No Really, We Did Have A Huge House Price Boom

Elvis is alive. He’s living out in that lovely new Adamstown area. He made a killing on property by getting in early.

Surely they are bad. They seem to me to amount to a considerable transfer of wealth from the young to the old. The real losers being young families.

Can we not just nail down borrowing to 92% and lending to 3.5/4 times salary. Property goes up with wage inflation. Seems simple to me.

Why hasn´t this already been done? Am I missing something? Is it that the state has a vested interest (NAMA) of seeing lending by salary multiples increase?

The housing boom didn’t happen spontaneously. It was created, and it would be interesting to examine the mechanism by which it came about.

Who was responsible for creating the sense of expectation and panic among the purchasing public? Who created the absurd belief that Irish property was more attractive than Manhattan?

How was this three-card trick executed?

The media, including the State broadcaster, had to be involved. So did the advertising industry and the estate agents.

Personal vanity and hubris were a major factor, but they were exploited by people who knew exactly what they were doing.

Let’s by all means investigate the banks and the financial regulator, but what would be wrong with examining in precise detail how this chimera was created, and by whom?

@Karl Whelan

Cue comments from house price boom deniers, flat earthers and folks who believe Elvis is alive and living with Michael Jackson

JTO again:

Neither the Reinharts nor anyone else said that there was not a house price boom in Ireland. Can anyone show me where they said that? Only a fool would deny that, just as only a fool would deny that there was, not coincidentally, an economic boom, a jobs boom, a living-standards boom, an export boom, a tourist boom, an immigration boom, and a population boom in Ireland at the same time (although there are quite a few such deniers of all the latter on this site).

The Reinharts’ analysis is all about figures, not semantics, and, moreover, figures for a specific period, 1997 to 2007. The figures they give are either right or wrong, so let’s investigate the evidence.

The Reinharts gave specific figures for real house price increases for a number of countries for the period 1997 to 2007 (not 1996 to 2006, not 1994 to 2007, not 1995 to 2007, but 1997 to 2007). The reason they chose 1997 as the base year is because they were analysing economic performance in the decade up to the global depression, with a view to comparing it with probable economic performance in the decade following the global recession. As I’m sure they teach in UCD, a decade is 10 years. Hence, 1997 is the logical starting-point for the Reinharts’ analysis. By pure coincidence, 1997 is also the year the evil right-wing rapacious FF/PD regime overturned the democratic wishes of the people and seized power in a military coup from the caring-sharing progressive beloved-by-all-decent-people Rainbow Coalition. So, given that it is invariably claimed, not least on this site and in the media repeatedly by David McWilliams and Morgan Kelly, that the evil right-wing rapacious FF/PD regime caused the house price boom in order to enrich their developer friends, the fact that, coincidentally, the Reinharts’ figures take 1997 as their starting-point comes in very handy for determining whether or not this claim has any basis.

The figures the Reinharts’ give for real house price increases in the period 1997 to 2007 are as follows:

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

Karl Whelan said in the thread earlier this week that these figures are ‘patently obviously false’. In that thread, Karl attempted to rubbish the Reinharts’ figures, but, in doing so, he only gave figures for the period 1996 to 2006, not the period 1997 to 2007 that the Reinharts’ figures are for. Now, he’s back for a second go at rubbishing the Reinharts’ figures, and this time he is using the correct dates, 1997 and 2007. But, anyone still awake at this time of night will notice that, in doing so, Karl gives figures only for ‘second hand houses’. Why only these? Were there no new houses built in that decade? If we look at the figures for new house prices, rather than second-hand house prices, the Reinharts’ figure for Ireland is almost exactly correct.

Here are the facts. The Department of the Environment reports that the average new house in the Republic of Ireland cost €102,222 in 1997 and cost €322,634 in 2007, an increase of 215.6%. The average value of the CPI increased by 42.4 percent between 1997 and 2007. So, from the DoE figures, we can calculate the real new house price increase from 315.6 / 1.424 = 216.4. In other words, real Irish new house prices rose by 116.4% from 1997 to 2007.

This is almost identical to the Reinharts’ figure of 114.8% (just 0.7% difference). So, it is obvious that the Reinharts were using figures for new house prices only. If that is the case, their figures are correct and not ‘patently obviously false’.

