After the Fall

In this Jackson Hole paper,  Carmen Reinhart and Vincent Reinhart find that the negative impact of severe financial crises on macroeconomic performance is long lasting, with real house prices remaining below the previous peak a decade after the crash, unemployment remaining at an elevated level and a cumulatively-large decline in GDP growth.

43 thoughts on “After the Fall”

  1. It somteimes helps to state what can be obvious to a lot of people but not policy-makers.

    European Central Bank Executive Board member Lorenzo Bini Smaghi said last January he did not expect the global economy to return to its pre-crisis situation, as this had been unsustainable.

    “I have the impression that many people, whether in the business sector, the financial markets, or in academic and political circles, think that the post-crisis world will be quite similar to the pre-crisis one in 2006-2007. In other words, they expect the economic recovery to bring us back to where we were before the crisis,” he said.

    “My feeling is that those who think like that are deluding themselves,” he told Frankfurt’s Chamber of Commerce and Industry.

    Optimism is of course important but as the Reinharts warned, policy-makers can make matters worse if they cannot see or ignore a changed reality.

    In Ireland, political leaders have a fingers-crossed policy, hoping that an international recovery will spur economic growth. In the longer-term, the hope is that a researcher in a university lab will have the eureka moment that will trigger another economic miracle.

    It could be called Lotto economics!

  2. Imagine a world where the workers representatives pursued wage rises equal to the monetory inflation created by the central banks such as the American silver advocates did during the late 19th century.
    The central banks would be unable to transfer the surplus of the society’s wealth to their favoured clients, The Banks.
    Unfortunetly the labour movement has since those days gravitated to the socialistic construct that the banks created to contain labour in a little box.
    Even now Labour still looks to the CBs in their imagined CPI indexes when they look for wage rises – unbelivable.
    I remember talking to Jack o Connor in a public forum about this subject of monetory inflation vs wage inflation 4 or 5 years ago and I was not sure if he understood what I was talking about – maybe he did but unfortunately the discourse if you could call it that was drowned out by the laughter of union reps who belived I was talking in strange tongues.
    I wonder who is laughing now that they have to pay all that credit money with deflated wages.
    It is so sad to see the manipulation of the labour movement by both false leftest and rightest forces but such is life withen a feudal society I guess.
    Labour is now dominated like always in Ireland by people who pour scorn on Rome while praying to the steeples of Frankfurt and Brussels for divine intervention.
    Sad so sad.

  3. @ Keith Cunneen

    The US farmers had suffered from 3 decades of declining prices when William Jennings Bryan of Nebraska in 1896 had railed against being crucified on a cross of gold. Silver mining was located in western states such as Colorado which would in particular have gained from a bi-metallic standard.

    “It is so sad to see the manipulation of the labour movement by both false leftest and rightest forces but such is life withen a feudal society I guess.”

    I have some sympathy with Jack O’Connor for not being able to follow the drift of this obscurantism!!

  4. @Micheal Hennigan
    I don’t quite follow the drift of your thought.
    Are you saying that Labour does not understand the dark art of money creation now or are you arguing against the balance of power that existed under the bi-metallic system.
    Looking at the graphs for the last 100 years or so it seems that London/ New York seem to have full control and unheard of power to manipulate the amount and velocity of money in their clients favour with predictable results.
    Nobody talks about the housing bubble as a almost hyperinflationary event but that is what it was – the CBs stood over this debacle like the colossus of Rhodes yet did nothing but bang on and on about consumer price inflation.
    This is not a accident but a deliberate policey to inflate assets at the expense of the plebs and facilitate wealth transfer to the owners of financial assets.
    My only hope is that this time they may have become too greedy even by their own dubious standards and their whole rotten structure will come tumbling down.

  5. @Micheal Hennigan
    I don’t quite follow the drift of your thought.
    Are you saying that Labour does not understand the dark art of money creation now or are you arguing against the balance of power that existed under the bi-metallic system.
    Looking at the graphs for the last 100 years or so it seems that London/ New York seem to have full control and unheard of power to manipulate the amount and velocity of money in their clients favour with predictable results.
    Nobody talks about the housing bubble as a almost hyperinflationary event but that is what it was – the CBs stood over this debacle like the colossus of Rhodes yet did nothing but bang on and on about consumer price inflation.
    This is not a accident but a deliberate policey to inflate assets at the expense of the plebs and facilitate wealth transfer to the owners of financial assets.
    My only hope is that this time they may have become too greedy even by their own dubious standards and their whole rotten structure will come tumbling down.

