Great to see some detail on how the same banks that we are being asked to rescue fuelled the 1970s bubble in agricultural market prices. Was there a NAMA then for farmers or banks?
Perhaps Alan Matthews might care to offer some more insight on this aspect of our economic history.
Assuming that now senior officials in financial institutions (including the Central Bank and offshoots) were junior during the 1970s, it suggests a poor capacity to learn. But then, the same is true of the Government with its reconstitution of the 1980s mechanism – An Bord Snip.
The detail on Japan is eloquent comment on what we now know on what NAMA is expected to pay for the loans it acquires.
There is still time to change policies, despite the TINA approach now being adopted by even some Green Party supporters.
“It appears, therefore, that, by paying an average of two thirds of the face value for Nama assets, the Government is likely to impose severe losses on taxpayers of the order of €30 billion, or one fifth of national income.”
Thank you Morgan Kelly for calling it as it is.
Consistent with previous analyses/informed speculations is MK’s implied estimate of paying no more than €30b. But, expect €60b national debt to be signalled tomorrow.
As an AIB shareholder, thank you taxpayers of Ireland….
Just so we don’t have any accusations of hindsight influencing opinions, before tomorrow could some of the more prominent posters on here signify what they see as the par score above which they will shriek and below which they will congratulate the Minister? I know we do not have the information that NAMA does etc etc but no doubt most will have a view.
For the purposes of this, it is probably safe to assume Eur5 billion of subordinated bonds.
And lets not forget it was Prof. Kelly who called the property crash more loudly and clearly than anyone else.
Unlike those in power who are currently peddling the fibs that “Nama might even make money for the taxpayer”, Kelly was awake to the dangers of the property market back when we were in a position to do something about it.
No one in power listened to him then. Hopefully we have learned something from our mistakes.
@Donal
There was a form of NAMA called the Agricultural Credit Corporation (now AccBank) which had funded land purchases ranking after the main banks in its collateral – ranking first for losses. Bailed out by Government forebearance it eventually wound out exposures – though it can hardly be said to be acting on some form of organisational memory today. It’s an interesting bank to observe – nearly bust in the 80’s bailed out by Government. Nearly bust in the late 90’s – sold off by Government not before it was outed as the worst trangressor in non-resident account usage and now nearly bust again were it not for its Dutch parental support.
Farmer debt recovery didn’t see the wholesale sell down of farm land or closure of farms – workouts were arranged and debt eventually written off or paid down.
Today the bank is interesting in its response to recovering bad debts. It’s parent has not been bailed out by its home state – moral hazard behaviours of state guaranteed bailed out banks do not apply – prudent banking does. This is of course Dutch driven rather than driven by Irish local management. It seems the penny eventually dropped in Utrecht as Rabo woke up to what has been going on in its Irish subsidiary in late 2007 and the bank has been active in pursuing debt ever since. Consider also Danske early decision to write down assets. One might assume their analysis and call on the future is somewhat similar to Morgan Kelly’s at least in the case of RaboBank which isn’t short of expertise in understanding or practicing prudent banking.
One of the things we have learned is that economic and financial forecasting is an utter waste of time. Instead of listening to idiots pontificating about stuff that might or might not happen it beoves us always to ask us what we know about the the present. In this context it is important to focus on Morgan Kelly’s assertion that property is still overvalued. If you compare Irish real property prices to their past, to rents, to international counterparts, it is impossible to argue that we are anywair near fair value. We don’t know how long it will take or how it might happen, but overvalued property will eventually move towards fair value. So, to contradict how I opened this post, here’s a forecast: Irish property prices will fall further.
@ Pa Bandit,
For me the par score is that equity and sub bondholder debt is erased, before the taxpayer is asked to chalk up one single eurodime.
By definition, any and every loan purchased from the banks will represent an overpayment because otherwise, why sell to Nama? Why not sell to Sauerkraut Privat Equity GmbH?
This whole debate about “what is the right haircut” is putting the cart before the horse. If we nationalise, we don’t need to worry about the size of the haircut.
Of course there is a haircut big enough as to also lead to de facto nationalisation, and one can speculate on what that is, but again, that’s an unnecessary and unproductive guessing game.
The price increase on residential property in Ireland really looks very mild when you look at 1995 to 2007, however if you add just a few more years the picture and go back to 1990 is truely shocking.
An average 10-20 year old 3 bed semi-D in a working class Dublin suburb cost €70,000 in 1990, it rose to €700,000 in the 2007 peak, that’s X10.
The eqivalent cape cod house in a New Jersey suburb has only risen from $160,000 to $400,000 over the same period i.e. X2.5.
Irish prices have therefore risen at x4 the US rate and the US is going through a house price crash at that rate.
@po
Gov is exposing the taxpayer to unquantifiable assytemetric risk no matter what the haircut. All that will be produced is a estimate which many fear once announced will become the “final” figure after the valuation process. Lenny is blindfolded, trying to hit a moving target ten years into the future with a pop gun.
Consider the Carroll case and the perverse risk taking displayed by banks, captive of large borrower exposures, agreeing to fund a business case requiring a two year interest motarorium priced at 1%.
Do you think for any minute bankers are not leveraging their insider knowledge for all it’s worth?
While tax payers share unequally in the distribution of catastrophic banking losses the inequity and rank nonsense of LTEV and its subordinate child represents the ultimate in moral hazard bail out.
@ all
what i’ve yet to see an analysis on is how the population growth experienced by Ireland affected/should have affected Irish property prices? The population has increased by roughly 42% between 1971-2006, and is expected to increase by a further 32% between 2006-2026 (per CSO 2006 census and projections). As such, surely this should provide some underlying stability to property prices, i would have thought?
In contrast, while the population trends of Japan between 1950-1990 roughly mirror those of Ireland in the initial period above, they have somewhat flatlined since, and are now starting to go into decline. As such, was this failure to sustain population growth not an underlying cause of the Japanese asset price bubble collapse, and might our population/property trend not have quite a bit further to go?
Also, given that the Japanese asset collapse was a long drawn out affair, and that this is considered one of the reasons why the collapse was so damaging, is our much quicker property price adjustment (it took Japan a decade to see residential property adjust 33% from the peak, its taken us 2 years!) not a ‘good’ thing in this regard and a ‘strength’ in terms of attaining a quicker recovery?
@Eoin: predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative.
@eoin
As far as I recall 2004/5 estimates of new builds considered not only population growth but net inbound migration patterns – peaking at c50k units a year until 2015 (if memory serves me right) – within two years output was 90k+ . Population growth may provide stablity in demand but does this necessarily translate into balanced supply, rising property values and property ownership consumption behaviour ? How attractive will Ireland be to migrants and could it not be the case that outbound migration will begin to rise once again as it did in the 80’s? Also factor in unemployment, tighter credit controls, rising cost of credit, contraction in affordability, overhang sold off at knock down prices etc.
@Eoin
Germany’s experience post unification followed by a dead market in the following decade, when most other countries were booming, suggest the importance of underlying economic trends.
Where will the new engine of Irish growth come from?
Construction employment increased from 126,000 in 1998 to 282,000 in 2007.
Overall employment increased 620,000.
In the tradable goods/services sector, employment peaked in 2000.
Easy credit and construction powered the rest of the economy.
International financial services will not be a huge growth area; the ‘so-called “smart economy” sector will be marginal and FDI generally, who knows?
Companies like Apple have almost all their manufacturing done in China; most PCs are currently made there.
Competition from Poland with its experienced workforce and other Eastern countries will be increasingly evident.
It would be a start to recognize the challenges but we are still at the delusion level.
Morgan Kelly’s strength is that he deals with facts and while people can quibble with some aspects of his forecasts, it’s hard to challenge the direction.
His most memorable commentary was last December which began: “For the current Government, a month without a catastrophic policy error has come to seem like a month wasted.”
“the Government’s proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish’s liabilities. For all it will achieve, the money might as well be piled up in St Stephen’s Green and incinerated.”
Before Alan Ahearne supped soup with the devil, he went on RTE’s Drivetime, where he also questioned why Anglo was being saved. “The market is saying that Anglo Irish Bank is bust, it cannot be resurrected . . . why is the Government insisting on putting more and more money into it?”
Kevin O’Rourke is perfectly correct in stating that: “predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative”.
In the past, forecasts of future population growth in Ireland have greatly under-estimated that growth. A DKM report in 1990 predicted that the population of Ireland would fall from 3.5 million then to 3.3 million by 2010. It predicted a 20 per cent fall in the number of young people (aged 15 to 24) in that period. In the event, the population increased to 4.5 million and the number of young people (aged 15 to 24) increased by 50 per cent. Most of the infrastructural bottlenecks (housing shortages, congested roads etc) Ireland was experiencing in the late 1990s and early 2000s, and which have only begun to be alleviated in the past few years, were largely due to hopeless forecasts of future population growth made by ‘experts’ in the late 1980s. This was largely due to those ‘experts’ assuming that net emigration would continue and actually increase during the 1990s and 2000s. In the event, the opposite happened. (Joan Burton, are you taking note?). I’m sure that, if Morgan Kelly had been around in 1990, he’d have concurred with the forecasts that the population would fall by 200,000 by 2010, and that, therefore, we didn’t need to build any houses. The moral is that no one should ever pay any attention to forecasts made by ‘experts’ of future migration trends in Ireland. They are always wrong.
However, net migration is not the only factor contributing to population growth. The other factor is the natural increase in population, i.e. the number of births minus the number of deaths. We can be much more confident about forecasting the contribution this will make to future population growth, as it is much less volatile than migration. Below are the figures for the number of births, deaths and births minus deaths in Ireland annually from 1995 to 2008. As can be seen, the annual natural increase in population is going into the stratosphere. It has almost trebled from 16,528 in 1995 to 46,873 in 2008. This is due to a combination of a soaring birth rate (the number of births in 2008 was the highest since 1896) and a plunging death rate (well done, Mary Harney). No other EU country is experiencing such demographic trends. In most of them, the annual number of deaths now exceeds the annual number of births.
So, in other words, even if there was zero net immigration from now on, the population would increase by 600,000 and exceed 5 million by 2020. Ireland had a massive housing boom from 1995 on, when the natural increase in population was under 20,000 annually. It is now nearly 50,000 annually.
I notice Morgan Kelly made no reference to these demographic trends in his IT article. This is amazing. I can’t imagine someone in any other country, who passed himself off as an ‘expert’ in forecasting future housing needs, making no reference to the fact that the annual rate of natural population growth had just trebled in the past decade.
@Graham Stull
@ Bill Hobbs
Totally agree with you. In the absence of letting capitalism work and letting the banks go bust, we are left with a situation of having to restore a banking system. Therefore Nama as a start isn’t a bad thing although the only way to ensure that the State does not over or under pay is to “buy” or nationalise the other side of the equation. Arguments about the expense of this are specious as the only reason such market caps exist today is because of the guarantee and the pronouncements of Government.
Given that we may not agree with it in its current form there will be an estimate given tomorrow of the “free IOUs” (that’d be sovereign debt) that will be printed at an “amazingly low” interest rate (that’d be taking interest rate risk) and “supported” (that’d be Repo-ed in the normal fashion) by the ECB, my only point behind asking BL, KW and other posters to nail their colours to the mast was to make sure their comments of most likely derision cannot be called hindsight or “they would say that wouldn’t they?”
So putting all the other arguments aside, if you were a civil servant saying what you should pay if you had to put a figure on it, what would it be?
I’d just like to comment on Morgan Kelly as a writer on this issue. He is absolutely wonderful. He manages to highlight just those facts that are key to understanding the situation in a way that anyone can understand yet he sacrifices no necessary nuance in doing so. That is real talent. If any awards can be given for Plain English in discussion of NAMA etc…then MK has got to be in the running. There is simply no answer to how he puts his argument together.
One more thing. This blog has done an excellent job as a clearing house of information, analysis and – even – emotions, on the question. The level of scrutiny here (along with Constantin Gurdgiev’s penetrating and forensic gutting of NAMA on his blog http://www.trueeconomics.blogspot.com/) of the most important and most stupid government policy in the history of the State has been top class.
How the heart sinks when we see Fine Gael proposing to enshrine Collective Bargaining as a right in Irish Law. They really are on top of things aren’t they?
@john
what’s the link between birth rate and property values?
@john
are you suggesting that 500,000 children under 8 will be in the market to buy property in the next ten years?
As distinct from the 500,000 who were in the market to buy property in the last 10 years who only acted like 8 year olds?
Never mind the good Professor, Brian Cowen is going to resurrect the property market=”What we are making sure is that the IOUs which will be provided by the agency enables the bank to get access to credits from the Central Bank and over a period of time, in the years ahead, we will ensure that the value comes back into those assets and we ensure that the taxpayers interests are protected,” he added”.
@John
I don’t think you can treat the excess of births over deaths as independent of net migration. Wouldn’t some of the people leaving be women who would end up having their children overseas?
@bill hobbs
If you bothered to analyse the statistics, you’d discover that the surge in the annual natural increase in population (from 16,528 in 1995 to 46,873 in 2008) is due in roughly equal measure to (a) a rise in the birth rate (b) a fall in the death rate. We need to analyse the two separately
If the age-standardised death rate in Ireland had remained the same as it was in 1995, there would now be 44,000 deaths annually. As it is, there are 28,000. So, that is an additional 16,000 older people annually (or 160,00 in a decade) who now require to be housed in houses rather than in cemeteries, and the number is going up each year. So, the effect of the dramatic fall in the death rate is an immediate increase in the requirement for houses in Ireland, since 16,000 fewer older people are now vacating their houses annually in order to change their place of residence to the local cemetery.
