're gradually falling, but they're still rising, but at a much lower rate. Are we going to hit soon enough a point where the prices aren't rising at all and they're actually beginning to fall?

12:28David McWilliams: So on a year-on-year basis, prices are still rising. But when you look at the last three months, what you see is prices falling. So if that were to be extrapolated out over the next 12 months, you would see year-on-year falls in prices. If you do see that, then your market psychology changes dramatically. So the chatter goes from, geez, I better get in now because prices are rising, to, do you know what? I think the bargain is going to come tomorrow. Yes. So let's hold off. So this is why it's fascinating because it is such a break with what has been the narrative for the last 10 years. Yeah. The narrative being prices are rising and get in if you possibly can.

13:10David McWilliams: front loads, your deposit, all that sort of stuff. But before we go and say the housing problem is solved, just hold your horses, right? Yes. House prices nationally remain, and this is a 44 % above COVID levels, pre-COVID, which is a huge amount. Right, yeah, yeah, yeah. So prices have increased by 44 % since the pandemic. And what we're not seeing is we're not seeing this easing because of new supply. You know, the idea is supply. This is much more a demand idea. And it reflects two things, right? One is that buyers have just become maxed out. They've reached the limit of what their income can pay.

13:51David McWilliams: So if you think their income, the lending rules, and the deposit, we'll talk about those, the three things that make up demand for housing and prices. People have just simply maxed out. They cannot afford anything. That's the first thing. The second thing is that Ireland is continuing to build homes for a population structure that looks like the 1980s and 1990s, not like now. Explain that. So we are still building three-bedroom semis in the suburbs. Right, yeah. When, and so the logic of this is that people and couples have two children and that's your first-time buyer. Yeah. But in fact, your first-time buyer has changed.

14:35Lots of people have no children. Lots of people are single. So what people want, actually, is not three-bedroom semis. They want to blend. They want one-bedroom apartments, two-bedroom apartments, three-bed semis. So a lot of the people are saying, I don't want that. So the demand has been affected, A, by income being maxed out.

14:54David McWilliams: We'll give you an example in a minute of a typical 30-year-old couple and what they must require and the sort of income they have to have in order to pay these ridiculously high prices. That's the first thing. But it's also that 30-year-old couple might say, I want to live in town in a one-bedroom flat. I don't want to live in a three-bedroom house. I don't want to commute. I don't want to be stuck in traffic. And on that, our transport infrastructure is so bad now. It's actually a source of national humiliation. It really is. Again, as I said, I was in Lisbon last week. Metro system is amazing.

15:29a much much poorer country yeah built a metro system in the 1990s and continues to build well we were just talking earlier on I mean the dart here the dart is off for the weekend I know so our family is supposed to get around and out and about the dart is off yeah yeah yeah and Lucy my daughter had to go to the airport yeah and she's away to the air coach so the air coach goes once every two hours the one that goes through Dullnery right wow Jesus so you have to get an Uber then you're suddenly it's costing you money it's traffic it's congestion it's the whole thing right so lots of young couples are saying or young people are saying i don't live with somebody number one yeah or if i do want to live with somebody i don't live out in the suburbs in a three-bedroom house yeah so they're not buying what's on offer so they're not buying what's been sold so you take those two things together and what we're seeing is the buyers of course there's a buyer's strike going on at the moment and that is having the effect of pushing down house prices, right?

16:30Okay, so let's have a look at, you were talking about your typical 30-year-olds and, you know, a couple starting out, been working for a few years, and now they're looking to either get married or have kids or whatever. Yeah, so give us that as a scenario. People are listening to this podcast, John.

16:48David McWilliams: That's exactly right. Yeah, yeah, yeah, yeah. So just before we talk about that, there is an expression in economics which is the cure for high prices is high prices. which seems kind of counterintuitive. Yes. But what it means is that as prices rise, eventually, A, on the demand side, you become maxed out and you can no longer afford it. So the upward pressure begins to abate. Yeah. But as prices rise also, profit in that area, in the housing sector, rises and rises. That causes resources to shift from other areas into construction. Yeah. This explains our ghost estates. And then you get an explosion of supply, which actually lags demand.