As for whether it is valid to use only new house prices in such analyses, it is a matter of opinion. Many analysts do this, while others use the average of new and second-hand house prices. I’m happy with either. But, until Karl’s post above, I’ve never seen any analysis of house price increases that used figures for second-hand house prices only and ignored figures for new house prices. The reason why many analysts are wary of including prices for second-hand house prices is that they take no account of any improvement in quality. Thus, while it is reasonable to assume that the average new house built in 2007 was broadly equal in quality to one built in 1997, the same can not be said for the average second-hand house, because between 1997 and 2007 a couple of hundred thousand pre-World-War-1-built houses, or houses lacking central heating, or even houses lacking bathrooms/indoor toilets, will have dropped out of the housing stock and been replaced by houses of modern design and facilities. So, as I say, for that reason many analysts, including obviously the Reinharts, base their figures on new house prices only.

So, that takes care of the period 1997 to 2007, the period the Reinharts give figures for, which are correct (if we assume that they are referring to new houses) and also the period of government by the evil right-wing rapacious FF/PD regime. But, what of the period 1994 to 1997?

Both Karl above and Con on the earlier thread give figures that indicate house prices in Ireland rose much faster than in other countries between 1994 or 1995 and 1997. From the figures Karl gave above, and assuming that the figures he gives are correct, a quick calculation shows that real house prices must have risen by 34.1% between 1995 and 1997. This is a far higher rate of increase than between 1997 and 2007. In fact, had real house prices continued to increase between 1997 and 2007 at the rate they were increasing between 1995 and 1997, the real increase would have been 332.6% (and not the 158% nor 116.4% discussed above). I have no problem with accepting this, but I would point out that the Rainbow Coalition were in power between 1994 and 1997 and Ruari Quinn was Minister for Finance. In their defence, I should add that real house prices hardly increased at all between 1980 and 1994, so they were starting off from a very low base.

Putting all the pieces together, I’d say that the following was a reasonable summary:

(a) after a long period of stagnation or even falls, real house prices in Ireland took off in 1995, when the Rainbow Coalition were in power and Ruari Quiinn was Minister for Finance, rising by 34.1% between 1995 and 1997 (calculated from Karl’s figures above), which equates to an average 16% annually

(b) in the following decade from 1997 to 2007, the average annual rate of real increase moderated to 8% for new houses (calculated from the Reinharts’ figure, which the DoE and CSO figures I gave above confirm is correct for new houses) or 10% for second-hand houses (calculated from Karl’s figures above).

So, between 1997 and 2007, the average annual rate of real increase of house prices in Ireland was just over half that inherited from the period 1995 to 1997. As Michael Caine might say: “not a lot of people know that”. And, as far as new house prices are concerned, the Reinharts’ figure, showing the increase in Ireland between 1997 and 2007 to be only the fourth highest of the countries covered, is supported by the DoE/CSO figures for nominal house prices and inflation.

Finally, regarding Karl Whelan’s insinuation that Elvis is not alive, by chance I visited Graceland last Tuesday, a day or two after my little disagreement with Karl, and I can assure everyone that his spirit is very much alive.

@ John

When people talk about house prices, they mean the price of all houses out there, not some special subcomponent. Most houses are not new houses and respected house price indices do not focus solely on new houses. The period under discussion saw a huge shift in the composition of new dwellings from houses to apartments and this composition shift likely explains why new home prices didn’t go up so much.

But look, I think it’s best to let others decide who is right on this. As for your ramblings about FF and the PDs and Labour etc, I honestly have no idea what you’re on about.

@JTO
Good argument with regard the statistics. I think Karl was definetley wrong to focus on second hand houses.

That said, the ten year period is irrelevant. Choosing this as you say imply was arbritrary and tells us little.
As you say, our house prices had already risen rapidly before this period from a very low base level.
The real damage only happened when we entered the bubble stage, when house prices became stupidly expensive. Comparing house price rises (of new, second hand, or all) between a few countries tells us nothing about the extent of a bubbles experienced in each country.

P.S I don’t think many people credit FF/PDs as having concieved and masterminded the property bubble to enrich their friends. More likely they were complacent and reluctant to reign in the bonanza that had befallen the whole country, and indeed their good friends. Their role was to distribute the loot, and boy did they embrace that.