Re the effect of the rise in the birth rate, it is true that the effect on the requirement for new houses is not as immediate. Few children under 10 require to own their own home. However, increasingly, as I’m sure anyone with children of that age who posts here will confirm, they do require to own their own room. So, the initial effect of the surge in the number of births will be an increase in demand for houses with a larger number of rooms.
@Podublain
Good spot. Again we get the IOU line and this time straight from the horses mouth. This man is telling us evey day that the size of the deficit—the issuance of IOUs—demands radical spending cuts. But when we issue IOUs in the form of NAMA bonds, they barely count.
@John
I’m bothered to ask what is the connection between birth rate and property values
PROPERTY VALUES -v- BANK ASSET VALUES
It would help if Morgan Kelly’s article had distinguished between values of loand and values of properties upon which loans are secured.
Morgan Kelly would not have confused property values with loan values, yet to the lay-man the article reads as if there were no difference:
“Despite these large falls, which already exceed the one third haircut on Nama assets rumoured to be proposed by the Government, the property market remains moribund…
It appears, therefore, that, by paying an average of two thirds of the face value for Nama assets, the Government is likely to impose severe losses on taxpayers of the order of €30 billion, or one fifth of national income.”
The above comments suggest to me that a two third drop in value of bank assets is being deduced from a two third drop in value of property assets combined with an assumption of an average of 100% loan-to-value ratios? Surely that can’t be correct. If Morgan Kelly thinks that bank assets should not be valued above the value of the underlying security then perhaps he would explain why this is the case.
LOAN TO VALUE RATIOS
Also, Morgan Kelly seems to assume that the fact that property loans at the peak may have been secured on equity in other property means the loan-to-value ratio was illusory. Again this doesn’t make sense. If I have a property worth €100K with a loan of €20K against it then the LTV is 20%. If I buy another property worth €200K with a loan of €200K then the combined LTV is 220/300, i.e 73%. now the fact that the first property may have dropped does not mean that the property was not worth €300K. Therefore, the €120bn figure is not lessened by LTVs based on equity.
YIELDS
“As many of you have discovered to your cost, property is a risky asset that performs particularly badly during economic downturns. To compensate for this fundamental risk, property should earn a long run rental return of at least 8 per cent.”
Can anyone give a view on how realistic Morgan Kelly’s suggestion of an 8% yield is? Would that mean the investments was effectively risk free as the yield compensated for the risk? Won’t investors qlways take a lower yield based on the property in question and their own ability to maximise lettings and reduce costs? I am just wondering because MK’s 8% differs to figures I have heard. I also wonder how it compares with current yields (which I consider somewhat illusory due to tenants’ inability to pay rents), bearing in mind the Minister’s recent statement that “The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough.”
One interesting comment by Morgan Kelly in his article:
“In ordinary times, property prices grow at the same rate as national income.”
I assume that he is trying to imply that house prices in Ireland have grown at a rate far in excess of national income. I can’t see what other point he could be making by that statement. Very well, let’s look at the figures.
From Department of Environment website:
average price of new house in Ireland in 1970: 6,692 euros
average price of new house in Ireland in 2007: 322,634 euros
i.e. average price in 2007 was 48.2 times that in 1970
From CSO website:
gross national income in 1970: 2,253 million euros
gross national income in 2007: 162,220 million euros
i.e. gross national income in 2007 was 72.0 times that in 2007
His case falls.
@Michael Hennigan
Competition from Poland with its experienced workforce and other Eastern countries will be increasingly evident.
Bang on Michael
As a Nation, we all need to wake up to that fact.
I was in Poland in April, I can tell you that 10 and eleven year olds are already speaking good English.
Our advantage of low corporate tax, educated workforce and more or less speaking the same language as our American friends is evaporating rapidly.
@ John
Wouldnt that depend on the data showing that the rise in births being the result of increasing family size as opposed to increased birth?
Also, are we talking about extensions of exisiting property??
The Celtic tiger brats will have to get use to no gym membership, etc etc.
While I will love to provide single rooms for all my eventual siblings, I may not be able to afford to!
Also, If your thesis will result in larger houses being built for this population growth, people may not be able to afford these new houses.
You probaly should develop your point a bit further rather than slinging at people!
Al
@john
as an aside I understand the old age death rate has risen remarkably this year – it’s being linked to a longer winter than normal and increasing worry over financial circumstances. If true then it puts socialisation of bank debt and deliberately overpaying for loans in a starkly human perspective.
@Bill Hobbs
I’d have thought it was obvious that an increase in the birth rate increases the demand for living accomodation, especially such a large increase in the birth rate as Ireland has experienced (which is unparallelled in any other EU country). Initially, the increased demand is for additional rooms, since children under 16 generally don’t require separate houses from their parents. In construction terms, it doesn’t matter that much that the initial increase in demand is for rooms, since a 4-bedroom house will generate more construction work than a 2-bedroom house. Later, as the children hit age 16 and over, the increased demand is for additional houses, not just rooms. As the figures I gave show, the increase in the number of births has been occurring since 1995, its not just in the last 2 or 3 years. So, this latter effect will start to emerge early in the next decade.
As was stated by the minister, demographics will be looked at in arriving at the LTEV
@ Michael
i suppose my original point/question was that Morgan Kelly’s analysis doesn’t seem to look at these demographic factors in coming to his opinion on where house prices are going.
We know that the Japanese demographic factors were negative. The figures that John and the CSO provide seem to suggest that ours will be positive. As such they should provide at least some level of support to demand for housing. It’s not an irrelevant topic of debate no matter how much some on this thread have attempted to brush over it.
@Zhou
The claim that those who oppose the current NAMA plans don’t understand the issues relating to loan-to-value ratios is now perhaps the second most common talking point from pro-NAMA economists (lagging somewhat behind the unbiquitous “it’s free money from the ECB”)
Indeed, in the hand of Davy stockbrokers, it becomes a claim that those who oppose the current plans are being “mischievous” about this
so perhaps it may be possible for people to say, no I didn’t mean you, I meant some other mischievous fellow.
In this case, you are at least being specific about who is supposed to be doing the misleading/mischief making, specifically saying the Morgan’s article failed to “distinguish between values of loand and values of properties upon which loans are secured.”
Well, the article specifically states
“In addition, while loans were supposedly 70 per cent of property value, the collateral supplied was usually equity in other property or personal guarantees, both now worthless.”
So, I simply don’t see how it failed to make that distinction. It did express doubts about the quality of the additional collateral. I agree that the fact that the equity component is put together via putting up a share in another property does not change the LTV. However, it is hard not to come away with the impression that most of the developers are seriously bust and that some of the stuff pleged as equity will indeed turn out to be worthless.
On a more general point, the fact that the three most common pro-NAMA talking points are now
(a) Claiming those who don’t oppose NAMA are dumb as a plank (don’t know about LTVs)
(b) Inaccuracies about the ECB’s role.
(c) Gross exaggerations about NAMA getting credit flowing again.
is interesting.
Normally those who have a good plan to sell are able to do so without relying on misleading spin.
@john
The effect has already emerged and been banked as buyers of new peak price 3/4 bed’s were those who had children in the early 90’s moving from starter two bed shoe-boxes to larger homes in commuter belt estates.
Whatever about the future, we are probably going through a patch of net outward migration right now. Q1 QNHS data show a marginal fall in the over-15 population. And I’m just itching to find out whether the slowdown in the rate of growth in unemployment in recent months is related more to stabilising employment levels, or to increased outward migration.
Roll on the release of Q2 QNHS data later this month.
@Eoin
I agree.
It all boils down to affordability.
Even before the latest property crash in the UK, there were several reports in the press and on TV of 30 year olds still living at home.
The price of buying a house had become unaffordable for a large percentage of the population.
It is easy for planners and developers to account for demographics, it is not so easy for them to tie that in with the direction the general economy will take.
We need house prices to fall a lot further. I suspect, Dublin will have to concede that multi storey appartment blocks will have to appear on the skyline in order to keep the cost of living units affordable.
A common mistake made by those charmed by their own numeracy is to believe that if we can describe and measure in mind-numbing detail those things that drive supply and demand we will know, with precision, where those two curves intersect. Hence we will know price. And we will know it over the short, medium and long term because we can describe supply and demand statically and dynamically. Nowhere is this conceit more evident than in the oil market: international agencies and individual analysts expend multiple lifetimes and terrabytes of brain power analysing and measuring the supply and demand for oil. Statically and dynamically. And nobody ever has any success at all with forecasting the oil price.
And so it is with the property market. Demographics are probably/possibly important. But may be not be. There are multiple drivers of supply and demand. Anything more precise than this is mere speculation.
@ simpleton
thats fair enough. But all i’ve done is suggest ‘support’ for the market from the positive demographics. I don’t think John suggested anything other than that he reckons the population is going to increase by a material amount and that this will cause at least some increase in the demand for housing. Morgan Kelly is the one who put a 66% decline from peak as his forecast and a great big €30bn figure on the overpayment. Your argument would appear to be with him.
@Eoin
Maybe I’m misinterpreting the demgographic argument: I took it that it was being used to at least support the assertion that Morgan Kelly was wrong to forecast further falls in house prices. A casual reader of John’s thesis would be forgiven for believing that property prices can be boosted permanently by demographics.
I’ve no idea where prices are going over the short term. But if you believe that it is possible to calculate, even approximately, where fair value lies, you can suggest where prices will end up over an uncertain time frame. And on any reasonable valuation methodolgy – own history, relative to rents, relative to international counterparts, – Irish property has a lot further to fall.
Maybe BL might pause to consider the latest on overpayment for assets as reported by Reuters-
AMSTERDAM, Sept 15 (Reuters) – The European Commission has extended a review of a 22 billion euro ($32 billion) loan portfolio guarantee between ING (ING.AS) and the Dutch state, saying the government may have paid too much.
ING and the Dutch state struck a deal in January for the government to guarantee 80 percent of a 27.7 billion euro portfolio of so-called Alt-A and subprime residential mortgage-backed securities. [ID:nLQ136110]
The government is due to receive 80 percent of the cash generated from the portfolio, which it took on at a 10 percent discount to par value. The Commission gave the deal six-month approval in March while it conducted an investigation.
In a sharply-worded statement on Tuesday, the Commission made it clear the deal seemed to unduly favour ING, but said its decision would not prejudice the final outcome of the inquiry.
“The Commission continues to have doubts that the price paid by the Dutch Government, equivalent to a transfer price of 90 percent of the face value, is justified,” it said in a statement.
@ Simpleton
im confused. So what you’re saying is that we can deduce the general direction of prices, but not their level with any decent level of precision? But isn’t the core statement that Morgan Kelly is making, that we are overpaying by 30bn, hugely dependent on house prices falling by a particular amount? ie paying 60bn for 90bn in loans, if house prices only fell by 40% across the board, rather than the 66% he is suggesting, and we had even 6bn in subordinated bonds, even using 100% LTV loans would see NAMA break even at a nominal level?
As such, i would have thought that someone like yourself who abhors precise forecasting would see Morgan Kelly’s analysis as pointless?
@John
Do not underestimate the effect of emigration
In 1980 Births 74064 Deaths 33,472
Not vastly different to 2008 except a welcome reduction in deaths (looking forward to living to 100!).
Emigration though meant population was falling. I started college in 1981 and was part of a 1960s baby boom. It didn’t produce an increase in demand for houses. All through the 1980s house prices fell. The people we bought from in 1987 bought in 1981 and made a loss.
Also I seem to remember reading somewhere that a significant factor in our higher birth rate was non nationals. If they leave they take the family with them. Are there figures available on the effect of the recession on new immigrants?
I happen to agree with Simpleton. Estimates of population and house prices in 2020 is merely speculation and most likely to be wrong.
B.Lenihan has at all stages said that any solution will be designed to comply with the EU Commission guidelines and the Govt will not try to do something which the Commission would disagree with. Indeed the Minister has pointed to the Commission’s position on state aid and the reality that NAMA must comply with EU Commission guidelines as an additional protection for the taxpayer. Lenihan has said that if he were plotting the kind of gross overpayment that some are predicting then the scheme would fall foul of the Commission.
@Eoin
Fair point: my views on forecasting are as you describe. So any precise forecasts by Prof. Kelly are equally derided:) For me it is a question of emphasis: I choose to interpret his point forecasts as attention grabbing numbers in a newspaper article that tries to get the simple message across that Irish property is still well over-valued.
… and within that, the number employed from the accession states fell by 24.6%.
Its been fairly widely and rightfully claimed say that we can’t predict net migration with any degree of certainty beyond the very short term. As such, shouldn’t we leave it out of our calculations altogether?
Therefore, based on the births vs deaths equation currently in place, which is far more stable and predictable than migrations patterns, the population, ceterus paribus, will continue to grow by at least some material amount? It is not a particularly difficult contention to make that this increasing population will, to at least some degree, provide a support for the housing market?
I know many of the demand vs supply dynamics are difficult to identify and quantify, but i think those that are plainly obvious should at least be given some merit.
@Eoin
“As such, shouldn’t we leave it out of our calculations altogether? ”
Always my problem with economics – ceterus paribus.
Answer is no we shouldn’t leave it out. History suggests that for Ireland except for a short possibly exceptional period in the last decade that Ireland suffers from net emigration. It is a potentially huge variable. As John pointed out in 1990 we didn’t predict the population growth (for very good reason) and so didn’t build the schools, transport and health services we need. We could make the opposite mistake assuming large population growth and therefore increased demand for housing and therefore an increase in house values over the next 10 years.