  6. Some very interesting statistics on Table 4. It would be good if the usual suspects studied them before committing to print here.

    The authors give median per capita growth rates between 1997 (the year the evil FF/PD government came to power) and 2010 (the year when, if the Irish media and this site is to be believed, the economy is more depressed than any economy has ever been in the history of the universe) – they are:

    Ireland + 5.0pc
    Spain +3.5pc
    Netherlands +2.9pc
    U. Kingdom +2.6pc
    U. States +2.1pc
    Denmark +1.8pc
    France +1.8pc
    Germany +1.7pc
    Italy +1.6pc

    These are the per capita figures. Ireland’s population has risen far more in that time than any of the other countries. So, if actual growth rates, rather than per capita growth rates, were used, Ireland’s lead would be even greater.

    They also say that, typically, in the decade after the dust settles from a big crash, average growth rates are 1pc lower than in the decade preceding the crash. If Ireland follows this pattern, per capita GDP growth in the next decade in Ireland will be 4pc. I’d settle for that, But, no dout the usual suspects will tell us that Ireland is different and that this pattern won’t hold in our case.

    The same table also gives figures for real house price increases between 1997 and 2007 (note: 2007, the peak, not 2010). While Ireland’s was high, it was by no means the highest. The figures are:

    U. Kingdom +150.1pc
    Spain +118.5pc
    Sweden +114.9pc
    Ireland +114.8pc
    France +111.6

    all others were below 100pc by varing amounts.

    So, contrart to what Morgan Kelly says about house price increases in Ireland since 1997 being in a league of their own – only fourth highest and actually below Irish economists’ favourite country, Sweden.

  7. @ JTO

    “Some very interesting statistics on Table 4. It would be good if the usual suspects studied them before committing to print here. “

    Apart from temporary growth resulting from an out-of-control property boom, the value added as percentage of GDP of US firms overseas was highest in Ireland according to the US Bureau of Economic Analysis (BEA) in an an analysis of 2005 data.

    The BEA figures show that the combined net profit of US corporations in Ireland doubled between 1999 and 2002 from $13.4 billion to $26.8 billion and was $48 billion in Ireland in 2005, compared with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany made net profits of $11.22 billion in 2005; French affiliates reported income of $9.52 billion and Italian operations made $8.58 billion.

    Maybe the Irish success resulted from a productivity miracle or maybe not!

    The BEA says the large affiliate share for Ireland may be related to US MNCs’ geographic allocation of their income from intellectual property rights (such as patents). A sizable share of the investment in Ireland is in industries, such as pharmaceuticals and software engineering, where intellectual property plays a major role. Affiliates in Ireland conduct substantial R&D work, but it appears that a significant portion of the intellectual property held by these affiliates originated as a result of parent-company activity in the United States, and the property rights were subsequently relocated to Ireland where the tax regime for patent royalties is favorable. The royalty income, much of which is for use of the patents in other countries, is treated as arising from sales of services and is counted as part of the value added of the affiliates that hold them.

    Sweden’s 2010 budget deficit is forecast to be the lowest in the European Union this year at 2.1% of GDP. It is forecast to grow by 4.5% in 2010.

    Wouldn’t it be more realistic or honest to estimate a growth rate stripped of the excess of the credit fuelled growth, that will result in sub-par growth this decade?

  8. JtO, the text discussion of Table 4 says that those per capita growth figures are to 2007, not 2010 (contrary to the table headings). To 2007 would make more sense in terms of their methodology.

    Note also their point that true deleveraging has not begun yet in Ireland. This party is just getting started.

