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The political timebomb of hitting housebuyers for the national good

As St Augustine might have said; give me thrift O Lord; but not just yet. The reduction of debt is greatly to be desired but the means of achieving it are rarely welcome.

This applies both to scaling back existing debt and the prevention of excessive borrowing in the future. Debt relief involves, one way or another, the transfer of funds from savers to borrowers. The trick is not to have the savers notice, but that is not easy.

Take Irish pension funds – as indeed the Government did. After the crash, economists pointed out that, unlike Greece, Portugal or Spain, Ireland was solvent overall, mainly because the savings in private pension funds offset debt elsewhere. Ergo, use assets in the fund to cover debt – in this case government debt, much of which had originally been bank debt.

A canvasser in last year’s elections told me of being pursued down the street by a man shouting, “Thief, thief!” The “theft” in question was the levy on pension funds. The man had a point but economists look to the greater good of the greater number and do not have to worry about votes.

Governments do, but in this case calculated that a levy on funds which have not yet been paid out would not be much noticed. That man apart, this seems largely to have been the case.

Politicians are even more aware of the dangers of mortgage debt relief. This is the debt with which voters are most familiar, whether existing loans or new ones. There is the “moral hazard” issue – an obscure phrase but one which translate readily into political hazard.

Those who are meeting their mortgage payments tend to get very upset if those who are not doing so are relieved of some of the burden. And, as we have seen, those who want to take out new home loans are not necessarily pleased by attempts to make sure they stay solvent.

Politicians have approached this issue with all the delicacy of a bomb disposal team. But it is not just them. There was strong civil service resistance to making the bankruptcy laws less onerous. Moral hazard again, and perhaps jealousy from those who never have to risk bankruptcy in the course of their careers.

As last week’s report* from the IMF pointed out, there is a “tragedy of the commons” when it comes to dealing with debt. Its economist also say the greater good would be served if more debt was forgiven, but almost everyone, from the bank with excessive loan losses to the customer who could lose their home, to the fearful politician, has good reasons to avoid such a thing.

As the economic indicators pick up, and memories become movies, the report is a timely reminder of how bad things were and how much is still to be done. It analyses the four EU countries with the biggest housing booms and busts, which turn out to be the unlikely quartet of Denmark, Ireland, Netherlands and Spain.

Denmark? That’s right. The same Danes who can lay claim to having the most successful economy in the world, had a right old house price blowout, spurred by tax incentives for home ownership and cheap loans.

All four suffered serious economic damage in the crash. Ireland and Spain suffered more, because a building boom accompanied the price boom. And Ireland suffered most, because there was an even bigger bubble in commercial property along with the destruction of the public finances. Of the four, it had the worst mortgage arrears, increased unemployment and numbers in negative equity.

For all, this is a crash unlike any previous one. Six years in, history suggests that by now domestic demand should have recovered and be above its bubble peak. But all four remain below that level. Demand in Ireland is a shocking 20pc below 2007 levels. This is partly because the peak was so high, and partly because the public finance correction was so severe but also because the increase in private debt during the boom was much greater than in past episodes.

It repeats the familiar warning that attempts by firms and households to reduce debt could hamper investment and spending for years to come. It is when one comes to the proposals for reducing debt that the difficulties become clear.

It has a helpful suggestion about mortgage relief: that there should be careful collection and analysis of data on households’ assets and liabilities, both to make the policy more effective and to reassure the thrifty that freeloaders were not getting away with it.

Politicians are likely to find other proposals less helpful. The first is that there should be no incentives or tax breaks to help people buy a house – not even first-time buyers.

This only helps them to borrow more and, in a keen market, makes houses more expensive. Ireland has abolished mortgage relief for new loans but another government did that after the last crisis. We will soon hear the calls for a second restoration.

The report – which does not represent the views of the IMF itself – thinks property tax based on value has a key role to play in limiting bubbles. The other three countries had such taxes but tended to freeze them irrespective of house prices. We seem to have caught up rapidly on both points.

An even trickier recommendation politically is the one which calls for renting to be favoured over buying; and for rent controls to be reduced, or even abolished. The report finds that Ireland is around the EU average when it comes to the imposition of rent controls, but has one of the smallest private rental sectors.

This really is a difficult business. There is overwhelming evidence of the damage rent controls can do but a completely unregulated market is not an option. There is wide agreement that a broad reform of the whole legal and financial system in the rental market is required, but who would want to try to balance the competing interest of landlords, tenants and social housing?

The one popular suggestion is the call for restrictions on mortgage lending to be introduced gradually and take account of economic conditions. The Central Bank has sparked a worthwhile debate with its suggestion of an 80pc maximum on mortgages and tight income limits.

The argument has laid the ground for the bank to introduce a sophisticated scheme which could respond to both bubbles and bursts. No fixed arrangement can do that.

One would like to think that Dame Street planned it that way, knowing that any initial proposal would have to be watered down. But one could understand if they are not keen to take on the awesome responsibility of assessing the property cycle and ruining some people’s dreams and others’ wealth in pursuit of long-term solvency. Still, that is what they are paid for, and pretty handsomely too.

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