If Nama had been set up in 1981 they would have still been waiting for house price increases in 1987. Would have made a killing if they hung on to 1997. That’s how volatile it has been.
Just on NAMA and valuation reports, I think there needs to be an obligation on the banks to disclose any valuation reports and any draft valuation reports which show a lower value of the property in question than the report submitted to NAMA. It could be like something akin to the disclosure requirements for medical reports in personal injury cases except a little more stringent.
The asking prices of houses on daft.ie are still very high compared with most of the US outside of a number of enclaves, and Europe.
An international comparison in 2007 showed that for a comparable management level house, Ireland ranked with Beverly Hills, for the most expensive property in the world.
Interest rates will rise with a recovery and Irish dispoable income will be lower than the peak boom period.
Kevin O’Rourke rightly points to the uncertainty of demographic forecasts/projections in an Irish context due to the overwhelming impact of net migration. An assumption of continued net immigration was used uncritically in many consultants’ reports projecting our housing requirements over the medium term. The reality on this front may be less buoyant.
John, equally correctly, documents the impressive surge in the Irish birth rate and marked decline in the death rate, which have caused a dramatic rise in the rate of natural increase. The relevance of this to the housing market over the medium term is not so clear, however.
To get a better fix on this issue, I refer readers to the CSO’s Population Projection, published in 2008 [http://www.cso.ie/releasespublications/documents/population/2008/].
The most pessimistic migration assumption used in this exercise was M0 – zero net migration (resulting from assumed offsetting outflows and inflows of 20,000 a year – which do have net impacts on particular age groups but not on the total population).
The results that are most relevant to the debate on the impact of demographics on the trajectory of house prices are the projected numbers in the age group 25-44, among whom house purchase rates are presumably the highest.
Under the CSO’s M0 assumption, the following are the actual and projected numbers (thousands) in this age group:
A 4% increase was projected between 2006 and 2011, followed by a fall of 9.2% between 2011 and 2021. (A very similar pattern emerges under the M0 assumption for the broader 15-64 age group.)
The increase projected for 2011 seems unlikely to materialise as emigration rises in response to the recession, but the decrease after 2011 reflects the impact of the “baby bust” of the 1980s and is unlikely to be offset by renewed immigration in the coming decade.
Thus a key component of the “strong fundamentals” often cited as underpinning the demand for housing – and of course the “long term economic value” of the housing stock – is likely to go missing in the years ahead.
@ Stuart
Here’s how its worked on this thread today:
1. Morgan Kelly releases an opinion piece.
2. I query what sort of effect, or analysis there in, there has been in regard to demographics on house prices, as Japan’s was negative but ours appears to be positive.
3. the important issue of net migration is raised, especially in the context of the unemployed leaving the country.
4. John notes that natural births vs deaths is highly positive and likely to remain so. He also notes we’ve screwed up on the net migration levels before.
5. The point is raised that as we cant forecast net migration very well, we cant forecast population very well, and so it tells us nothing.
6. its suggested that forecasting in general is an inaccurate, blunt and often incorrect science, and doesn’t help us very much beyond the very short term, other than maybe helping to suggest a general trend/direction.
7. i note that a key argument in Morgan Kelly’s piece requires fairly accurate forecasting and that this forecasting ignores demographics.
8. people refer me back to point 5 above. Therefore, population ceterus paribus, house prices will fall.
9. I point out that as we can in fact relatively accurately forecast one side of the population equation, that of likely births minus deaths, shouldn’t we at least use this in our analysis, as some information is better than none.
10. people suggest that a forecasting model that is incomplete is therefore useless, and all information there in is to be ignored. Ceterus paribus no longer works.
11. i suggest that we just leave out the hard-to-forecast parts and use the easy-to-forecast parts to at least some degree
12. its suggested that we can and should use the highly variable historic migration data, excluding the last decade, to try and come up with a highly variable net migration figure for the future, but as it’ll probably throw up the wrong data, as it has historically, then it’ll probably send us down the wrong track.
Do you see why this chain of events may leave some people perplexed?!
@ Eoin
Very good synopsis. Amazing to think that because forecasts were wrong before we should consciously ignore the directional evidence we have to hand.
@ KW
Any chance of a par prediction on tomorrow’s estimate? No trick. Just think it will add to your (and other’s) views post estimate annoucement
@KW
Other than the point about equity in other properties being counted in LTV which you agreed with above, I didn’t suggest that Morgan Kelly doesn’t understand LTVs.
I wasn’t questioning the assumptions (66% drop + 100% LTV), when I said:
“The above comments suggest to me that a two third drop in value of bank assets is being deduced from a two third drop in value of property assets combined with an assumption of an average of 100% loan-to-value ratios? Surely that can’t be correct”
What I was questioning was that loan values were being equated to property values [perhaps correctly?]. If I am wrong then please show me how. I am a big MK fan so I won’t be too upset.
I read MK’s maths as follows (all figures approximate):
Loans total = €90bn
Secured Property peak value = €90bn
Secured Property likely trough value (66% decline) = €30bn
Likely State payment for loans = €60bn
Likely overpayment = €30bn
From that I deduced that MK was saying
State payment (€60bn) – Property Trough Val (€30bn) = Overpayment (€30bn)
Assuming that
State payment (€60bn) – True Loan Val (€ ? bn) = Overpayment (€30bn)
Then
True Loan Val (€ ? bn) = Property Trough Val (€30bn)
Have I made a mistake in my logic?
I also did not say that MK could not tell the difference between loan values and property values. To avoid being misunderstood I prefaced my point with the comment that “Morgan Kelly would not have confused property values with loan values…”.
If there is a basis for equating laon values with property values, and perhaps there is, then it would help if MK spelled it out. I didn’t and wouldn’t call Morgan Kelly as dumb as a plank.
With that said I have no doubt that there are a few planks on either side of the debate (though not on this blog of course 🙂 ) including those who say that credit will be on tap after NAMA.
In relation to credit flow and in defence of the Minister, I note that Brian Lenihan said to the finance committee that NAMA was necessary to get the banks lending to viable businesses. I think that ‘viable’ is quite a caveat.
In relation to the role of the ECB I am unhappy that there is a lack of clarity about how the NAMA bonds will work and what they will cost. I note that others have said the ECB is loaning us money which it isn’t. I made this wording mistake myself in the past so it is hard for me to get all Chris De Burgh on their asses. The mention of IOU’s is egregious spin but it isn’t inaccurate. With all that said the ECB is playing a crucial role and if it is providing a mechanism whereby bonds of sub-par value can be used to recapitalise banks at par then it is not beyond the bounds to describe that as q.e.
@Eoin
Actually that’s my point.
But what happened before was most people decided “this time it’s different” to justify the massive house price increases over the last 10 years. They threw in population demographics and immigration and family unit size to justify the never ending spiral which flew in the face of logic. Someone even suggested by 2020ish the “irish” would be in a minority.
Now with Nama and LTEV the assumption is that after this hiccup things will get back to the way they were in the late 90s, early noughties. And indeed they might but also they might not. I don’t know what’s going to happen but people who know for certain on both sides worry me.
So we do need to formulate policy but with an eye to the downside or upside (depending what position you take) so I like the idea the banks won’t get all the LTEV money up front. Better for them to have a contingent asset than contingent liability i.e they have hoped for money coming in down the road than a possible big liability (levy/clawback). If that means they have to get more funding today so be it.
PS I never thought ceterus paribus worked even in my days in college. Life is too complex.
@Pa
“Amazing to think that because forecasts were wrong before we should consciously ignore the directional evidence we have to hand”
The problem is the picking and choosing of that directional evidence. The last 10 years have been exceptional maybe unrepeatable in the medium term.
@ Stuart
Fair comment. I thought at the time that forecasting housing demand by including immigrants who arrived to build said housing stock was circular. So also is it self fulfilling on the downside as craftsmen leave due to no work resulting in less demand e
tc…
Will anyone give me a par bid? Even the GIS aka Zhou is reticent on the figure.
@ Stuart
“Life is too complex”. Surely life, ceterus paribus, is actually very simple!!? But i digress…
@ zhou
re your suggestion on QE – thats exactly how i see it panning out. I can’t see how it works any other way. Fair play for managing to get a Chris De Burgh reference involved in a debate about NAMA too. That’ll show the anti-NAMA side you mean business…
Does anybody else think of the suitcase in Dumb and Dumber whenever somebody mentions IOUs?
@Eoin
Cheers. I am hoping to be approached by the NAMA drafting team based on that.
@ Pa Bandit
52.5bn in senior bonds + 7.5bn in subs.
Ill go one further and suggest that they are medium-to-long term in maturity (5yrs+), based off floating rate, with the senior bonds being held at par on the banks books and being repo-ed at par (less standard haircut) with ECB.
Sub bonds will be subject to an additional haircut from the ECB, but still probably end up with 80 cents of funding.
Just picking this up from the morning, with the day job and all….
My prediction for tomorrow
: 55b regular (blue) NAMA bonds, max 5b subordinated (purple) NAMA-bonds tp purchase low80sb of book value; we may get to know the bond issue more clearly – expect to hear that the bonds are being issued on 12-18m rollover basis, and that subbies are very longdated.
@Zhou
Fair enough. The ING case looks like gross overpayment. Good to see the Commission looking over the shoulder. I wonder which they will accept as valuation expert, Prof. Kelly or Mr.88%
Good idea on the disclosure of valuation reports. It should all be based on utmost good faith(Uberrima fides). Sanctions might be a problem as the money will be gone.
@Stuart Blythman
Emigration though meant population was falling. I started college in 1981 and was part of a 1960s baby boom. It didn’t produce an increase in demand for houses. All through the 1980s house prices fell. The people we bought from in 1987 bought in 1981 and made a loss.
Stuart, I am not sure of your source of information….but the CSO disagrees. Property prices fell only in 1987, even then it was miniscule.
New built – National average
1980 34967
1981 40167
1982 44060
1983 44448
1984 45419
1985 46542
1986 48256
1987 48151
1988 52450
1989 58178
1990 65541
The picture is pretty much the same for second hand properties.
You could have added high unemployment as well.
Simple fact is, as I have pointed out before, there is an ongoing love affair between the Irish and property/land. It seems as though we will pay any price to get it. Presumably the Banks and developers realised this long before we have.
Take a closer look at those CSO figures. They again dropped by a miniscule amount in 1992.
After that it was up all the way to 2007.
The figures go back to 1975. At that time a new house cost 13,254 Nationaly.
Only in 1987 and 1992 has there been a drop.
@Michael,
Try deflating for some measure or other of inflation. CPI is easiest to come by. The numbers you get will be more entertaining. 1987 was a great year to buy a home.
“In addition, while loans were supposedly 70 per cent of property value, the collateral supplied was usually equity in other property or personal guarantees, both now worthless.”
Many posters- both here and on the Irish Times website – have made much of the fact that Morgan Kelly uses hard facts to back up his arguments rather than speculation.
I don’t see on what basis Morgan Kelly has made the assertion in quotes above.
I work as a banking lawyer in Ireland and while real property as equity has certainly been a feature, I would strongly disagree with his inclusion of personal guarantees – in my experience, it is very innacurate to describe this as the norm.
Since the quality of the equity provided is so critical to the analysis of whether NAMA is overpaying or not, I think it is very surprising to see this assertion in the article.
Bit off topic but tthe article in the IT (page8) under sub heading “Green Party members endorse agency plan appears to be at odds with reports yesterday in the paper of record.
It’s intriguing that it took three writers to pen a very short piece that reports a result of 657 for NAMA with Green input with the second pref listed as the Swedish model – no vote reported. John Gormley is reported as saying the members want a new and improved NAMA. Sounds like a soap add to me.
@ Concubhar
When banks were willing to supply 100% residential mortgages and 5-yr interest only loans to investors on the provision of a net worth statement, the claims that development/commercial property investors had to provide 25% in cash, at least gives rise to doubt.
When developers were bidding up prime sites, the likes of Anglo were hardly demanding big cash payments.
New 3-bed houses that were selling for £28K in Bray in 1981, were fetching £26,000 or less in 1987.
When attention was given to the public finances, it was against a backdrop of a positive international environment; ditto for Sweden in the early 90s. It will be a different story in coming years.
TAXPAYER NOT PAYING ANYTHING Deputy Fleming News at 6 RTE
@Michael
You have only confirmed to me the figures that come out of the CSO need to be treated with caution. Averages can hide a multitude of trends.
We bought a house in D18 in 1987 from a couple who bought it in 1981. It had fallen 10% (They bought it new). We were able to knock them down and we were the only people to make an offer in 6 weeks when they finally accepted ours. (€66k but at the height of the boom went to €750k – no idea what they are now as none have gone on sale in the past 18 months).
My brother bought a house (new) when he got married in 1981 in Greystones and made a loss in 1986 when he and his family emigrated. My wife’s family home in Stillorgan sold in 1988 for a fairly dismal price
We were house hunting all through 1987, there was no rush and plenty of availability. Second hand houses mainly – new ones were a bit pricy for what they were offering (basically shiny and new but much smaller), maybe that’s where the discrepancy is. Banks were only lending 1.5 times one salary and interest rates were 11%ish.
My point being emigration kept the lid on house prices . 50% of us were under 25. But the government finances were in a mess, unemployment high and inflation was also high. Ring any bells?
@ those ‘throwing’ statistical estimates about property values and demographics. Go REAL careful around these estimates. You need to ignore the data prior to 1990: the 1995 -2009 sequence is most unusual and must be treated in isolation – else you are likely to mislead.