  9. The authors admit that “evidence of lost decades, as in the depression of the 1930s, 1980s Latin America and 1990s Japan are not ubiquitous”. However they find fifteen crises to compare the before and after. (There are 5 countries in the sample that were all caught up together in the Asian crisis, 10 in EM, and 3 Scandis).
    There seems to be an additional Data Appendix section. The paper refers to it, but doesn’t seem to include it (with just 3 pages at the back that explain methods). So I am not sure where the data is coming from. But it would have required a lot of work, and some massaging. The uneven nature of the distributions would suggest to me that the data set is pretty lumpy.
    Admittedly, the paucity of the data makes the topic a tough nut to crack, and it is difficult to envisage much better, other than to be more transparent with the data and the difficulties.
    .
    Obviously such an interpretation of the data fits forecasts of a “lost decade” very well. And so comforts my own bias in the matter. In Section VI Policy Reflections, the Reinharts make it clear behind the lines that we are on the road to disaster.
    But I am still uneasy with transposing number crunching of this type into policy. A good deal of the “last decade” talk is taken to suggest that we are on an ineluctable path to disaster. But there is no “inevitability”. In Ireland like elsewhere, policy can still steer us back towards prosperity. Indeed the Reinharts show that levels of real per capita GDP for some countries after crisis do rise.
    .
    That said, I have written similar to what they conclude – just it is based on prospective analysis, and I thoroughly agree when they write.
    Reinharts – “The human temptation to credit good fortune to good character and bad results to bad luck further complicates matters. A ubiquitous pattern in policy pitfalls has been to assume negative shocks are temporary, when these were, in fact, subsequently revealed to be permanent (or, at least, very persistent). Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level. Many past policy mistakes across the globe and over time can be traced to not recognizing in a timely basis that such changes have taken place”.
    .
    Also we need a good of inflation to dilute savings and wages, and facilitate the redemption of public debt
    Reinharts – “monetary policy makers need to reconsider the benefits of an inflation buffer to protect from the zero lower bound to nominal interest rates. If real GDP growth has permanently tilted down as a consequence of a severe economic dislocation, or at least has done so in a time frame measured by decades, fiscal authorities face lower prospects for revenue and higher pressure on outlays.”
    The drama today is that investors don’t seem to think central banks could even engineer inflation for quite a while, even if they so wished.
    .
    The obvious implication of a lost decade for Ireland (from Reinhart’s stylisations of history, or from more prospective analysis) is that the dangers for the economy and public finances are all the greater. Hence, in my books, the necessity for a very speedy adjustment to a lower rate of growth in public debt and liability. That will help avoid the economy and monetary arrangements going belly up at some point. It is still not too late. That means ignoring the sirens (on this blog and elsewhere) that recommend easy fixes. Policies that are ever less realistic include ongoing massive stimulus for years to come, and long spread out management of banking losses.
    .
    ps other interesting papers from JH with implications supporting the above come from James Stock and Mark Watson, and Eric Leeper (with the latter suggestion giving rise to an immediate gain in credibility for Ireland with zero cost, if it could be implemented very shortly)

  10. @JTO
    Consumption growth and wealth are two entirely different things – for instance I could spend all of my money on prostitutes and beer and while it would make make me temporally happy it would not make me a wealthier man.

  11. @JtheO
    I’m disappointed again. Fixed capital formation is part of GDP growth. If you lever up an economy with lots of fixed capital formation on borrowed money, GDP growth rates are impressive. Writing the capital stock back down to the values that the bursting of the debt bubble require has a negative impact on fixed capital formation.

    PS. Does anyone know if government borrowings contribute to BOP? So if the state borrows 16 bn from foreign sources for the deficit, is that positive or negative to BOP? What about private sector borrowing?

    (I am presuming that the money coming in (borrowings) are positive for BOP and going out (interest and debt repayments) are negative. If this is the case, the BOP data is largely meaningless, as it will turn negative again as borrowing reduces in the future and interest and debt repayments increase…).

  12. “While inflation and banking crisis predate independence in many cases,a sovergin debt crisis (external or internal) is, by definition,not possible for a colony”

    I wonder what our masters will do for us now that we have not even begun to deleverage – will they somehow give us enough money spice to sustain our existence or will they make us a sacrificial offering to the money Gods in the sky ?
    These are the questions that need to be debated not artificial valuations with artificial money – this is chiefly a political question given our small size although the money in this juristication but not under our control is not peanuts and will possibly force the centres hand.

  13. @Ciaran O Hagan

    There is a easy fix that would keep the present monetory system intact – the elimination of all so called risk bank debt” – there is no need for inflation to clear debts – especially in the irish context.
    The reason why this solution is not viable in the hearts of our cardinal superiors is that it would be a transfer of wealth to plebs rather then the now more convential transfer to the FIRE sector which our divine rulers intersect in conjunction with their God mammon.
    The more patrician elements withen the financial community such as our own Peter Matthews and William K Black in the states realize that there is a blood payment if they want to continue with this present monetory system as the current one of one way bets is unsustainable from any rational perspective.