@Karl Whelan

When people talk about house prices, they mean the price of all houses out there, not some special subcomponent.

JTO again:

But, by including only second-hand houses, you are doing the same.

Houses bought and sold consist of:

(a) new houses

(b) second-hand houses

The Reinharts appear to be basing their figures on new houses only. But, you are basing your figures on second-hand houses only, which is also a subcomponent. If you had calculated the average for new and second-hand houses, you would be on stronger ground. New houses may be a small proportion of all houses, but they are a hefty proportion of houses bought and sold. Obviously, the average figure for all houses would be somewhere between the 114.8% the Reinharts give (which appears to be based on new houses only) and the 158% that you give (which is based on second-hand houses only).

But, what is important is merely that the Reinharts figures be consistent for all countries, regardlees of whether their figures are for new houses only or all houses. In other words, if they used figures for new houses only for Ireland, they need to have done the same for the other countries. If they did, their figures are valid for comparison. If they didn’t, their report was unprofessional. Obviously, I have no information on whether or not this was the case. In general, new house prices tend to rise slower than the overall average for all houses for the reasons I gave (very old and very poor-quality houses continually dropping out of the housing stock). So, I would agree that, if they used figures for new house prices only for Ireland, but figures for all house prices in the case of the other countries, then their figures would not be valid for comparison. But, I have no evidence that this is the case.

@JTO and Karl

I don’t understand why either of you is using the DoEHLG non-hedonic new or second hand statistics when the Permanent TSB/ESRI produce an hedonic amalgamated (ie new and second hand combined) series that covers the 1997 – 2007 period. In fact why does anyone ever refer to the DoEHLG figures when they are simple averages of mortgage based sales so a €58m sale on Shrewsbury Road counts as one sale and a €60,000 studio flat in Ballyfermot is another sale so the average is €29,030,000 – that’s how these jokers at the DoEHLG work it out. Neither of you are bananas so why use DoEHLG figures prepared on such an unsafe basis?

Taking the serious PTSB/ESRI series. Firstly the table 4 of the R&R paper isn’t explicit but I take it to mean 11 years – 1 Jan 1997 – 31 Dec 2007. And for PTSB (link to table below) the figures are as follows:

Index at end Q4 1996 (national) – 35.5
Index at end Q4 2007 (national) – 129.7
CPI (index Dec 1996 = 100, index Dec 2007 = 142.1)
Index at end Q4 2007 (national) expressed in Dec 1996 money = 91.3 (129.7/142.1 * 100)
Real increase = 157% (91.3/35.5-1)*100[%]

By comparison the UK’s figures are taken from the Nationwide BS who also prepare hedonic prices.

Average price M12 1996 (national) – 55,093
Average price M12 2007 (national) – 182,080
RPI Q4,1996 – 154
RPI Q4,2007 – 209.8
RPI change – 36.2%
Average price M12, 2007 in Q4,1996 money – 133,652
Real increase – 142.6% (133 652/55 093 – 1)*100[%]

RPI in the UK includes mortgage interest and housing costs and I understand it to be the closest equivalent to our CPI (confusingly CPI in the UK excludes mortgage costs).

So the conclusion I draw is that Ireland was boomier than the UK! I would also contribute the observation that house prices in the UK collapsed in the early 1990s following a boom in the late 1980s and in December 1996 the price of a home was the same as June 1991 in nominal terms (GBP 55 000) – in real terms 1996 was way below 1991. So the UK had a lot of catching up in the following decade to get back to its pre-1990 days for its 142.6% increase – what was our excuse?

http://www.esri.ie/irish_economy/permanent_tsbesri_house_p/Q22010_numbers.xls

The UK RPI figures are taken from their government statistics dept – link here

http://www.statistics.gov.uk/statbase/tsdownload.asp?vlnk=7173

@Michael

“The ESRI/PermanentTSb index is based on the lender’s mortgage closings and its believed that it does not reflect the sales at the higher end of the market where price inflation was the greatest and in recent times, matched by steep falls.”

That may or may not be true but the DoEHLG only examine mortgage based sales as well – see the caveat on their data below:

http://www.cso.ie/px/DoEHLG/Dialog/Saveshow.asp

“Average house prices are derived from data supplied by the mortgage lending agencies on all loans approved by them. In comparing house prices figures from one period to another, account should be taken of the fact that changes in the mix of dwellings will affect the average figures.”