Births + nett immigration – deaths give increase. But, what proportion of the increase results in a household formation – and how many persons are in each household (1,2 3 ??). Does household formation need a new, as opposed to an existing dwelling. How about the enlargement of existing dwellings? Take a REAL CAREFUL approach to the estimates – like you were attempting to walk through an area with active anti-personnel mines!
@ others: try not to sweat the NAMA details – this is just a welcome distraction for those proposing a deceitful, financially and economically damaging scam. “It’s not the liquidity stupid! – it’s the inability to service the colossal levels of state, commercial and personal debt!” Please try to re-focus on this – these debts, and how in God’s name it is intended (absent default or inflation) to pay down these debts.
If you apply a sufficient level of rational analyis to the debt problem you will come to the awful conclusion that the debts cannot (mathematically) be paid down – current incomes are declining and future incomes are mortgaged. So why NAMA: it’s just another s**tload of debt piled upon the current heap. Who benefits?
Brian P
@Professor Brendan Walsh
“Under the CSO’s M0 assumption, the following are the actual and projected numbers (thousands) in this age group (25 to 44): 2006 1,343.3 , 2011 1,399.3 , 2016 1,359.0 , 2021 1,270.0”
note: the CSO 2006 figure is actual, the others are projections
The CSO published those projections in 2006. But, now in 2009 we know the ACTUAL figures for 2008. Just for the record, the ACTUAL figures for 2008 for that age-group (25 to 44) was 1,435.9. So, in 2008 it was way ahead of the CSO projection made in 2006.
I won’t labour the point, however. I’m not going to make migration forecasts. As I said above, these are nearly always wrong. And, if I made migration forecasts myself, they’d be as likely to be as wrong as anybody else’s. I fully accept that the trend evident up to 2008 might be reversed permanently, or it might be reversed temporarily and then return to its pre-2008 trend, or it might not be reversed at all. All of these are possibilities.
Re the general point, I do accept Professor Walsh’s point that, assuming for the sake of argument zero migration, the population aged 25 to 44 will fall for a number of years before rising again. This is because the number of births fell from just over 70,000 in 1981 to under 50,000 by 1995, but has since risen to over 75,000 in 2008.
However, this will be more than compensated for by a massive increase in the population aged over 45. According to the same CSO M0 projections Professor Walsh used for the population aged 25 to 44, the CSO gives the following for the population aged over 45.
So, an extra 832,000 people aged over 45 by 2026. That is 40,000 to 45,000 annually.
We shouldn’t make the mistake of thinking that an increase in the population aged over 45 has little or no effect on the demand for houses, merely because all these people are allready living in houses. It does in two ways:
(a) Average household size is much lower among the population aged over 45. This is due to the unfortunately increasing tendency of people to be divorced as they hit that age group and the fact that their children are much less likely to be living with them. The percentage of one-person households is much higher among those aged over 45 than those aged 25 to 44.
(b) In so far as the increase in the population aged over 45 is due to a fall in the death rate (which, indeed, is happening dramatically in Ireland), this means fewer and fewer houses vacated each year by older people dying. I myself am a good example. I’m 60. Given the death rates in Ireland in the 1980s abd before, I could reasonably expect to be passing on my house to a younger relative in 10 years. Now, with the dramatic fall in death rates in Ireland, I fully expect this to not happen for another 25 or 30 years and, touch wood, even longer. Multiply me by a couple of hundred thousand in the coming years.
The bottom line is:
Natural population growth in Ireland is currently over 1% annually, This is miles higher than in any other EU country. In many of them it is negative.
Average household size in Ireland is falling very rapidly (because of divorce and population ageing). As a result, the number of households is increasing much faster than the overall population. Since the 1960s, the number of households has increased well over twice as fast as the overall population.
As I said earlier, neither I nor anyone else can forecast migration trends. But, leaving migration out of the equation, and just basing our projections on known natural population growth and the other well-established trend of rapidly-falling average household size, this would indicate a demand for houses in Ireland in coming years that is far in excess of that in any other EU country. Obviously, if net emigration reached 1980s or 1950s levels and stayed there, this would be completely nullified. But, as I said, its impossible to predict that.
Rather than bandy statistics about on a blog like this, the best solution would be for the CSO to publish projections for the number of households in Ireland. They do for population, which Professor Walsh quoted above, but not for number of households. Its difficult, but not not rocket science. Its well within their capabilities. The N. Ireland-equivalent of the CSO, the N. Ireland Statistics and Research Agency (NISRA) do precisely that for N. Ireland. For anyone interested, the link is below. The consequence is that, in N. Ireland, the authorities have a far better idea of the likely future increase in number of households and, therefore, likely future requirement for new houses.
Thank God for John. He analyses and knows and writes sense of what is going on in this country. As for the Professors and others who consider themselves so expert in these matters that they have all of the answers and can predict into the future for the next 20 years all I can say is God save us from their mumbo jumbo and crystal balls. There is not one amongst them including Kelly who ever created a iota of wealth or took one risk in their safe as houses lives. One of them someday might get out of the safety of their cosseted cushy jobs and realise only for the risktakers there would be no resources to pay their wages. Yeah Lenihan is taking risks but at least it is a lot better than procastrinating to the point of destroying the confidence of the entire business community and populace.
@ Ray
‘ safe as houses ‘ ?????
@John
Thanks for your helpful comment. Yes, it is interesting to see that the inter-censal data point to continued net immigration in the relevant age groups and yes, I agree that the older population dooes having housing requirements too! A projection of the change in the number of households (applying household headship rates to the projected population by age group) is fairly easy to do – if I have time over the next few weeks, I’ll have a go and share the results here.
@ Ray
tell it brother!
More seriously, i find the way this thread has evolved in regards to the question on demographics to be hilarious.
Far from being more opaque than the meaning of life itself, John’s analysis of population trends, and particularly his noting of this analysis being regularly done by our friends up North, appears to show that we can make at least some sense and predictions regarding the likely change in the population of a country.
Is it highly precise? No.
Does it depend very significantly on the net migration trends? Absolutely.
But this this mean we should almost ignore the births vs deaths figures and consider them as useless? Hell no.
We use what we can to try and predict general trends and likely scenario’s for the future economic and social evolution of the country. To suggest otherwise, as a huge amount of people on this thread have, is a worrying situation. I’ll also note that people seemed far more willing to use the ‘useless’ information when it seemed to suggest falling population trends.
@Alan
That phrase was deliberate to annoy the property valuer economic experts we have here……………
The omission of foreign properties in Kelly’s analysis appears to be an enormous oversight. It transforms the equation when one considers the much smaller decline in UK property prices in the Greater London area. The international dimension deserves more careful consideration.
I would have to agree with his assertion that “… the Government’s claim that €90 billion in developer loans are backed by €120 billion in assets appears implausible” though.
@ Kevin O’ Rourke
predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative.
Thanks for making that point. It is one aspect of the Celtic Tiger that we really tend to forget nowadays. Especially, given the fact that residential vacancies in Dublin never tend to stay too high for too long. Although, this downturn is surely different.
The troubling thing to my mind, is what happened in the Celtic Tiger, when residential property came under pressure, that so many people migrated out to the farthest edges of what we know as the ‘commuter belt’. I have spoken to many a grand mother, native of Dublin city’s outer suburbs, places such as Kimmage and Crumlin who noted that their children could have afforded ordinary working class or middle class residential property in Dublin, but chose to move into the commuter belt, in order to have more disposable income left over, to enjoy a good life style.
But even that wasn’t too bad.
I think what happened then, is that development started in what is now known as ‘Nama-land’. I think it is the land that is outside the commuter belt for any centre. Ronan Lyons called it a ‘T-shape’ down the centre of the country, where you now have high negative equity combined with unemployment. Counties such as Laois, Offaly, Cavan, Leitrim, Sligo and so on.
I suppose, these are things we tend to forget, being so focussed as we are at the moment on the crisis. I know the economist is often criticised for being part of the ‘dismal profession’. But I have been reading some of the discussion here at the Irish Economy blog, and while a large portion of the discussion is very good, I have to say one thing. I have highlighted or touched upon a couple of issues above, to do with forward planning and sustainable planning. I doubt very much if those ideas will come directly from economics. Certainly, they should be informed by sound principles of economics.
People complain the CIF has issued ‘statements’ via Tom Parlon etc. I have listened to the NAMA debate quite a lot this year and I noticed one thing. A lot of articles from economists etc. None, whatsoever from architects or planners. Sure, yeah, the Green party are doing their bit, chipping in. But how come that architects and planners are so divorced from the process? I applaude economists very much btw, for broadening the debate on NAMA. Well done all.
@ Michael Hennigan,
Thanks for linking that 2008 MK Irish Times article, I am going to enjoy having a read of it now.
@ John
Who the hell are you?
Probably not DoF (too smart), I’d say you work for a bank based on your vendetta against Morgan Kelly. Right?
Nice to have a chink of light shining through anyhow. Not very “dismal science” though. You should make your projections far more pessimistic to fit in with your economist brethren on here.
@economists
On the challenges associated with projections and therefore predictions & planning (something we might consider at some stage in this country), they are using scenario analysis in the civilized world these days. Probably something that will catch on here as soon as you economists admit that they haven’t a clue what’s going to happen next week, not to mind 15 years time (rf: ESRI Medium Term Economic Review 2008:).
Great initial post by Prof. Brendan Walsh and fair play to John too.
@JC
Scenario analysis- that thing I teach in my second year finance class?
@jc
“Nice to have a chink of light shining through anyhow. Not very “dismal science” though. You should make your projections far more pessimistic to fit in with your economist brethren on here. ”
No problem with people being optimistic – hope is essential. But it is not the best way to make long term potentially costly decisions. You have to factor in the potential downside and leave yourself a plan B.
Those poor unfortunates who took out huge mortgages in 2007 based on optimism will pay for it for a long time. There were plenty of people by then shouting this doesn’t make sense but they were seen as pessimists.
Optimism is great but caution is also pretty good too.
PS I’m an accountant (not in practice but in business) but we can be pretty dismal too. Just wish more of my peers were!
@BL
Does anyone use it? ESRI, any government department? No, they make one projection and “plan” accrodingly.
Futures Academy in DIT are only ones that I have seen using this type of analysis in Ireland.
This is going to be a greater depression then in the 1930’s. We already have the Japanese experience from which to learn. They do not migrate. For them it is shameful to leave. Their land is holy to them. As a result, they have abortions, not children, as they cannot afford them. So they are trapped into “permashrink”. They have 100 yr mortgages. Very few go into bankruptcy.
This may change as the natural leaders have lost the last election. But I doubt it.
Australia is the size of the USA or Canada. It is the 14th largest empire the world has ever seen. It has a population of 22 million. It imprisons government ministers. It has at least 33% Irish related population. We need qualified young energetic people. We are going to get a lot of them from Ireland. Think about NZ as the backdoor to Australia as once you have NZ citizenship, you can live ibn Australia! And then acquire Aussie citizenship, if desired.
Leave Ireland. Do it now. If you are unemployed in Australia you can live on the beach. North of us are 3 Billion people who are happy to have an income of Euro 3,000 pa. Ireland cannot compete with a continent. Just leave the politicians, bankers and estate agents behind!
@Pat,
What about the poisonous spiders?!
@ Pat,
‘Permashrink’ , beats Permadecline any day.
Sail away to OZ? Mmmm. I have a suspicion that Them is a tad short of fresh water. But maybe some enterprising person will arrange the transport of water from Here to There – though Malta or mid-East are somewhat nearer. But hold on, WE, are short of fresh water too!!! I know it rains a lot – but our Ag sector extrudes a lot of pollution into our existing freshwater sources.
Anyone care to erect a statue to St. NAMA so we can make votive offerings. Maybe even a new Litany to St. NAMA.
Also, could someone please explain how it is intended that we (the Irish taxpayer) will be able to repay our debts. With an income stream of Monopoly money?
Brian P
Morgan Kelly’s contribution is the soundest piece of writing on this subject that I have seen so far. No BS no axe to grind no green/rose tinted glasses, just a sound analysis of the situation. How refreshing.
daily cash loan now…
[…]The Irish Economy » Blog Archive » Morgan on property prices[…]…
91 replies on “Morgan on property prices”
Great to see some detail on how the same banks that we are being asked to rescue fuelled the 1970s bubble in agricultural market prices. Was there a NAMA then for farmers or banks?
Perhaps Alan Matthews might care to offer some more insight on this aspect of our economic history.
Assuming that now senior officials in financial institutions (including the Central Bank and offshoots) were junior during the 1970s, it suggests a poor capacity to learn. But then, the same is true of the Government with its reconstitution of the 1980s mechanism – An Bord Snip.
The detail on Japan is eloquent comment on what we now know on what NAMA is expected to pay for the loans it acquires.
There is still time to change policies, despite the TINA approach now being adopted by even some Green Party supporters.
“It appears, therefore, that, by paying an average of two thirds of the face value for Nama assets, the Government is likely to impose severe losses on taxpayers of the order of €30 billion, or one fifth of national income.”
Thank you Morgan Kelly for calling it as it is.
Consistent with previous analyses/informed speculations is MK’s implied estimate of paying no more than €30b. But, expect €60b national debt to be signalled tomorrow.
As an AIB shareholder, thank you taxpayers of Ireland….
Just so we don’t have any accusations of hindsight influencing opinions, before tomorrow could some of the more prominent posters on here signify what they see as the par score above which they will shriek and below which they will congratulate the Minister? I know we do not have the information that NAMA does etc etc but no doubt most will have a view.