  14. @hogan

    i think the current account catches flows of payments on assets (as well as trade obviously)

    so i think ongoing interest payments to foreigners count as a debit in the current account

    the capital account catches asset sales

    so id say sales of gov debt to foreigners, is just like the sale of any other domestic asset like stocks or private debt. it counts as a credit in the capital account.

  15. @Ciaran
    I think the dataset is probably “in prep” as it seems to be a combination of updated This Time Is Different data.
    @PollyJohnna
    p15
    “Unemployment rates are significantly higher in the years of the decade that follow the crises than in the years of the decade that preceded it. For the advanced economies, the pre- and post-crises medians are 2.7 versus 7.9 percent, respectively” ; an increase of near 3 times. And thats over a decade. I suspect a lot of people would think that fairly damning. Of course, NAMA will help to alleviate this, wont it..?
    P22
    “The median duration (in years) of these credit booms, as shown in Figure 7, is about 10 years. The unwinding or deleveraging following a crisis (shown in the lower bars) is of comparable magnitude. Indeed, the median decline in credit/GDP is also about 38 percent. This unwinding also stretches over many years–often a full decade (and even longer). We cannot discriminate from this analysis whether the retrenchment in credit arises primarily from financial institutions inability or unwillingness to lend after the crisis or from weak demand for loans associated with slower economic growth and greater resource slack.”
    Zo the longer the runup in credit the zombier the economy thereafter. Good job NAMA will get credit flowing eh? (where is Donal O’Mahoney these days , didnt he say that credit will flow within three months of NAMA setting up? – guess hes strategising)

    As for house prices ; Well, we don’t have to hand the dataset so its hard to know the measure, or the deflator. But im glad you have now disabused us that we had a major bubble. Phew…So things will be fine…
    P24
    After discussing our fully fledged systemic banking crisis they conclude
    “If the protracted unraveling of private debt (coupled with a high public debt
    burden) unfolds in the same pattern as previous crises, one can infer that this would exert a dampening influence on employment and growth, as in the decade following earlier crises” giving Ciaran his feared lost decade.
    Figure 8 shows us pleasingly towards the top, apart from Iceland, of the sick puppy league. But, then Ireland is different

  16. 1997 isn’t a great base year for looking at the Irish house price bubble. Real prices increased by 35% for new houses and by 41% for second hand houses between 1994 and 1997 based on Dept of the Environment price stats.

  17. @christy
    Thanks, so pretty much: sale of debt instrument – positive for BOP
    interest and redemption – negative for BOP

    Is there any way we can strip out borrowings/repayments and see what the other figures are? Or would that be simply the external trade & services figures?

    (So we might be able to work out how much capital is flowing from the country and will continue to flow based on the amount of debt and the prevailing interest rate – my concern is that we are in for a BOP ‘shock’ when we stop borrowing and start repaying or when interest rates rise…).

  18. Lots of food for thought on deleveraging timescales post-crisis.

    If the protracted unraveling of private debt (coupled with a high public debt burden) unfolds in the same pattern as previous crises, one can infer that this would exert a dampening influence on employment and growth, as in the decade following earlier crises.

    Tell me again please. What exactly is government policy on unwinding domestic mortgage debt?

  19. JTO wrote the following:

    “The same table also gives figures for real house price increases between 1997 and 2007 (note: 2007, the peak, not 2010). While Ireland’s was high, it was by no means the highest. The figures are:

    U. Kingdom +150.1pc
    Spain +118.5pc
    Sweden +114.9pc
    Ireland +114.8pc
    France +111.6

    all others were below 100pc by varing amounts.

    So, contrart to what Morgan Kelly says about house price increases in Ireland since 1997 being in a league of their own – only fourth highest and actually below Irish economists’ favourite country, Sweden.”

    Let’s move over to the ESRI’s website

    http://www.esri.ie/irish_economy/permanent_tsbesri_house_p/

    Scroll down to their ESRI/PTSB release from June 2006, still a few months short of the peak in 2007:
    “National house prices have increased by 270% over the past ten years – compared to a total rise of just 30% in the consumer price index.”

    John, unless you want to lose face altogether, you should admit that you’ve made a mistake about this.