17:34David McWilliams: And you end up going from a situation of very acute housing shortages to a situation of a glut very quickly. And the only way you can clear the glut is if prices fall yet further. So this is the idea that there is an inbuilt dynamic in markets that when people worry about high prices, they should actually chill out because the solution to high prices is high prices. Great example of that was the 2008 crash. So when I was shouting and roaring about these prices are too high, eventually they were too high. Eventually the internal inconsistency of forcing people to live miles away from cities, borrow their heads off, leverage themselves up to yin yang, suddenly there comes a moment where those very high prices act against themselves.

18:22Prices start to fall, and what you see is this dynamic.

18:26David McWilliams: And you end up with, as we had in Ireland, enormous amounts of unfinished, unoccupied homes in 2010, whereas in 2008, you couldn't get your hands on a home before they crashed. So you go from acute shortage to a massive glut in a very quick period of time. Yeah, but albeit that glut being uninhabitable houses. Well, you know, in a housing crisis, everything's habitable. You know, you just have to fix them up. Yeah. You know, but my point is there's a dynamic. There is a dynamic in markets. So that's the first thing, right? Yeah. The reason that people are maxed out is prices are just too high.

19:09I'm going to give you a set of figures which will amaze you, right? Yeah.

19:14David McWilliams: Since COVID, although wages are more or less rising in line with inflation, So people's incomes haven't risen. House prices across the country are up massively, particularly outside of Dublin. In Munster, outside the cities in Munster, house prices are up by 72 % since the pandemic. So if you want to buy a house in the countryside in Munster, it's costing you a fortune, right? House prices are up 62 % in Leinster outside Dublin. And in the four regional cities, so your Waterfords, your Golds, your Limericks, your Corks, house prices are up by 57%, while Connacht Ulster, a place traditionally with cheap housing and non-dynamic housing markets, kind of slow housing markets, prices are up 72 % since COVID.

20:02This is a huge amount. That's incredible. It is incredible, right? Dublin lags behind. Prices are only up by 32 % in Dublin. So, no, but I mean, it is quite amazing, right? Now, the current asking price, think about this, and for non-Irish listeners you might have to have a double take

20:19David McWilliams: for a three bedroom semi-detached house in Dublin is 635 ,000 euros yeah give us that again 635 ,000 euros for a three bedroom house in Dublin city that's the average right in Cork city it's 431 ,000 incredibly expensive Galway 424 ,000 Limerick 376 ,000 and Waterford, 313 ,000. Right. So that's the house price. Yeah. Now let's look at... Wages. Wages. Yeah. Real wages have been going up in line with inflation. So real wages are up about 3.9%. Inflation is about 3.7%. So real wages are static. And if you have to borrow, which everyone does has to buy these houses, the font of all borrowing is income.

21:16David McWilliams: So when you don't have any income, you can't borrow. But the font is dry because people's real wages are not rising. And first-time buyers are half of all buyers, right? So let's have a look at them, right? They can borrow at most four times their income, this is the lending, and they have to have a 10 % deposit. So we've given you the figure 635 grand now let's work backwards yeah what sort of income must you have to acquire that house you can only borrow four times your total income right which is usually a joint income yeah and you need to have at least 10 of the house in cash in this case you need about 60 grand 65 grand in cash first of all yeah buy house and do it right so if you take your which is always bonkers because, you know, prior to buying your house, you're spending a good chunk of your wages on rent.

22:09Exactly. For many people anyway. For everyone. For almost everyone. So take this typical couple in your 30s, right?

22:17David McWilliams: Both, let's say, on average earnings. We're talking about the average house prices. Yeah. So we have to look at the average earning. Average earnings in Ireland are 1 ,046 euros a week. That's 54 ,000 euros a year. So you put those two together. that's 108 grand combined income, maybe 109 grand. It's the average of these two people in their factories, right? Four times that means they can borrow only 435 ,000. And adding their 10 % deposit, if they have it, means the maximum purchase price they can afford is a house of 484 ,000 euros. That's when they're kin to their color, they're maxed out on everything.