For the purposes of this, it is probably safe to assume Eur5 billion of subordinated bonds.
And lets not forget it was Prof. Kelly who called the property crash more loudly and clearly than anyone else.
Unlike those in power who are currently peddling the fibs that “Nama might even make money for the taxpayer”, Kelly was awake to the dangers of the property market back when we were in a position to do something about it.
No one in power listened to him then. Hopefully we have learned something from our mistakes.
@Donal
There was a form of NAMA called the Agricultural Credit Corporation (now AccBank) which had funded land purchases ranking after the main banks in its collateral – ranking first for losses. Bailed out by Government forebearance it eventually wound out exposures – though it can hardly be said to be acting on some form of organisational memory today. It’s an interesting bank to observe – nearly bust in the 80’s bailed out by Government. Nearly bust in the late 90’s – sold off by Government not before it was outed as the worst trangressor in non-resident account usage and now nearly bust again were it not for its Dutch parental support.
Farmer debt recovery didn’t see the wholesale sell down of farm land or closure of farms – workouts were arranged and debt eventually written off or paid down.
Today the bank is interesting in its response to recovering bad debts. It’s parent has not been bailed out by its home state – moral hazard behaviours of state guaranteed bailed out banks do not apply – prudent banking does. This is of course Dutch driven rather than driven by Irish local management. It seems the penny eventually dropped in Utrecht as Rabo woke up to what has been going on in its Irish subsidiary in late 2007 and the bank has been active in pursuing debt ever since. Consider also Danske early decision to write down assets. One might assume their analysis and call on the future is somewhat similar to Morgan Kelly’s at least in the case of RaboBank which isn’t short of expertise in understanding or practicing prudent banking.
One of the things we have learned is that economic and financial forecasting is an utter waste of time. Instead of listening to idiots pontificating about stuff that might or might not happen it beoves us always to ask us what we know about the the present. In this context it is important to focus on Morgan Kelly’s assertion that property is still overvalued. If you compare Irish real property prices to their past, to rents, to international counterparts, it is impossible to argue that we are anywair near fair value. We don’t know how long it will take or how it might happen, but overvalued property will eventually move towards fair value. So, to contradict how I opened this post, here’s a forecast: Irish property prices will fall further.
@ Pa Bandit,
For me the par score is that equity and sub bondholder debt is erased, before the taxpayer is asked to chalk up one single eurodime.
By definition, any and every loan purchased from the banks will represent an overpayment because otherwise, why sell to Nama? Why not sell to Sauerkraut Privat Equity GmbH?
This whole debate about “what is the right haircut” is putting the cart before the horse. If we nationalise, we don’t need to worry about the size of the haircut.
Of course there is a haircut big enough as to also lead to de facto nationalisation, and one can speculate on what that is, but again, that’s an unnecessary and unproductive guessing game.
The price increase on residential property in Ireland really looks very mild when you look at 1995 to 2007, however if you add just a few more years the picture and go back to 1990 is truely shocking.
An average 10-20 year old 3 bed semi-D in a working class Dublin suburb cost €70,000 in 1990, it rose to €700,000 in the 2007 peak, that’s X10.
The eqivalent cape cod house in a New Jersey suburb has only risen from $160,000 to $400,000 over the same period i.e. X2.5.
Irish prices have therefore risen at x4 the US rate and the US is going through a house price crash at that rate.
@po
Gov is exposing the taxpayer to unquantifiable assytemetric risk no matter what the haircut. All that will be produced is a estimate which many fear once announced will become the “final” figure after the valuation process. Lenny is blindfolded, trying to hit a moving target ten years into the future with a pop gun.
Consider the Carroll case and the perverse risk taking displayed by banks, captive of large borrower exposures, agreeing to fund a business case requiring a two year interest motarorium priced at 1%.
Do you think for any minute bankers are not leveraging their insider knowledge for all it’s worth?
While tax payers share unequally in the distribution of catastrophic banking losses the inequity and rank nonsense of LTEV and its subordinate child represents the ultimate in moral hazard bail out.
@ all
what i’ve yet to see an analysis on is how the population growth experienced by Ireland affected/should have affected Irish property prices? The population has increased by roughly 42% between 1971-2006, and is expected to increase by a further 32% between 2006-2026 (per CSO 2006 census and projections). As such, surely this should provide some underlying stability to property prices, i would have thought?
In contrast, while the population trends of Japan between 1950-1990 roughly mirror those of Ireland in the initial period above, they have somewhat flatlined since, and are now starting to go into decline. As such, was this failure to sustain population growth not an underlying cause of the Japanese asset price bubble collapse, and might our population/property trend not have quite a bit further to go?
Also, given that the Japanese asset collapse was a long drawn out affair, and that this is considered one of the reasons why the collapse was so damaging, is our much quicker property price adjustment (it took Japan a decade to see residential property adjust 33% from the peak, its taken us 2 years!) not a ‘good’ thing in this regard and a ‘strength’ in terms of attaining a quicker recovery?
@Eoin: predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative.
@eoin
As far as I recall 2004/5 estimates of new builds considered not only population growth but net inbound migration patterns – peaking at c50k units a year until 2015 (if memory serves me right) – within two years output was 90k+ . Population growth may provide stablity in demand but does this necessarily translate into balanced supply, rising property values and property ownership consumption behaviour ? How attractive will Ireland be to migrants and could it not be the case that outbound migration will begin to rise once again as it did in the 80’s? Also factor in unemployment, tighter credit controls, rising cost of credit, contraction in affordability, overhang sold off at knock down prices etc.
@Eoin
Germany’s experience post unification followed by a dead market in the following decade, when most other countries were booming, suggest the importance of underlying economic trends.
Where will the new engine of Irish growth come from?
Construction employment increased from 126,000 in 1998 to 282,000 in 2007.
Overall employment increased 620,000.
In the tradable goods/services sector, employment peaked in 2000.
Easy credit and construction powered the rest of the economy.
International financial services will not be a huge growth area; the ‘so-called “smart economy” sector will be marginal and FDI generally, who knows?
Companies like Apple have almost all their manufacturing done in China; most PCs are currently made there.
Competition from Poland with its experienced workforce and other Eastern countries will be increasingly evident.
It would be a start to recognize the challenges but we are still at the delusion level.
Morgan Kelly’s strength is that he deals with facts and while people can quibble with some aspects of his forecasts, it’s hard to challenge the direction.
His most memorable commentary was last December which began: “For the current Government, a month without a catastrophic policy error has come to seem like a month wasted.”
“the Government’s proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish’s liabilities. For all it will achieve, the money might as well be piled up in St Stephen’s Green and incinerated.”
http://www.irishtimes.com/newspaper/opinion/2008/1223/1229728473144.html
Before Alan Ahearne supped soup with the devil, he went on RTE’s Drivetime, where he also questioned why Anglo was being saved. “The market is saying that Anglo Irish Bank is bust, it cannot be resurrected . . . why is the Government insisting on putting more and more money into it?”
Kevin O’Rourke is perfectly correct in stating that: “predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative”.
In the past, forecasts of future population growth in Ireland have greatly under-estimated that growth. A DKM report in 1990 predicted that the population of Ireland would fall from 3.5 million then to 3.3 million by 2010. It predicted a 20 per cent fall in the number of young people (aged 15 to 24) in that period. In the event, the population increased to 4.5 million and the number of young people (aged 15 to 24) increased by 50 per cent. Most of the infrastructural bottlenecks (housing shortages, congested roads etc) Ireland was experiencing in the late 1990s and early 2000s, and which have only begun to be alleviated in the past few years, were largely due to hopeless forecasts of future population growth made by ‘experts’ in the late 1980s. This was largely due to those ‘experts’ assuming that net emigration would continue and actually increase during the 1990s and 2000s. In the event, the opposite happened. (Joan Burton, are you taking note?). I’m sure that, if Morgan Kelly had been around in 1990, he’d have concurred with the forecasts that the population would fall by 200,000 by 2010, and that, therefore, we didn’t need to build any houses. The moral is that no one should ever pay any attention to forecasts made by ‘experts’ of future migration trends in Ireland. They are always wrong.
However, net migration is not the only factor contributing to population growth. The other factor is the natural increase in population, i.e. the number of births minus the number of deaths. We can be much more confident about forecasting the contribution this will make to future population growth, as it is much less volatile than migration. Below are the figures for the number of births, deaths and births minus deaths in Ireland annually from 1995 to 2008. As can be seen, the annual natural increase in population is going into the stratosphere. It has almost trebled from 16,528 in 1995 to 46,873 in 2008. This is due to a combination of a soaring birth rate (the number of births in 2008 was the highest since 1896) and a plunging death rate (well done, Mary Harney). No other EU country is experiencing such demographic trends. In most of them, the annual number of deaths now exceeds the annual number of births.
number of births in Ireland:
1995: 48,787
1996: 50,655
1997: 52,775
1998: 53,969
1999: 53,924
2000: 54,789
2001: 57,854
2002: 60,503
2003: 61,529
2004: 61,972
2005: 61,372
2006: 64,237
2007: 70,620
2008: 75,065
number of deaths in Ireland:
1995: 32,259
1996: 31,723
1997: 31,581
1998: 31,563
1999: 32,608
2000: 31,391
2001: 30,212
2002: 29,683
2003: 29,074
2004: 28,665
2005: 28,260
2006: 27,479
2007: 28,050
2008: 28,192
excess of births over deaths in Ireland:
1995: +16,528
1996: +18,932
1997: +21,194
1998: +22,406
1999: +21,316
2000: +23,398
2001: +27,642
2002: +30,820
2003: +32,455
2004: +33,307
2005: +33,112
2006: +36,758
2007: +42,570
2008: +46,873
So, in other words, even if there was zero net immigration from now on, the population would increase by 600,000 and exceed 5 million by 2020. Ireland had a massive housing boom from 1995 on, when the natural increase in population was under 20,000 annually. It is now nearly 50,000 annually.
I notice Morgan Kelly made no reference to these demographic trends in his IT article. This is amazing. I can’t imagine someone in any other country, who passed himself off as an ‘expert’ in forecasting future housing needs, making no reference to the fact that the annual rate of natural population growth had just trebled in the past decade.
@Graham Stull
@ Bill Hobbs
Totally agree with you. In the absence of letting capitalism work and letting the banks go bust, we are left with a situation of having to restore a banking system. Therefore Nama as a start isn’t a bad thing although the only way to ensure that the State does not over or under pay is to “buy” or nationalise the other side of the equation. Arguments about the expense of this are specious as the only reason such market caps exist today is because of the guarantee and the pronouncements of Government.
Given that we may not agree with it in its current form there will be an estimate given tomorrow of the “free IOUs” (that’d be sovereign debt) that will be printed at an “amazingly low” interest rate (that’d be taking interest rate risk) and “supported” (that’d be Repo-ed in the normal fashion) by the ECB, my only point behind asking BL, KW and other posters to nail their colours to the mast was to make sure their comments of most likely derision cannot be called hindsight or “they would say that wouldn’t they?”
So putting all the other arguments aside, if you were a civil servant saying what you should pay if you had to put a figure on it, what would it be?
I’d just like to comment on Morgan Kelly as a writer on this issue. He is absolutely wonderful. He manages to highlight just those facts that are key to understanding the situation in a way that anyone can understand yet he sacrifices no necessary nuance in doing so. That is real talent. If any awards can be given for Plain English in discussion of NAMA etc…then MK has got to be in the running. There is simply no answer to how he puts his argument together.
One more thing. This blog has done an excellent job as a clearing house of information, analysis and – even – emotions, on the question. The level of scrutiny here (along with Constantin Gurdgiev’s penetrating and forensic gutting of NAMA on his blog http://www.trueeconomics.blogspot.com/) of the most important and most stupid government policy in the history of the State has been top class.
How the heart sinks when we see Fine Gael proposing to enshrine Collective Bargaining as a right in Irish Law. They really are on top of things aren’t they?
@john
what’s the link between birth rate and property values?
@john
are you suggesting that 500,000 children under 8 will be in the market to buy property in the next ten years?
As distinct from the 500,000 who were in the market to buy property in the last 10 years who only acted like 8 year olds?
Never mind the good Professor, Brian Cowen is going to resurrect the property market=”What we are making sure is that the IOUs which will be provided by the agency enables the bank to get access to credits from the Central Bank and over a period of time, in the years ahead, we will ensure that the value comes back into those assets and we ensure that the taxpayers interests are protected,” he added”.
@John
I don’t think you can treat the excess of births over deaths as independent of net migration. Wouldn’t some of the people leaving be women who would end up having their children overseas?
@bill hobbs
If you bothered to analyse the statistics, you’d discover that the surge in the annual natural increase in population (from 16,528 in 1995 to 46,873 in 2008) is due in roughly equal measure to (a) a rise in the birth rate (b) a fall in the death rate. We need to analyse the two separately
If the age-standardised death rate in Ireland had remained the same as it was in 1995, there would now be 44,000 deaths annually. As it is, there are 28,000. So, that is an additional 16,000 older people annually (or 160,00 in a decade) who now require to be housed in houses rather than in cemeteries, and the number is going up each year. So, the effect of the dramatic fall in the death rate is an immediate increase in the requirement for houses in Ireland, since 16,000 fewer older people are now vacating their houses annually in order to change their place of residence to the local cemetery.