  20. America is about to pay a heavy price for Obama’s failure to tackle the bankers head on and unfortunately Ireland finds itself in exactly the same position.
    In the words of Frank Daly, chairman of NAMA, information provided to the agency by bailed out banks “has not stood up”.
    The bankers fooled NAMA and also fooled the government.
    Even at this late hour we can still pull back from the disastrous Banks Rescue Plan (unlimited debt guarantees) and NAMA follies.
    Failure to do so will surely have catastrophic consequences for the country.

    It’s time to shout STOP and it’s time for the government to finally admit that we have a very serious banking sector solvency problem and not a liquidity one.
    .
    .
    “ — a sense has taken hold that government policy makers cannot deliver meaningful intervention.
    The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.
    This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky …………….

    …….. The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s. Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten).
    The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning ………
    …. “There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. “It’s just really hard to see what will bring us out.”
    .
    http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html?_r=1
    .
    .
    How Wall Street Shafted Obama –
    http://www.newsweek.com/2010/08/29/how-obama-got-rolled-by-wall-street.html
    .
    .

  21. @Alchemist
    This is the last I think I heard of it
    http://www.irishexaminer.com/ireland/kfcwauaueysn/rss2/
    “(dermot) Ahern ruled out a debt forgiveness scheme for consumers who owe money to banks. He said debt was something owed to somebody and “the Government can’t just pass laws saying the debt isn’t there anymore.””
    This a few days before Anglo wrote off lots of Seanie money..

  22. I see no, repeat NO! deleveraging. The private debt of banks and favoured clients of some politicians has been nationalized, socialized, so that the taxpayer may suffer more.

    The actual total amount of debt of the coutry has increased due to stupidity on the part of the so called government. Interest rate is rising, proof of my point.

    So expect th3e benefit of deleveraging to be transient, due to mis-government, and ultimately nil.

    All the debts that are being incurred, voluntarily by the Irish people are supposed to be repaid by increased taxes in a time of depression.

    Geddit yet??

  23. PAt D

    Not sure what Mrs H’s share losses in CRH have to do with Mr H’s fitness to be a central banker?

  24. Legoland is hereI The pieces are being delivered ‘piece-meal’ and being assembled slowly. Aggregrate ‘growth’ will have to be +3.5% p/a (or thereabouts) to keep deficits stable; +7% p/a to deal with the debt mess.

    So now we know, (as if some of us didn’t already know), that the developed economies are going to ‘flatline’, economicaly speaking, for some time. Then its downhill to a semi-temporary terrace, before we go down some more.

    Notice the recent increase in domestic oil consumption by the principal producers? I would be a tad more concerned about our ‘energy and food security’ that about the banks. We can fail the banks, but we need food, light and hot water more.

    B Peter

  25. @ Eoin

    If the Reinharts said that the average annual temperature in Ireland was 80 degrees, would JTO repeat it as truth? Repeating something that was so patently obviously false was, in my opinion, a mistake.

  26. @ Karl

    im just saying that you should save some of your ire for the authors instead of the readers!! Or maybe Philip (sorry Philip!)!

  27. @Pat Donnelly
    re Mrs. Honohan’s share portfolio and the Sunday Independent.

    Shame on Shane Ross for multiplying Mrs H’s current number of CRH shares by the peak price to get a peak value.
    Does no one remember there was a deeply discounted rights issue along the way?

    No one regards the Sindo as a paper of record but it doesn’t do much for Senator Ross’s reputation as a financial journalist to make such an elementary mistake.

  28. House Price Indices

    For what it’s worth The Economist has an interactive chart (at http://www.economist.com/node/14438245?story_id=14438245) showing historic trends in house prices in a number of countries including the four listed by JTO. ESRI is listed as one of the sources. According to the real price option Ireland’s house prices peaked in 2007 at about 160% above 1997 Q1. Spain, Sweden and France are shown peaking at around 125% over 1997 Q1. However when you look at prices vs. average income it suggests that Ireland is even more of an outlier than the real house price increase suggests. It’s not quite clear to me how the two variables are related to each other but I think it says that for Ireland house prices were 150% greater relative to average income in 2007 compared to 1997. (The ratio hasn’t fallen much since 2007. Is this because average Irish incomes have fallen even faster than house prices?) No other country listed exceeds 75% greater over the same period except Britain and it only went to 100%. That suggests to me that Irish house prices have to fall a long way to restore equilibrium. If that is true then the lingering effects of the Irish house price boom/bust will indeed be as bad and as prolonged as the Reinharts suggest whether their Table 4 is correct or incorrect.

