14th Aug 2008
Does Denis make good medicine?
In the concluding Irish Times article by senior Irish business figures on the best way out of the current economic blip, Denis O’Brien makes the case for greater state intervention in the housing market.
Calling for the expansion of the role of the Housing Finance Agency, Mr O’Brien says:
“The significant positive is that government debt is only 25 per cent of GDP. Therefore, the State has a huge capacity to play a most important role. I would advocate expanding the role of the Housing Finance Agency (HFA) and this could be overseen by the National Treasury Management Agency (NTMA). The HFA could be expanded and its criteria for funding home ownership dramatically changed. Effectively, right now, a bank looking to make a mortgage would want a margin of up to 250 basis points over Euribor (three months/4.9 per cent) to make a home loan. [Euribor, the Euro Interbank Offered Rate, is the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime.]
The HFA can raise money at a tenth of this margin. By reducing the cost of mortgages, then a lot of unsold housing stock becomes a lot more affordable to first-time buyers.
By reducing the cost of mortgages to circa 5 per cent to first-time buyers, this would, in turn, provide liquidity for developers and things would begin to move again, (albeit more slowly). It would also have a big impact on trade-up homes. It must be realised that the housing market is one market and that trading up and down are as important to the liquidity of the sector as the first-time buyer.
The crunch now is that with loan-to-value ratios retreating to 70 per cent, stamp duty will have to be overhauled as buyers have to fund more equity.”
An interesting suggestion from a man who would be perceived by many as an advocate of small government and free market economics. The rest of his piece is well worth a read.
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