Re the effect of the rise in the birth rate, it is true that the effect on the requirement for new houses is not as immediate. Few children under 10 require to own their own home. However, increasingly, as I’m sure anyone with children of that age who posts here will confirm, they do require to own their own room. So, the initial effect of the surge in the number of births will be an increase in demand for houses with a larger number of rooms.
@Podublain
Good spot. Again we get the IOU line and this time straight from the horses mouth. This man is telling us evey day that the size of the deficit—the issuance of IOUs—demands radical spending cuts. But when we issue IOUs in the form of NAMA bonds, they barely count.
Link here
http://www.irishtimes.com/newspaper/breaking/2009/0915/breaking34.htm
@John
I’m bothered to ask what is the connection between birth rate and property values
PROPERTY VALUES -v- BANK ASSET VALUES
It would help if Morgan Kelly’s article had distinguished between values of loand and values of properties upon which loans are secured.
Morgan Kelly would not have confused property values with loan values, yet to the lay-man the article reads as if there were no difference:
“Despite these large falls, which already exceed the one third haircut on Nama assets rumoured to be proposed by the Government, the property market remains moribund…
It appears, therefore, that, by paying an average of two thirds of the face value for Nama assets, the Government is likely to impose severe losses on taxpayers of the order of €30 billion, or one fifth of national income.”
The above comments suggest to me that a two third drop in value of bank assets is being deduced from a two third drop in value of property assets combined with an assumption of an average of 100% loan-to-value ratios? Surely that can’t be correct. If Morgan Kelly thinks that bank assets should not be valued above the value of the underlying security then perhaps he would explain why this is the case.
LOAN TO VALUE RATIOS
Also, Morgan Kelly seems to assume that the fact that property loans at the peak may have been secured on equity in other property means the loan-to-value ratio was illusory. Again this doesn’t make sense. If I have a property worth €100K with a loan of €20K against it then the LTV is 20%. If I buy another property worth €200K with a loan of €200K then the combined LTV is 220/300, i.e 73%. now the fact that the first property may have dropped does not mean that the property was not worth €300K. Therefore, the €120bn figure is not lessened by LTVs based on equity.
YIELDS
“As many of you have discovered to your cost, property is a risky asset that performs particularly badly during economic downturns. To compensate for this fundamental risk, property should earn a long run rental return of at least 8 per cent.”
Can anyone give a view on how realistic Morgan Kelly’s suggestion of an 8% yield is? Would that mean the investments was effectively risk free as the yield compensated for the risk? Won’t investors qlways take a lower yield based on the property in question and their own ability to maximise lettings and reduce costs? I am just wondering because MK’s 8% differs to figures I have heard. I also wonder how it compares with current yields (which I consider somewhat illusory due to tenants’ inability to pay rents), bearing in mind the Minister’s recent statement that “The yield is at an all time high relative to the assets, which is a clear objective economic indicator that we are approaching the trough.”
One interesting comment by Morgan Kelly in his article:
“In ordinary times, property prices grow at the same rate as national income.”
I assume that he is trying to imply that house prices in Ireland have grown at a rate far in excess of national income. I can’t see what other point he could be making by that statement. Very well, let’s look at the figures.
From Department of Environment website:
average price of new house in Ireland in 1970: 6,692 euros
average price of new house in Ireland in 2007: 322,634 euros
i.e. average price in 2007 was 48.2 times that in 1970
From CSO website:
gross national income in 1970: 2,253 million euros
gross national income in 2007: 162,220 million euros
i.e. gross national income in 2007 was 72.0 times that in 2007
His case falls.
@Michael Hennigan
Competition from Poland with its experienced workforce and other Eastern countries will be increasingly evident.
Bang on Michael
As a Nation, we all need to wake up to that fact.
I was in Poland in April, I can tell you that 10 and eleven year olds are already speaking good English.
Our advantage of low corporate tax, educated workforce and more or less speaking the same language as our American friends is evaporating rapidly.
@ John
Wouldnt that depend on the data showing that the rise in births being the result of increasing family size as opposed to increased birth?
Also, are we talking about extensions of exisiting property??
The Celtic tiger brats will have to get use to no gym membership, etc etc.
While I will love to provide single rooms for all my eventual siblings, I may not be able to afford to!
Also, If your thesis will result in larger houses being built for this population growth, people may not be able to afford these new houses.
You probaly should develop your point a bit further rather than slinging at people!
Al
@john
as an aside I understand the old age death rate has risen remarkably this year – it’s being linked to a longer winter than normal and increasing worry over financial circumstances. If true then it puts socialisation of bank debt and deliberately overpaying for loans in a starkly human perspective.
@Bill Hobbs
I’d have thought it was obvious that an increase in the birth rate increases the demand for living accomodation, especially such a large increase in the birth rate as Ireland has experienced (which is unparallelled in any other EU country). Initially, the increased demand is for additional rooms, since children under 16 generally don’t require separate houses from their parents. In construction terms, it doesn’t matter that much that the initial increase in demand is for rooms, since a 4-bedroom house will generate more construction work than a 2-bedroom house. Later, as the children hit age 16 and over, the increased demand is for additional houses, not just rooms. As the figures I gave show, the increase in the number of births has been occurring since 1995, its not just in the last 2 or 3 years. So, this latter effect will start to emerge early in the next decade.
As was stated by the minister, demographics will be looked at in arriving at the LTEV
@ Michael
i suppose my original point/question was that Morgan Kelly’s analysis doesn’t seem to look at these demographic factors in coming to his opinion on where house prices are going.
We know that the Japanese demographic factors were negative. The figures that John and the CSO provide seem to suggest that ours will be positive. As such they should provide at least some level of support to demand for housing. It’s not an irrelevant topic of debate no matter how much some on this thread have attempted to brush over it.
@Zhou
The claim that those who oppose the current NAMA plans don’t understand the issues relating to loan-to-value ratios is now perhaps the second most common talking point from pro-NAMA economists (lagging somewhat behind the unbiquitous “it’s free money from the ECB”)
Indeed, in the hand of Davy stockbrokers, it becomes a claim that those who oppose the current plans are being “mischievous” about this
https://www.davydirect.ie/content/articles/supplydemandcurve20090914.pdf
Of course, it’s always hard to pin down exactly who it is that’s supposed to be doing this misleading. I’ve been clear all along about this issue.
e.g. http://www.irisheconomy.ie/index.php/2009/08/30/do-nama-critics-know-about-ltvs/
so perhaps it may be possible for people to say, no I didn’t mean you, I meant some other mischievous fellow.
In this case, you are at least being specific about who is supposed to be doing the misleading/mischief making, specifically saying the Morgan’s article failed to “distinguish between values of loand and values of properties upon which loans are secured.”
Well, the article specifically states
“In addition, while loans were supposedly 70 per cent of property value, the collateral supplied was usually equity in other property or personal guarantees, both now worthless.”
So, I simply don’t see how it failed to make that distinction. It did express doubts about the quality of the additional collateral. I agree that the fact that the equity component is put together via putting up a share in another property does not change the LTV. However, it is hard not to come away with the impression that most of the developers are seriously bust and that some of the stuff pleged as equity will indeed turn out to be worthless.
On a more general point, the fact that the three most common pro-NAMA talking points are now
(a) Claiming those who don’t oppose NAMA are dumb as a plank (don’t know about LTVs)
(b) Inaccuracies about the ECB’s role.
(c) Gross exaggerations about NAMA getting credit flowing again.
is interesting.
Normally those who have a good plan to sell are able to do so without relying on misleading spin.
@john
The effect has already emerged and been banked as buyers of new peak price 3/4 bed’s were those who had children in the early 90’s moving from starter two bed shoe-boxes to larger homes in commuter belt estates.
Whatever about the future, we are probably going through a patch of net outward migration right now. Q1 QNHS data show a marginal fall in the over-15 population. And I’m just itching to find out whether the slowdown in the rate of growth in unemployment in recent months is related more to stabilising employment levels, or to increased outward migration.
Roll on the release of Q2 QNHS data later this month.
@Eoin
I agree.
It all boils down to affordability.
Even before the latest property crash in the UK, there were several reports in the press and on TV of 30 year olds still living at home.
The price of buying a house had become unaffordable for a large percentage of the population.
It is easy for planners and developers to account for demographics, it is not so easy for them to tie that in with the direction the general economy will take.
We need house prices to fall a lot further. I suspect, Dublin will have to concede that multi storey appartment blocks will have to appear on the skyline in order to keep the cost of living units affordable.
A common mistake made by those charmed by their own numeracy is to believe that if we can describe and measure in mind-numbing detail those things that drive supply and demand we will know, with precision, where those two curves intersect. Hence we will know price. And we will know it over the short, medium and long term because we can describe supply and demand statically and dynamically. Nowhere is this conceit more evident than in the oil market: international agencies and individual analysts expend multiple lifetimes and terrabytes of brain power analysing and measuring the supply and demand for oil. Statically and dynamically. And nobody ever has any success at all with forecasting the oil price.
And so it is with the property market. Demographics are probably/possibly important. But may be not be. There are multiple drivers of supply and demand. Anything more precise than this is mere speculation.
@ simpleton
thats fair enough. But all i’ve done is suggest ‘support’ for the market from the positive demographics. I don’t think John suggested anything other than that he reckons the population is going to increase by a material amount and that this will cause at least some increase in the demand for housing. Morgan Kelly is the one who put a 66% decline from peak as his forecast and a great big €30bn figure on the overpayment. Your argument would appear to be with him.
@Eoin
Maybe I’m misinterpreting the demgographic argument: I took it that it was being used to at least support the assertion that Morgan Kelly was wrong to forecast further falls in house prices. A casual reader of John’s thesis would be forgiven for believing that property prices can be boosted permanently by demographics.
I’ve no idea where prices are going over the short term. But if you believe that it is possible to calculate, even approximately, where fair value lies, you can suggest where prices will end up over an uncertain time frame. And on any reasonable valuation methodolgy – own history, relative to rents, relative to international counterparts, – Irish property has a lot further to fall.
Maybe BL might pause to consider the latest on overpayment for assets as reported by Reuters-
AMSTERDAM, Sept 15 (Reuters) – The European Commission has extended a review of a 22 billion euro ($32 billion) loan portfolio guarantee between ING (ING.AS) and the Dutch state, saying the government may have paid too much.
ING and the Dutch state struck a deal in January for the government to guarantee 80 percent of a 27.7 billion euro portfolio of so-called Alt-A and subprime residential mortgage-backed securities. [ID:nLQ136110]
The government is due to receive 80 percent of the cash generated from the portfolio, which it took on at a 10 percent discount to par value. The Commission gave the deal six-month approval in March while it conducted an investigation.
In a sharply-worded statement on Tuesday, the Commission made it clear the deal seemed to unduly favour ING, but said its decision would not prejudice the final outcome of the inquiry.
“The Commission continues to have doubts that the price paid by the Dutch Government, equivalent to a transfer price of 90 percent of the face value, is justified,” it said in a statement.
@ Simpleton
im confused. So what you’re saying is that we can deduce the general direction of prices, but not their level with any decent level of precision? But isn’t the core statement that Morgan Kelly is making, that we are overpaying by 30bn, hugely dependent on house prices falling by a particular amount? ie paying 60bn for 90bn in loans, if house prices only fell by 40% across the board, rather than the 66% he is suggesting, and we had even 6bn in subordinated bonds, even using 100% LTV loans would see NAMA break even at a nominal level?
As such, i would have thought that someone like yourself who abhors precise forecasting would see Morgan Kelly’s analysis as pointless?
@John
Do not underestimate the effect of emigration
In 1980 Births 74064 Deaths 33,472
Not vastly different to 2008 except a welcome reduction in deaths (looking forward to living to 100!).
Emigration though meant population was falling. I started college in 1981 and was part of a 1960s baby boom. It didn’t produce an increase in demand for houses. All through the 1980s house prices fell. The people we bought from in 1987 bought in 1981 and made a loss.
Also I seem to remember reading somewhere that a significant factor in our higher birth rate was non nationals. If they leave they take the family with them. Are there figures available on the effect of the recession on new immigrants?
I happen to agree with Simpleton. Estimates of population and house prices in 2020 is merely speculation and most likely to be wrong.
@Stuart, between Q1 2008 and Q1 2009, the number of non-Irish nationals employed in the economy fell by 16.3%, while the number of Irish nationals fell by 5.8%. See: http://www.cso.ie/qnhs/documents/calendar/tableA3calq.xls
@podubhlain
B.Lenihan has at all stages said that any solution will be designed to comply with the EU Commission guidelines and the Govt will not try to do something which the Commission would disagree with. Indeed the Minister has pointed to the Commission’s position on state aid and the reality that NAMA must comply with EU Commission guidelines as an additional protection for the taxpayer. Lenihan has said that if he were plotting the kind of gross overpayment that some are predicting then the scheme would fall foul of the Commission.
@Eoin
Fair point: my views on forecasting are as you describe. So any precise forecasts by Prof. Kelly are equally derided:) For me it is a question of emphasis: I choose to interpret his point forecasts as attention grabbing numbers in a newspaper article that tries to get the simple message across that Irish property is still well over-valued.
… and within that, the number employed from the accession states fell by 24.6%.
Its been fairly widely and rightfully claimed say that we can’t predict net migration with any degree of certainty beyond the very short term. As such, shouldn’t we leave it out of our calculations altogether?
Therefore, based on the births vs deaths equation currently in place, which is far more stable and predictable than migrations patterns, the population, ceterus paribus, will continue to grow by at least some material amount? It is not a particularly difficult contention to make that this increasing population will, to at least some degree, provide a support for the housing market?