23:05David McWilliams: They're basically eating beans and watching Netflix for the next 10 years. Based on those figures, the average Dublin house is way out of their league. Right. So the average person can't buy the average house because the couple would need to buy the average Dublin house 145 ,000 per year. They only have 108 ,000. So they are short. Or they might need 200 grand in cash to bring down the amount they have to borrow. And who has 200 grand in cash? Nobody. Nobody. Right. So what you're looking at is young couples are now completely maxed out. The solution to high prices is high prices. they cannot borrow anymore unless the central bank eases up on the borrowing rules, but it is terrorized and traumatized by 2008, so it's not going to do that, unless they ease up on the deposit rules.

24:11David McWilliams: But the fact is that the deposit is almost like a little bit of insurance for the lender. Yeah, you're going to go back to pre-2008 days. Which were no, remember the no deposits, 100 % mortgages, all that sort of stuff. I mean, that's just a... And that pushes prices way up, right? So what we're looking at now, John, is that young people are simply out of the market. The market has to adjust. Okay, I understand all of that. And I wonder, to add to that, how much the kind of volatility in the global market, in all markets, and the war in Iran and Gaza and Ukraine and everywhere else... Stop the game, John.

24:54And oil prices are shooting up and the Fed is raising interest rates and stuff. So mortgage rates in America are now over 7%, which they haven't been in many, many years. But as you said, when the bond yield rises, borrowing costs rises, and that ripples out across the whole world. So are young people kind of a bit more sceptical now and, you know, are more anxious because of this volatility, both in the financial markets and in the geopolitical stage?

25:26David McWilliams: But I think that all of our moods is affected by what we read online, what our newsfeed are telling us. And very little in this is reassuring younger people. And so you take that together with the fact that they're maxed out and you have a market that is adjusting as we speak. One other dilemma for a lot of young people in Ireland will be the fact that many, many people are in positions that are very, very AI sensitive over the course of the next few years. So if you're buying a mortgage, you're looking at a 30-year view of your income, and you might be sitting like, you know, I'm working in a clerical position, something that a robot could do very, very easily, and at half the price.

26:25David McWilliams: So all of this is impacting. And even those traditional kind of coding jobs are now. Well, they're the ones that have been most affected. Yeah, yeah, yeah. And they were some of the high-paid jobs in Ireland. Yeah, I mean, the software engineer has had a mass extinction event. Yeah, yeah. And they were, as you said, coding because they spoke the language of code. And now we realize the language can be done by anyone with a chat GPT or clawed ability. You just tell the yoke to do it. Yeah, yeah, yeah. Vibe coding. All those things. Yes, exactly. I think we've a vibe coder, you know. What a shit name.

27:04David McWilliams: It is a really shit name, isn't it? Anyway, so you take this together and the good thing is, John, is the market is adjusting downward for once. Take, for example, a two-bedroom apartment. Two-bedroom apartment in Dublin costs about 500 grand at the moment, the average cost. And again, that is out of the reach of this average couple. They need to find another 18 grand somewhere in order to do that. okay so what is the solution for our 30 year olds or for anybody where are we going with this but actually let's come back after a break okay

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29:41The day pack supports cognition, focus, and cellular energy production. At night, the night pack helps you wind down and supports a calm, relaxed state. Less time managing your supplements, more support for your day and night. Shop Total Human now at onnit.com. Okay, Mac, so there's good news and bad news. The good news is that housing prices are beginning to drop or certainly level off. No, they're beginning to drop in the last three months. and the bad news is that people are still pinned to their collar. So what is the solution?

30:22David McWilliams: Prices are beginning to drop, but from incredibly high levels. So much so that we painted that picture of the average couple. Yeah. It's priced out of almost everything unless they want to commute. Yeah. And lots and lots of them are thinking, you know what? I couldn't be arsed. Yeah. That's also an additional cost to commute. It's anxiety. It's a cost. It's a pain. It's petrol. Like think about the cost of living, right? Everything has gone up the price. So if you're 30 and you're trying to save and you're trying to have some sort of social life, like basic social life. Yeah. You know, something has to give.

