[...]The Irish Economy » Blog Archive » After the Fall[...]…

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.

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.

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%

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.

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’.

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.

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.

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.

Ok, let’s say I officially administering some ire to the Reinharts.

I’m sure Vince and Carmen will be deeply upset!

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

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.

re JtO

well its actually Reinhart squared who have made the mistake, right?

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

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

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??

Clearly, the awareness of the depression is not a feature of the breakfast conversation in the H household! This man is now a Central Banker! Ireland is #$^^$%^ed!

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.
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“ — 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.”
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http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html?_r=1
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How Wall Street Shafted Obama -
http://www.newsweek.com/2010/08/29/how-obama-got-rolled-by-wall-street.html
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“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.

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?

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…).

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

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.

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.

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.

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…).