I know many of the demand vs supply dynamics are difficult to identify and quantify, but i think those that are plainly obvious should at least be given some merit.
@Eoin
“As such, shouldn’t we leave it out of our calculations altogether? ”
Always my problem with economics – ceterus paribus.
Answer is no we shouldn’t leave it out. History suggests that for Ireland except for a short possibly exceptional period in the last decade that Ireland suffers from net emigration. It is a potentially huge variable. As John pointed out in 1990 we didn’t predict the population growth (for very good reason) and so didn’t build the schools, transport and health services we need. We could make the opposite mistake assuming large population growth and therefore increased demand for housing and therefore an increase in house values over the next 10 years.
If Nama had been set up in 1981 they would have still been waiting for house price increases in 1987. Would have made a killing if they hung on to 1997. That’s how volatile it has been.
Just on NAMA and valuation reports, I think there needs to be an obligation on the banks to disclose any valuation reports and any draft valuation reports which show a lower value of the property in question than the report submitted to NAMA. It could be like something akin to the disclosure requirements for medical reports in personal injury cases except a little more stringent.
The asking prices of houses on daft.ie are still very high compared with most of the US outside of a number of enclaves, and Europe.
An international comparison in 2007 showed that for a comparable management level house, Ireland ranked with Beverly Hills, for the most expensive property in the world.
Interest rates will rise with a recovery and Irish dispoable income will be lower than the peak boom period.
http://www.finfacts.ie/irishfinancenews/article_1014455.shtml
Kevin O’Rourke rightly points to the uncertainty of demographic forecasts/projections in an Irish context due to the overwhelming impact of net migration. An assumption of continued net immigration was used uncritically in many consultants’ reports projecting our housing requirements over the medium term. The reality on this front may be less buoyant.
John, equally correctly, documents the impressive surge in the Irish birth rate and marked decline in the death rate, which have caused a dramatic rise in the rate of natural increase. The relevance of this to the housing market over the medium term is not so clear, however.
To get a better fix on this issue, I refer readers to the CSO’s Population Projection, published in 2008 [http://www.cso.ie/releasespublications/documents/population/2008/].
The most pessimistic migration assumption used in this exercise was M0 – zero net migration (resulting from assumed offsetting outflows and inflows of 20,000 a year – which do have net impacts on particular age groups but not on the total population).
The results that are most relevant to the debate on the impact of demographics on the trajectory of house prices are the projected numbers in the age group 25-44, among whom house purchase rates are presumably the highest.
Under the CSO’s M0 assumption, the following are the actual and projected numbers (thousands) in this age group:
2006 1,343.3
2011 1,399.3
2016 1,359.0
2021 1,270.0
A 4% increase was projected between 2006 and 2011, followed by a fall of 9.2% between 2011 and 2021. (A very similar pattern emerges under the M0 assumption for the broader 15-64 age group.)
The increase projected for 2011 seems unlikely to materialise as emigration rises in response to the recession, but the decrease after 2011 reflects the impact of the “baby bust” of the 1980s and is unlikely to be offset by renewed immigration in the coming decade.
Thus a key component of the “strong fundamentals” often cited as underpinning the demand for housing – and of course the “long term economic value” of the housing stock – is likely to go missing in the years ahead.
@ Stuart
Here’s how its worked on this thread today:
1. Morgan Kelly releases an opinion piece.
2. I query what sort of effect, or analysis there in, there has been in regard to demographics on house prices, as Japan’s was negative but ours appears to be positive.
3. the important issue of net migration is raised, especially in the context of the unemployed leaving the country.
4. John notes that natural births vs deaths is highly positive and likely to remain so. He also notes we’ve screwed up on the net migration levels before.
5. The point is raised that as we cant forecast net migration very well, we cant forecast population very well, and so it tells us nothing.
6. its suggested that forecasting in general is an inaccurate, blunt and often incorrect science, and doesn’t help us very much beyond the very short term, other than maybe helping to suggest a general trend/direction.
7. i note that a key argument in Morgan Kelly’s piece requires fairly accurate forecasting and that this forecasting ignores demographics.
8. people refer me back to point 5 above. Therefore, population ceterus paribus, house prices will fall.
9. I point out that as we can in fact relatively accurately forecast one side of the population equation, that of likely births minus deaths, shouldn’t we at least use this in our analysis, as some information is better than none.
10. people suggest that a forecasting model that is incomplete is therefore useless, and all information there in is to be ignored. Ceterus paribus no longer works.
11. i suggest that we just leave out the hard-to-forecast parts and use the easy-to-forecast parts to at least some degree
12. its suggested that we can and should use the highly variable historic migration data, excluding the last decade, to try and come up with a highly variable net migration figure for the future, but as it’ll probably throw up the wrong data, as it has historically, then it’ll probably send us down the wrong track.
Do you see why this chain of events may leave some people perplexed?!
@ Eoin
Very good synopsis. Amazing to think that because forecasts were wrong before we should consciously ignore the directional evidence we have to hand.
@ KW
Any chance of a par prediction on tomorrow’s estimate? No trick. Just think it will add to your (and other’s) views post estimate annoucement
@KW
Other than the point about equity in other properties being counted in LTV which you agreed with above, I didn’t suggest that Morgan Kelly doesn’t understand LTVs.
I wasn’t questioning the assumptions (66% drop + 100% LTV), when I said:
“The above comments suggest to me that a two third drop in value of bank assets is being deduced from a two third drop in value of property assets combined with an assumption of an average of 100% loan-to-value ratios? Surely that can’t be correct”
What I was questioning was that loan values were being equated to property values [perhaps correctly?]. If I am wrong then please show me how. I am a big MK fan so I won’t be too upset.
I read MK’s maths as follows (all figures approximate):
Loans total = €90bn
Secured Property peak value = €90bn
Secured Property likely trough value (66% decline) = €30bn
Likely State payment for loans = €60bn
Likely overpayment = €30bn
From that I deduced that MK was saying
State payment (€60bn) – Property Trough Val (€30bn) = Overpayment (€30bn)
Assuming that
State payment (€60bn) – True Loan Val (€ ? bn) = Overpayment (€30bn)
Then
True Loan Val (€ ? bn) = Property Trough Val (€30bn)
Have I made a mistake in my logic?
I also did not say that MK could not tell the difference between loan values and property values. To avoid being misunderstood I prefaced my point with the comment that “Morgan Kelly would not have confused property values with loan values…”.
If there is a basis for equating laon values with property values, and perhaps there is, then it would help if MK spelled it out. I didn’t and wouldn’t call Morgan Kelly as dumb as a plank.
With that said I have no doubt that there are a few planks on either side of the debate (though not on this blog of course 🙂 ) including those who say that credit will be on tap after NAMA.
In relation to credit flow and in defence of the Minister, I note that Brian Lenihan said to the finance committee that NAMA was necessary to get the banks lending to viable businesses. I think that ‘viable’ is quite a caveat.
In relation to the role of the ECB I am unhappy that there is a lack of clarity about how the NAMA bonds will work and what they will cost. I note that others have said the ECB is loaning us money which it isn’t. I made this wording mistake myself in the past so it is hard for me to get all Chris De Burgh on their asses. The mention of IOU’s is egregious spin but it isn’t inaccurate. With all that said the ECB is playing a crucial role and if it is providing a mechanism whereby bonds of sub-par value can be used to recapitalise banks at par then it is not beyond the bounds to describe that as q.e.
@Eoin
Actually that’s my point.
But what happened before was most people decided “this time it’s different” to justify the massive house price increases over the last 10 years. They threw in population demographics and immigration and family unit size to justify the never ending spiral which flew in the face of logic. Someone even suggested by 2020ish the “irish” would be in a minority.
Now with Nama and LTEV the assumption is that after this hiccup things will get back to the way they were in the late 90s, early noughties. And indeed they might but also they might not. I don’t know what’s going to happen but people who know for certain on both sides worry me.
So we do need to formulate policy but with an eye to the downside or upside (depending what position you take) so I like the idea the banks won’t get all the LTEV money up front. Better for them to have a contingent asset than contingent liability i.e they have hoped for money coming in down the road than a possible big liability (levy/clawback). If that means they have to get more funding today so be it.
PS I never thought ceterus paribus worked even in my days in college. Life is too complex.
@Pa
“Amazing to think that because forecasts were wrong before we should consciously ignore the directional evidence we have to hand”
The problem is the picking and choosing of that directional evidence. The last 10 years have been exceptional maybe unrepeatable in the medium term.
@ Stuart
Fair comment. I thought at the time that forecasting housing demand by including immigrants who arrived to build said housing stock was circular. So also is it self fulfilling on the downside as craftsmen leave due to no work resulting in less demand e
tc…
Will anyone give me a par bid? Even the GIS aka Zhou is reticent on the figure.
@ Stuart
“Life is too complex”. Surely life, ceterus paribus, is actually very simple!!? But i digress…
@ zhou
re your suggestion on QE – thats exactly how i see it panning out. I can’t see how it works any other way. Fair play for managing to get a Chris De Burgh reference involved in a debate about NAMA too. That’ll show the anti-NAMA side you mean business…
Does anybody else think of the suitcase in Dumb and Dumber whenever somebody mentions IOUs?
@Eoin
Cheers. I am hoping to be approached by the NAMA drafting team based on that.
@ Pa Bandit
52.5bn in senior bonds + 7.5bn in subs.
Ill go one further and suggest that they are medium-to-long term in maturity (5yrs+), based off floating rate, with the senior bonds being held at par on the banks books and being repo-ed at par (less standard haircut) with ECB.
Sub bonds will be subject to an additional haircut from the ECB, but still probably end up with 80 cents of funding.
Just picking this up from the morning, with the day job and all….
My prediction for tomorrow
: 55b regular (blue) NAMA bonds, max 5b subordinated (purple) NAMA-bonds tp purchase low80sb of book value; we may get to know the bond issue more clearly – expect to hear that the bonds are being issued on 12-18m rollover basis, and that subbies are very longdated.
@Zhou
Fair enough. The ING case looks like gross overpayment. Good to see the Commission looking over the shoulder. I wonder which they will accept as valuation expert, Prof. Kelly or Mr.88%
Good idea on the disclosure of valuation reports. It should all be based on utmost good faith(Uberrima fides). Sanctions might be a problem as the money will be gone.
@Stuart Blythman
Emigration though meant population was falling. I started college in 1981 and was part of a 1960s baby boom. It didn’t produce an increase in demand for houses. All through the 1980s house prices fell. The people we bought from in 1987 bought in 1981 and made a loss.
Stuart, I am not sure of your source of information….but the CSO disagrees. Property prices fell only in 1987, even then it was miniscule.
New built – National average
1980 34967
1981 40167
1982 44060
1983 44448
1984 45419
1985 46542
1986 48256
1987 48151
1988 52450
1989 58178
1990 65541
The picture is pretty much the same for second hand properties.
You could have added high unemployment as well.
Simple fact is, as I have pointed out before, there is an ongoing love affair between the Irish and property/land. It seems as though we will pay any price to get it. Presumably the Banks and developers realised this long before we have.
Take a closer look at those CSO figures. They again dropped by a miniscule amount in 1992.
After that it was up all the way to 2007.
The figures go back to 1975. At that time a new house cost 13,254 Nationaly.
Only in 1987 and 1992 has there been a drop.
@Michael,
Try deflating for some measure or other of inflation. CPI is easiest to come by. The numbers you get will be more entertaining. 1987 was a great year to buy a home.
“In addition, while loans were supposedly 70 per cent of property value, the collateral supplied was usually equity in other property or personal guarantees, both now worthless.”
Many posters- both here and on the Irish Times website – have made much of the fact that Morgan Kelly uses hard facts to back up his arguments rather than speculation.
I don’t see on what basis Morgan Kelly has made the assertion in quotes above.
I work as a banking lawyer in Ireland and while real property as equity has certainly been a feature, I would strongly disagree with his inclusion of personal guarantees – in my experience, it is very innacurate to describe this as the norm.
Since the quality of the equity provided is so critical to the analysis of whether NAMA is overpaying or not, I think it is very surprising to see this assertion in the article.
Bit off topic but tthe article in the IT (page8) under sub heading “Green Party members endorse agency plan appears to be at odds with reports yesterday in the paper of record.
It’s intriguing that it took three writers to pen a very short piece that reports a result of 657 for NAMA with Green input with the second pref listed as the Swedish model – no vote reported. John Gormley is reported as saying the members want a new and improved NAMA. Sounds like a soap add to me.
@ Concubhar
When banks were willing to supply 100% residential mortgages and 5-yr interest only loans to investors on the provision of a net worth statement, the claims that development/commercial property investors had to provide 25% in cash, at least gives rise to doubt.
When developers were bidding up prime sites, the likes of Anglo were hardly demanding big cash payments.
@Michael Harvey
Inflation in 1981 was 20.4% and 17.1% in 1982.
http://www.cso.ie/quicktables/GetQuickTables.aspx?FileName=CPA01C3.asp&TableName=Annual+Percentage+Change&StatisticalProduct=DB_CP
New 3-bed houses that were selling for £28K in Bray in 1981, were fetching £26,000 or less in 1987.
When attention was given to the public finances, it was against a backdrop of a positive international environment; ditto for Sweden in the early 90s. It will be a different story in coming years.
TAXPAYER NOT PAYING ANYTHING Deputy Fleming News at 6 RTE
@Michael
You have only confirmed to me the figures that come out of the CSO need to be treated with caution. Averages can hide a multitude of trends.