30:58David McWilliams: It seems to me that the solutions are always more supply and less demand. Yeah. So this is the ideal world. Yeah. Particularly. This is all you can do, right? So this is the idea. Come back to it. And it's something that we need to tease out, right? I think we should have less onerous requirements on things like fire obsessions. I think that what is happening is the cost of building apartments has been onerously increased by far too much regulation. But you don't want a Grenfell. You don't want a Grenfell. You obviously don't want a Grenfell. But again, again, Grenfell was an absolute one-off.

31:42My point is that if you increase constantly the cost of doing business, of building, you're going to price everyone out. So maybe there is a way of looking at fire regulations elsewhere that are less strict.

31:58David McWilliams: I've been told by a lot of builders that the fire officers used to be facilitatory. They'd come in and say, look, okay, here's your building. Look, what's your budget? Okay, we'll try and figure something out. I've been told in recent years that the fire officers have become incredibly aggressive and lots of builders are like, we just can't afford that. But again, I'm not focusing on lots of different regulations. Floor size, requiring apartment blocks to have car park spaces, all these things. And of course, the major one is the height of the building. Because as you go up, apartments become cheaper.

32:38This is the whole thing.

32:39David McWilliams: It is much more expensive to build an apartment in a four-story block than it is in a 10-story block. So what you're saying actually is don't let the perfect bully the good. Exactly, because we're in a crisis. You're absolutely right. That's exactly what I'm saying, John. You're in a crisis. And in a crisis, you have to throw lots of your perfection at the window. You say, let's get this done. That's the first thing. And of course, the second thing is, if you look at demand, if we have more and more immigration, immigrants, like everybody else, have to live somewhere. And the problem is, one of our dilemmas is the following, John.

33:20David McWilliams: If we are having more migrants come in to do lots of jobs that lots of people don't want to do, right, but to do other jobs, what it does is that pushes down the wage rates in the economy. Because you have more people who are willing to do the job at lower prices. So we've become an economy where real incomes are being compressed by the fact that there's lots of people who are prepared to do those jobs cheaper. But those people who are prepared to do those jobs cheaper have to live somewhere. So house prices have to rise. So what you have is you have a dynamic now, and it's a kind of a cultish obsession with cheap labor.

34:04You have a dynamic now where wages, as we've seen, like real wages, are static, even though unemployment is at its lowest. Unemployment at this level should mean wages are rising. Yeah, that's the Phillips curve, isn't it? Exactly, John. Exactly, John. But they're not because immigration is compressing wages. So if this bizarre policy, wages are being held down by the very force that is driving house prices up. It's exactly the same force. So what you need to do is rebalance this. Now, this is a difficult conversation that I think every European country is going to have, right?

34:47David McWilliams: Because unless we fix supply, we are going to have house prices. but supply has to respond to a demand and demand's major propulsive force is population. There's no other force in there, right? Whereas in 2008, the force was credit. This is the key thing to understand. I'd like listeners to get their head around, right? In 2008, the Promethean force that drove Irish house prices upwards was not population growth. It was credit growth. and then credit growth can disappear overnight. And it did. In 2028, I know it's a couple of years hence, but we're talking about now, the propulsive, the prometean force that's driving house prices isn't credit, it's population.

35:38Demand, yeah. And that population is driving demand. So in the past, it was credit driving demand, speculation, gambling, and get-rich-quick schemes.

35:51David McWilliams: Right? That was the world of 2008. Now what we have is demand has been driven by population, which has been driven by the state not controlling how many people are coming in and going out. And of course, the final thing is that as house prices rise and as real wages do not rise, the Irish people, the graduates who are expecting to live here, they leave. Yeah. And they're leaving in their tens of thousands. Yes, they are. So the whole complexion of the economy is changing because they're saying, look, I'm not hanging around here because I can't get a house. So I'm going elsewhere. But the people coming in from much poorer countries don't have that choice.

36:38So they're saying, look, I'm getting out of my country because real wages are half of what they are in Ireland. I'm coming to Ireland anyway. Yeah. And them coming to Ireland brings down the wage in Ireland but pushes up the house prices. So as I said, this is the key. That force is the same force. So again, prices are adjusting downward. The market has spoken. This is good. But in order to get to some equilibrium where things are just affordable, prices have to fall yet further. And that requires changes in policy. We leave it there.

37:15By the way, if you want to get this podcast early and with no ads,

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