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Ireland: When MMT and Price Controls Collide, Little Remains

  • Dublin homes

Tags InflationMonetary PolicyPrice Controls

05/24/2022
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The following is a real-world example (and unfortunately not a parable) of what happens when the perils of modern monetary theory (MMT) and price controls both are ignored.

David McWilliams is an economics writer in Ireland and is a big fan of MMT, often confusing saving with printing money. In a recent piece, he opined on the Irish property market, referring to the increasing costs of construction and the fact that housing supply must be increased while studiously avoiding mention of the core reasons why prices are rising and housing supply is curtailed in Ireland.

By way of overview, we in Ireland have, in essence, two central banks and a government currently following policies/setting rules with opposing effects in the market.

The European Central Bank (ECB) (through its decade-long application of MMT) is intent on inflating the money supply and hence prices. This, as all sane economic thinkers know, drives up the cost of all real assets (including land and the materials used to build properties) and is now affecting consumer and producer prices too. These increases long predate Russia's invasion of Ukraine, despite the recent efforts of politicians and journalists across the world to insist inflation is all Putin's fault.

The Central Bank of Ireland (CBI) is intent on keeping the price of properties down (through its mortgage lending rules). These mortgage lending rules were introduced after the great financial crisis (GFC) to curb the excessive credit growth fueling rising property prices.

The ECB's low interest rates in the early 2000s facilitated a speculative property bubble in Ireland that burst slightly ahead of the GFC

These mortgage lending rules were introduced in 2015 and have had various iterations. After the GFC, there was a significant oversupply of properties and a consequent downward pressure on house prices and rents, but by 2014/15, the signs of the overhang having been "worked through" were becoming more evident through a partial recovery in prices and rents, especially in the major cities.

These mortgage lending rules effectively cap the buying ability of one set of buyers (hopeful homeowners and private investors who plan to finance their purchases) while other buyers (cash buyers and investment funds) are not so hamstrung. These rules have the effect of creating a price ceiling for many buyers (who mostly vote) but not for others (many of whom do not, such as investment funds).

Nonvoting buyers pricing voting buyers out of the market is a recipe for economically challenged observers to cast their eyes leftward and fertile ground for the type of politicians that believe Venezuela is an economic model to be emulated.

The major reason for our housing shortage in the last ten years has been the CBI doing its best to suppress the housing prices and not caring that they have suppressed it below the costs of supplying housing. Separately, these costs have been increasing more and more because of the ECB's MMT-inspired policies.

In the meantime, the Irish government responded to the upward pressure on rents by introducing rent pressure zones (RPZs) in 2016. Firstly, a brief history of Irish rent control: rent control existed in a limited form in Ireland up until the early 1980s, at the Irish Supreme Court held rent control to be an unconstitutional attack on the right to property recognized in the Irish Constitution. 

RPZs were/are identified as specific areas (initially the major cities but gradually spreading out across the country, local authority by local authority) where there is significant upward pressure on rents caused by a housing shortage (in great part caused by the CBI mortgage lending rules, as we shall see below). Annual rent increases were capped at 4 percent per annum (from whatever the rent on each particular property happened to be in 2016 and not necessarily the market rent at that time). These rules initially applied for four years but have since been rolled forward. The time-bound limitations of the caps and very modest increases permitted were/are clearly means to avoid triggering a constitutional challenge to the rent controls.

In the most recent iteration of the rules, annual rent increases are capped at between 2 percent per annum and the increase in the Consumer Price Index (CPI), whichever is lower. More left-wing political parties (some of whom have a yearning for the economic miracles performed by Venezuelan socialism) are advocating for a flat out freeze on rents for three years.

So the CBI's mortgage lending rules essentially operate to cap the buying power of great number of market participants, the RPZs are an effort to cap rents, and the ECB merrily MMTs the money supply according to Buzz Lightyear's motto, with the consequence that construction costs have been soaring over the decade. 

The housing supply, meanwhile, has been mirroring Buzz's plummet, for as all sane economic thinkers know, everywhere and any time a price ceiling for a particular good or service has been set at a level below that which the free market would otherwise set, the result is a shortage and/or a drop in quality. Even Paul Krugman knows that.

The CBI policy is also substantially responsible for the run up in rental prices over the last ten years. By trying to limit the prices at which residential properties can be sold, the CBI has, for years, disincentivized developers from building. 

By preventing/hindering the hopeful homeowners from buying sooner (through the mortgage lending rules), the CBI has forced them to remain renters. By severely limiting private investors from investing in residential accommodation, the CBI has reduced the supply of rental accommodation.

All the foregoing is a recipe for one thing and one thing only. A shortage of rental accommodation that can only pressure rents upward. As noted, the government then tried to solve that problem by creating RPZs, which have had the effect of driving out of the market many landlords (who don't fancy paying a marginal income tax rate of 52 percent while being vilified to boot,) further curtailing the supply of rental properties.

Also, many landlords who had been renting at below-market value in 2016 (and were trapped indexing their increases to this below-market rent) have either sold up and exited the market (reducing the supply of rental properties) or made sure to index rents up at each opportunity. The Left's response has been predictable; ban the landlords from selling, unless tenants are left in situ. 

This is without getting into all the other issues that push property prices upward; viz., the value-added tax (a sales tax of 13.5 percent imposed on the first sale of newly developed properties) and the insistence by a vocal swathe of the population that water be provided "free"—without user charges and out of general taxation—without limit. This has had the knock-on effect of property developers paying increased infrastructure costs, which then must be passed on to the purchasers of these properties.

In the nation with the most progressive tax system in both the European Union and the Organisation for Economic Co-operation and Development, it's a very good bet that most of this swathe who insist on "free" water without limit are contributing a portion of tax revenues vastly smaller than the demands they place on those revenues. In addition, McWilliams continually advocates for a tax on vacant land to incentivize development, in essence imposing an extra cost on development. 

This plays well to his gallery, who either refuse to acknowledge, are incapable of appreciating, or forget that costs of a business must be passed on to their customers or the business goes out of business, in which case another business—say, an investment fund—fills the gap.

There has a been a move toward build-to-rent schemes, which are creating political and popular backlash against those who refuse to or cannot appreciate that the current situation is a direct and predictable consequence of central bank and government policy. The only thing one can say for the government is that the opposition's Krugmanesque policies are far, far worse, essentially being tax, borrow, print, and spend far more on public housing. Again, when MMT and price controls collide, little (supply) remains.

Author:

James Murphy

James Murphy, CFA BA MBS BL is an experienced financial services professional with 25 years of experience in the banking, finance and hedge fund industry with interests in finance, economics, law, history and politics and the interplay between these fields.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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