We bought a house in D18 in 1987 from a couple who bought it in 1981. It had fallen 10% (They bought it new). We were able to knock them down and we were the only people to make an offer in 6 weeks when they finally accepted ours. (€66k but at the height of the boom went to €750k – no idea what they are now as none have gone on sale in the past 18 months).
My brother bought a house (new) when he got married in 1981 in Greystones and made a loss in 1986 when he and his family emigrated. My wife’s family home in Stillorgan sold in 1988 for a fairly dismal price
We were house hunting all through 1987, there was no rush and plenty of availability. Second hand houses mainly – new ones were a bit pricy for what they were offering (basically shiny and new but much smaller), maybe that’s where the discrepancy is. Banks were only lending 1.5 times one salary and interest rates were 11%ish.
My point being emigration kept the lid on house prices . 50% of us were under 25. But the government finances were in a mess, unemployment high and inflation was also high. Ring any bells?
@ those ‘throwing’ statistical estimates about property values and demographics. Go REAL careful around these estimates. You need to ignore the data prior to 1990: the 1995 -2009 sequence is most unusual and must be treated in isolation – else you are likely to mislead.
Births + nett immigration – deaths give increase. But, what proportion of the increase results in a household formation – and how many persons are in each household (1,2 3 ??). Does household formation need a new, as opposed to an existing dwelling. How about the enlargement of existing dwellings? Take a REAL CAREFUL approach to the estimates – like you were attempting to walk through an area with active anti-personnel mines!
@ others: try not to sweat the NAMA details – this is just a welcome distraction for those proposing a deceitful, financially and economically damaging scam. “It’s not the liquidity stupid! – it’s the inability to service the colossal levels of state, commercial and personal debt!” Please try to re-focus on this – these debts, and how in God’s name it is intended (absent default or inflation) to pay down these debts.
If you apply a sufficient level of rational analyis to the debt problem you will come to the awful conclusion that the debts cannot (mathematically) be paid down – current incomes are declining and future incomes are mortgaged. So why NAMA: it’s just another s**tload of debt piled upon the current heap. Who benefits?
Brian P
@Professor Brendan Walsh
“Under the CSO’s M0 assumption, the following are the actual and projected numbers (thousands) in this age group (25 to 44): 2006 1,343.3 , 2011 1,399.3 , 2016 1,359.0 , 2021 1,270.0”
note: the CSO 2006 figure is actual, the others are projections
The CSO published those projections in 2006. But, now in 2009 we know the ACTUAL figures for 2008. Just for the record, the ACTUAL figures for 2008 for that age-group (25 to 44) was 1,435.9. So, in 2008 it was way ahead of the CSO projection made in 2006.
I won’t labour the point, however. I’m not going to make migration forecasts. As I said above, these are nearly always wrong. And, if I made migration forecasts myself, they’d be as likely to be as wrong as anybody else’s. I fully accept that the trend evident up to 2008 might be reversed permanently, or it might be reversed temporarily and then return to its pre-2008 trend, or it might not be reversed at all. All of these are possibilities.
Re the general point, I do accept Professor Walsh’s point that, assuming for the sake of argument zero migration, the population aged 25 to 44 will fall for a number of years before rising again. This is because the number of births fell from just over 70,000 in 1981 to under 50,000 by 1995, but has since risen to over 75,000 in 2008.
However, this will be more than compensated for by a massive increase in the population aged over 45. According to the same CSO M0 projections Professor Walsh used for the population aged 25 to 44, the CSO gives the following for the population aged over 45.
2006 1,386.2
2011 1,562.2
2016 1,758.5
2021 1,977.9
2026 2,218.2
So, an extra 832,000 people aged over 45 by 2026. That is 40,000 to 45,000 annually.
We shouldn’t make the mistake of thinking that an increase in the population aged over 45 has little or no effect on the demand for houses, merely because all these people are allready living in houses. It does in two ways:
(a) Average household size is much lower among the population aged over 45. This is due to the unfortunately increasing tendency of people to be divorced as they hit that age group and the fact that their children are much less likely to be living with them. The percentage of one-person households is much higher among those aged over 45 than those aged 25 to 44.
(b) In so far as the increase in the population aged over 45 is due to a fall in the death rate (which, indeed, is happening dramatically in Ireland), this means fewer and fewer houses vacated each year by older people dying. I myself am a good example. I’m 60. Given the death rates in Ireland in the 1980s abd before, I could reasonably expect to be passing on my house to a younger relative in 10 years. Now, with the dramatic fall in death rates in Ireland, I fully expect this to not happen for another 25 or 30 years and, touch wood, even longer. Multiply me by a couple of hundred thousand in the coming years.
The bottom line is:
Natural population growth in Ireland is currently over 1% annually, This is miles higher than in any other EU country. In many of them it is negative.
Average household size in Ireland is falling very rapidly (because of divorce and population ageing). As a result, the number of households is increasing much faster than the overall population. Since the 1960s, the number of households has increased well over twice as fast as the overall population.
As I said earlier, neither I nor anyone else can forecast migration trends. But, leaving migration out of the equation, and just basing our projections on known natural population growth and the other well-established trend of rapidly-falling average household size, this would indicate a demand for houses in Ireland in coming years that is far in excess of that in any other EU country. Obviously, if net emigration reached 1980s or 1950s levels and stayed there, this would be completely nullified. But, as I said, its impossible to predict that.
Rather than bandy statistics about on a blog like this, the best solution would be for the CSO to publish projections for the number of households in Ireland. They do for population, which Professor Walsh quoted above, but not for number of households. Its difficult, but not not rocket science. Its well within their capabilities. The N. Ireland-equivalent of the CSO, the N. Ireland Statistics and Research Agency (NISRA) do precisely that for N. Ireland. For anyone interested, the link is below. The consequence is that, in N. Ireland, the authorities have a far better idea of the likely future increase in number of households and, therefore, likely future requirement for new houses.
http://www.nisra.gov.uk/archive/demography/population/household/NI06_House_Projs.pdf
[…] Brian Lucey has posted his prediction: […]
Thank God for John. He analyses and knows and writes sense of what is going on in this country. As for the Professors and others who consider themselves so expert in these matters that they have all of the answers and can predict into the future for the next 20 years all I can say is God save us from their mumbo jumbo and crystal balls. There is not one amongst them including Kelly who ever created a iota of wealth or took one risk in their safe as houses lives. One of them someday might get out of the safety of their cosseted cushy jobs and realise only for the risktakers there would be no resources to pay their wages. Yeah Lenihan is taking risks but at least it is a lot better than procastrinating to the point of destroying the confidence of the entire business community and populace.
@ Ray
‘ safe as houses ‘ ?????
@John
Thanks for your helpful comment. Yes, it is interesting to see that the inter-censal data point to continued net immigration in the relevant age groups and yes, I agree that the older population dooes having housing requirements too! A projection of the change in the number of households (applying household headship rates to the projected population by age group) is fairly easy to do – if I have time over the next few weeks, I’ll have a go and share the results here.
@ Ray
tell it brother!
More seriously, i find the way this thread has evolved in regards to the question on demographics to be hilarious.
Far from being more opaque than the meaning of life itself, John’s analysis of population trends, and particularly his noting of this analysis being regularly done by our friends up North, appears to show that we can make at least some sense and predictions regarding the likely change in the population of a country.
Is it highly precise? No.
Does it depend very significantly on the net migration trends? Absolutely.
But this this mean we should almost ignore the births vs deaths figures and consider them as useless? Hell no.
We use what we can to try and predict general trends and likely scenario’s for the future economic and social evolution of the country. To suggest otherwise, as a huge amount of people on this thread have, is a worrying situation. I’ll also note that people seemed far more willing to use the ‘useless’ information when it seemed to suggest falling population trends.
@Alan
That phrase was deliberate to annoy the property valuer economic experts we have here……………
The omission of foreign properties in Kelly’s analysis appears to be an enormous oversight. It transforms the equation when one considers the much smaller decline in UK property prices in the Greater London area. The international dimension deserves more careful consideration.
I would have to agree with his assertion that “… the Government’s claim that €90 billion in developer loans are backed by €120 billion in assets appears implausible” though.
@ Kevin O’ Rourke
predicting future trends in Ireland’s population is pretty hazardous, since it largely depends on net migration, which can be either positive or negative.
Thanks for making that point. It is one aspect of the Celtic Tiger that we really tend to forget nowadays. Especially, given the fact that residential vacancies in Dublin never tend to stay too high for too long. Although, this downturn is surely different.
The troubling thing to my mind, is what happened in the Celtic Tiger, when residential property came under pressure, that so many people migrated out to the farthest edges of what we know as the ‘commuter belt’. I have spoken to many a grand mother, native of Dublin city’s outer suburbs, places such as Kimmage and Crumlin who noted that their children could have afforded ordinary working class or middle class residential property in Dublin, but chose to move into the commuter belt, in order to have more disposable income left over, to enjoy a good life style.
But even that wasn’t too bad.
I think what happened then, is that development started in what is now known as ‘Nama-land’. I think it is the land that is outside the commuter belt for any centre. Ronan Lyons called it a ‘T-shape’ down the centre of the country, where you now have high negative equity combined with unemployment. Counties such as Laois, Offaly, Cavan, Leitrim, Sligo and so on.
I suppose, these are things we tend to forget, being so focussed as we are at the moment on the crisis. I know the economist is often criticised for being part of the ‘dismal profession’. But I have been reading some of the discussion here at the Irish Economy blog, and while a large portion of the discussion is very good, I have to say one thing. I have highlighted or touched upon a couple of issues above, to do with forward planning and sustainable planning. I doubt very much if those ideas will come directly from economics. Certainly, they should be informed by sound principles of economics.
People complain the CIF has issued ‘statements’ via Tom Parlon etc. I have listened to the NAMA debate quite a lot this year and I noticed one thing. A lot of articles from economists etc. None, whatsoever from architects or planners. Sure, yeah, the Green party are doing their bit, chipping in. But how come that architects and planners are so divorced from the process? I applaude economists very much btw, for broadening the debate on NAMA. Well done all.
@ Michael Hennigan,
Thanks for linking that 2008 MK Irish Times article, I am going to enjoy having a read of it now.
@ John
Who the hell are you?
Probably not DoF (too smart), I’d say you work for a bank based on your vendetta against Morgan Kelly. Right?
Nice to have a chink of light shining through anyhow. Not very “dismal science” though. You should make your projections far more pessimistic to fit in with your economist brethren on here.
@economists
On the challenges associated with projections and therefore predictions & planning (something we might consider at some stage in this country), they are using scenario analysis in the civilized world these days. Probably something that will catch on here as soon as you economists admit that they haven’t a clue what’s going to happen next week, not to mind 15 years time (rf: ESRI Medium Term Economic Review 2008:).
Great initial post by Prof. Brendan Walsh and fair play to John too.
@JC
Scenario analysis- that thing I teach in my second year finance class?
@jc
“Nice to have a chink of light shining through anyhow. Not very “dismal science” though. You should make your projections far more pessimistic to fit in with your economist brethren on here. ”
No problem with people being optimistic – hope is essential. But it is not the best way to make long term potentially costly decisions. You have to factor in the potential downside and leave yourself a plan B.
Those poor unfortunates who took out huge mortgages in 2007 based on optimism will pay for it for a long time. There were plenty of people by then shouting this doesn’t make sense but they were seen as pessimists.
Optimism is great but caution is also pretty good too.
PS I’m an accountant (not in practice but in business) but we can be pretty dismal too. Just wish more of my peers were!
@BL
Does anyone use it? ESRI, any government department? No, they make one projection and “plan” accrodingly.
Futures Academy in DIT are only ones that I have seen using this type of analysis in Ireland.
This is going to be a greater depression then in the 1930’s. We already have the Japanese experience from which to learn. They do not migrate. For them it is shameful to leave. Their land is holy to them. As a result, they have abortions, not children, as they cannot afford them. So they are trapped into “permashrink”. They have 100 yr mortgages. Very few go into bankruptcy.
This may change as the natural leaders have lost the last election. But I doubt it.
Australia is the size of the USA or Canada. It is the 14th largest empire the world has ever seen. It has a population of 22 million. It imprisons government ministers. It has at least 33% Irish related population. We need qualified young energetic people. We are going to get a lot of them from Ireland. Think about NZ as the backdoor to Australia as once you have NZ citizenship, you can live ibn Australia! And then acquire Aussie citizenship, if desired.
Leave Ireland. Do it now. If you are unemployed in Australia you can live on the beach. North of us are 3 Billion people who are happy to have an income of Euro 3,000 pa. Ireland cannot compete with a continent. Just leave the politicians, bankers and estate agents behind!
@Pat,
What about the poisonous spiders?!
@ Pat,
‘Permashrink’ , beats Permadecline any day.
Sail away to OZ? Mmmm. I have a suspicion that Them is a tad short of fresh water. But maybe some enterprising person will arrange the transport of water from Here to There – though Malta or mid-East are somewhat nearer. But hold on, WE, are short of fresh water too!!! I know it rains a lot – but our Ag sector extrudes a lot of pollution into our existing freshwater sources.
Anyone care to erect a statue to St. NAMA so we can make votive offerings. Maybe even a new Litany to St. NAMA.
Also, could someone please explain how it is intended that we (the Irish taxpayer) will be able to repay our debts. With an income stream of Monopoly money?
Brian P
Morgan Kelly’s contribution is the soundest piece of writing on this subject that I have seen so far. No BS no axe to grind no green/rose tinted glasses, just a sound analysis of the situation. How refreshing.
daily cash loan now…
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