  29. @Karl Whelan

    John, unless you want to lose face altogether, you should admit that you’ve made a mistake about this.

    JTO again:

    I haven’t. I have simply quoted various figures verbatim given in the paper that Messrs Reinhert have published, which is the basis for this thread, and which Brian Lucey called a ‘great paper’. If the figures are wrong, its Messrs Reinhert at fault.

    I normally check out such figures myself, even when published in a reputable paper by reputable authors. Alas, my post yesterday morning, was sent in the very brief interval between breakfast in the Sheraton Plaza Hotel, New Orleans, and catching the tour coach to Memphis, where I’m postiing this from. I shall investigate the matter on my reurn to Ireland at the weekend.

  30. @Karl Whelan

    John, unless you want to lose face altogether, you should admit that you’ve made a mistake about this. Repeating something that was so patently obviously false was, in my opinion, a mistake.

    JTO again:

    I was over-generous about your comment in my last post, sent early evening, Memphis time. Probably due to the after-glow of an afternoon spent at Graceland. However, a night on the town in Memphis has wiped all generosity from my system.

    First, as a general rule, it is a bit ludicrous for one economist to start a thread based on a particular publication, have another economist describe it as a ‘great paper’, then a third economist attack someone for quoting verbatim figures given in the paper. If the figures given in the paper were ‘so patently obviously false’, as Karl Whelan says, then it was hardly a ‘great paper’, as Brian Lucey says. And, if the figures given in the paper were ‘so patently obviously false’, then maybe the site organisers should have pointed this out when opening a thread based on the paper.

    Second, the figures may not actually be as ‘patently obviously false’ as Karl Whelan says. I have just checked out the house price figures and the inflation figures on the CSO website. At this point, I should say that I’m posting from the Crown Plaza Hotel in Memphis, Tennessee, and for some reason it won’t let me access the house prices tables in the ESRI website or access the the full paper by the Reinharts again (only the abstract), although I could access the full paper yesterday from a different location. The CSO house price figures are from the Department of the Environment, not ESRI. But, this is what the CSO website gives:

    average new house price in 1997: 102,222 euros
    average new house price in 2007: 322,634 euros

    average consumer price index in 1997: 100.7
    average consumer price index in 2007: 143.4

    This works out at a real increase in new house prices between 1997 and 2007 of 121pc, which is quite close to the Reinhart’s figure of 114.8pc. For a full analysis of how accurate the Reinhart’s figure is, we’d need to know the exact basis of their calculation. For example: are the figures for new houses only or for new and second-hand houses? are the figures based on the annual averages for 1997 and 2007 or based on the end-1997 and end-2007 figures? what inflation measure are they using to calculate the real increases from the nominal increase? is it based on consumer price inflation, or income inflation, of GDP inflation? I do not know the answers to these questions. But, as I showed above, based on average annual prices for new houses given in the CSO (and DoE) website, and using consumer price inflation as the inflation measure, the real increase between 1997 and 2007 is very close to the figure the Reinharts gave (121pc v 114.8pc) and certainly not ‘patently obviously false’.

  31. @Karl Whelan

    I have just spotted that the figures you give are between 1996 and 2006. But, the Reinharts figures are between 1997 and 2007. This is not a trivial matter, as it affects the calculations quite significantly, as follows:

    (a) House prices rose much more in 1997 than in 2007. In 1997, they rose by 17pc (annual average). In 2007, they rose by 5pc (annual average). Again, I’m using CSO/DoE figures, for the reasons stated in my last post, but I doubt if the ESRI figures are much different in this respect. So, the nominal increase in house prices between 1997 and 2007 will be about 12pc less than the increase between 1996 and 2006.

    (b) Consumer price inflation was much higher in 2007 than in 1997. So, the increase in consumer prices between 1997 and 2007 will be considerably higher than between 1996 and 2006. The actual increase in consumer prices between 1997 and 2007 was 43.2pc, not the 30pc figure you quote from ESRI.

    The Reinhart’s figures for real house price increases are for the decade between 1997 and 2007. If you wish to attack them, you should do so on the basis of house price and inflation figures in 1997 and 2007, not 1996 and 2006. Elementary, my Dear Watson.

