As a prelude to a more detailed discussion about the household debt crisis in subsequent posts, I’d like to present a few graphs that should become central to the debate. They come from the data in the Department of Environment’s Housing Statistics. The first measures the growth of average wages between 1991 and 2007 which covers the period of the boom years.
In this period, wages grew by 92 percent (seems like a lot but when inflation is factored in wages grew by about 30 percent, or less than 2 percent annually in real terms).
Now let’s overlay the growth in house building costs.
Interesting. The cost of building a house rose at almost exactly the same pace – 98 percent.
Now let’s overlay the growth in house prices.
Hmmm. House prices rose at the same pace as building costs and average wages up to 1996. After that the gap widens – exponentially. Over the entire period new house prices rose by 379 percent.
We tend, as shorthand, to blame the speculators, regulators and financial institutions. And, yes, they were getting up to some pretty wild and crazy stuff. But Shane Ross reminds us – in ‘The Bankers: How the Banks Brought Ireland to its Knees’ – that there were a number of other vested interests involved: realtors, mortgage brokerage firms, stockbrokers, development-landowners, professional associations, and the media – especially those sections which came to rely on vast property advertising revenue. In other words, there was a whole golden circle (remember that phrase?) that not only enthusiastically promoted the property boom but drove an entire social discourse around the economic and social virtues of the property market.
I don’t want to graph you out but here’s one that puts the household debt crisis in perspective.
This represents the gap between new house prices and building costs. Calling the entire gap ‘speculative’ might not be fully correct. After all, there were demographic pressures – a younger population, changing household formations, etc. However, this would not account for the vast bulk of the price increase.
So what does all this mean for the debate today?
First, household debt did not become a crisis because people ‘went nuts’ buying houses without any regard to anything. It was a systemic crisis – deeply rooted in the base of the political economy. Faced with this systemic phenomenon people had two choices when purchasing shelter. They could either take on a lot of debt buying a house, or they could travel far away from work to buy a house they could afford (adding transport costs and losing home-time for their efforts). People’s behaviour did not cause the property boom, it was merely a response. They did not and could not control the price of housing – that was driven by a runaway market manipulated by a golden circle of myriad interests.
And there were no substitution goods. Renting in the private sector was not an option for most household types as this sector was was woefully under-developed.
Second, the household debt crisis did not arise through the normal functioning of the ‘market’. As we saw above, house price increases were consistent with average wages and construction costs in the period between 1990 and 1996. Builders weren’t losing money during this period. They weren’t building and selling houses for philanthropic reasons. They were making profits and employing workers. But the speculative gap arose because the normal functioning of the market was perverted. How do you think financial institutions make a living? They earned profits by loading households with debt. A number of interests made a lot of money with the complicity of Government policy (tax reliefs, tax cuts, lax planning regulations, boom-incentivising development fees for local authorities, etc.) and irresponsible financial regulation.
The household debt crisis is a political and social issue. It is not – and let’s be absolutely clear – it is not an issue of individual profligacy or household irresponsibility. That people get into financial trouble through imprudent conduct happens all the time – but to suggest that that the property crisis was simply the aggregation of individual financial recklessness is merely a self-serving attempt to shift blame.
Yet we now frame the debate – and the new insolvency regime – in terms of ‘sin’. People ‘sinned’ during the boom period, ‘over-extending’ themselves, buying a house. They must now purge their sins through five years of below-poverty line existence – a process that involves the consent of the very financial institutions which produced the crisis in the first place.
There is one word for all this: perverse. There’s another word for this: obscene. Not only do tens of thousands of households suffer from arrears or the fear of arrears, the economy flat-lines under the rule of the financial moral-police.
There is only one rational and equitable solution: get rid of the debt, write-it down, consign it to oblivion. That is the starting point for recovery. And if anyone dares mention ‘moral hazard’ I’m calling in the Hulk to do some intellectual slum-clearance. After paying off bondholders and creditors, after bailing out insolvent institutions, the notion of moral hazard is a tasteless joke.
How we do this is a major challenge which I will come back to in subsequent posts. But the fundamental starting point is to frame the issue properly. Otherwise, we will be frog-marched into a limited range of solutions that places the burden in the wrong place.
With banks still in a dark place, with Government finances in a similar state, we will have to think and construct solutions outside the box – and in particular, the debt box that t has trapped so many people in.
This is the box we have to dismantle to help all of us get back on the road to recovery.