    The bottom line is that the Reinharts have published figures for real house price increases for a large number of countries for the decade between 1997 and 2007. And, these figures do not support the claim by Morgan Kelly and others that the increases in Ireland were way out in a league of their own. Unless evidence is produced to the contrary, it is reasonable to assume that the Reinharts figures are accurate and done on a consistent basis for all countries. If they don’t meet these criteria, then their competence is called into question and the whole paper becomes worthless and a waste of time discussing. But, if you are going to claim they are inaccurate, then you need to do better than produce figures for a different decade, ie between 1996 and 2006, than the one the Reinharts figures are for, ie between 1997 and 2007.

  32. @JTO,
    I’ve done a fair amount of digging around the data, and I am having a lot of difficulty in finding any reasonable way to stand up the R&R number for Ireland. I’m not saying it’s wrong – just that I can’t figure out how it might be right. And I certainly wouldn’t think less of them for a minor glitch like this if it is incorrect.

    I thought you might be interested in an alternative view based on real house price data that BIS published in 2008, which unfortunately did not include 2007 data. I can no longer find it on the BIS site (it’s astonishing how much property price data, particularly Irish data, has been taken down over the last couple of years), but it can be found elsewhere if you search on BISHOUSE_PRICE_DATA.

    I have taken 1994 as the reference point. Irish house prices started to rise steeply in 1995, so 1997 is a poor reference point if one’s primary interest is in the Irish house price bubble.

    Growth in Real House Prices 1994 to 2006
    IRELAND 192%
    DENMARK 132%
    GB 127%
    BELGIUM 125%
    NORWAY 112%
    NEW ZEALAND 104%
    NL 99%
    SPAIN 98%
    SWEDEN 98%
    FRANCE 91%
    AUSTRALIA 88%
    FINLAND 75%
    USA 70%
    CANADA 44%
    ITALY 26%
    SWITZERLAND -5%
    GERMANY -21%
    JAPAN -31%

  33. @Con

    Thanks for the house price figures, Con. Good piece of work by you and, yes, very interesting. I’ve been travelling in southern US for the past 2 weeks and just flew back today, so haven’t had much time to research a detailed comment on your figures. I’ll do so the next time a relevant thread comes up, as this one is on its deathbed. But, just a few general points.

    (a) The Reinhart’s figures were for the decade 1997 to 2007. No one has been able to show that their figures for that decade are wrong, despite Karl Whelan claiming without evidence that they were ‘patently obviously false’.

    (b) Other posters have attacked the Reinhart’s figures, not on the basis that they are wrong, but on the basis that 1997 is not a valid starting-point for doing comparisons of house price trends in different countries. But, the year 1997 is as valid as the year 1994 for doing the comparisons. One shouldn’t simply assume that the year in which Irish house prices started to rise in real terms, after a long period of real falls or moderate real rises, is the only valid starting-point for doing comparisons (not suggesting that you do, but some posters do). Some countries had rising real house prices in the 1980s, while Ireland didn’t. The bottom of the Irish cycle isn’t the only valid starting-point for doing comparisons, if other countries were half-way up their cycle in that year. Assuming house prices in Ireland in 1997 weren’t high in comparison with other countries, then 1997 is a perfectly valid starting-point for doing comparisons.

    (c) Your suggestion that real house prices in Ireland started to rise steeply in 1995, when the Minister for Finance was from the Labour Party, while it may well be true, is enough to have you ostracised on this site and, indeed, in Irish society generally.

  34. @JTO,
    Here’s a trough to 2006 view based on the same data source, for countries that had a trough in home prices in the early to mid-1990s.
    % Change in Real House Prices Trough to 2006
    IRELAND 197%
    DENMARK 154%
    NORWAY 137%
    NEW ZEALAND 133%
    GB 133%
    SPAIN 108%
    FRANCE 107%
    SWEDEN 102%
    AUSTRALIA 92%
    FINLAND 84%
    USA 70%
    CANADA 58%
    ITALY 53%
    SWITZERLAND 13%

    I don’t think folks care enough any more about the politics of the 1990s – back when I think all mainstream Irish parties had mostly sound economic policies – to ostracise me for anything I might say on the topic. But I remember well looking to trade up after the birth of my first child, and being shocked at the rate of increase in home prices between 1995 and 1997.

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