@ Jagdip

I knew that the ESRI price index gave pretty much the same answer.

I decided not to mention that because (a) The table I found on the web (the one you linked to) only goes back to 2006 (I have the historic data on my computer but always prefer to rely on verifiable links) and (b) Anticipation of comments questioning hedonics.

Probably I should have gone with the ESRI index. Still, I’m sure this observation will now trigger long comments about the evils of the ESRI-PTSB index …

@Karl

The ESRI does go back to 1996 – when you open the ESRI spreadsheet, highlight the first two columns, right click and click ‘unhide’ – it’s all there! Not sure what you mean with the hedonics comment – PTSB is hedonic, DoEHLG is a simple average which I’ve asserted is basically rubbish and unsafe for any serious analysis.

@JTO

I didn’t have any ulterior motive in chosing Jan 1 1997 – 31 Dec 2007 (remember that the prices on Jan 1 1997 should be the same as the prices on 31 Dec 1996 and neither the PTSB or the Nationwide produce figs for the *beginning* of a period) and I would be surprised if picking any date in either 1997 or 2007 would give different results, but you have the sources linked to above though you’ll obviously need the CSO’s Irish CPI but you seem to have found that link.

As regards R&R making mistakes, they cite the paid-for International Financial Statistics pub from the IMF for their housing stats. Don’t know what the IMF use but would just say garbage in garbage out – to the very best of my knowledge the PTSB is the most accurate record of actual prices in the State.

@Jagdip Singh

Many thanks for the information about how to navigate the ESRI website. I can now do it, which I couldn’t before.

I’m not suggesting any ulterior motive at all. In general, an 11-year period is as valid as a 10-year period. But, in this case, none of us are attempting original research, but merely attempting a Columbo-type investigation of where the Reinharts might have got their Irish figure of 114.8% from. As the Reinharts’ table says 1997 to 2007, and as their paper is essentially about comparing the pre-recession decade with the post-recession decade, I think it is reasonable to assume that they calculated their figure for a 10-year period (decade). I think I’ve now worked out where they got their figure from, but subject to correction if I got it wrong.

Using exactly the same method of calculation as you, but replacing ‘end Q4 1996’ by ‘end Q4 1997’ for the house price index and ‘Dec 1996’ by ‘Dec 1997′ for the CPI index, to cover a 10-year period, this is what I get.

Index at end Q4 1997 (national) – 42.1
Index at end Q4 2007 (national) – 129.7
CPI (index Nov 1996 = 100, index Dec 1997 = 101.9, index Dec 2007 = 146.1)
Index at end Q4 2007 (national) expressed in Dec 1997 money = 90.46 (129.7/(146.1/101.9)) * 100)
Real increase = 114.87% (90.46/42.1-1)*100[%]

So, this gives 114.87%, which is almost identical to the Reinharts 114.8% figure. I’m sure that you will observe that my CPI figures are very slightly different to your’s. Mine are what I’m seeing on the CSO website. I hope I’m reading them correctly. Feel free to correct me if I’m not. I can’t find a series to base Dec 1996=100, only base Nov 1996=100, and the figures I’m seeing in that series are 101.9 for Dec 1997 and 146.1 for Dec 2007.

So, it now looks as if the Reinharts’ figures were taken from the ESRI/TSB series, rather than the DoEHLG series, which I said last night, and are for all houses, and not just new houses, which I also said last night. Had I been able to navigate the ESRI website before now, I could have saved us all a lot of time, so apologies for that. But, the important point is that the Reinharts’ figure for Ireland is indeed CORRECT, although their table heading is slightly ambiguous in that their Irish figure of 114.8% is for the decade between the end of 1997 and the end of 2007, rather than yearly averages for the decade between 1997 as a whole and 2007 as a whole. But, as long as they did likewise for all countries, their figures are valid for comparison.

Wouldn’t it be easiest just to actually ask the Reinharts for the details of their calculation? Someone associated with this blog must know them or know someone who knows them well enough to ask that favour. Carmen Reinhart seems keen to make available the supplementary data that are behind her publications. For example she has published with Victor Rogoff a paper supplying lots of supplementary data for “This Time is Different”. I’m sure she and her husband would be tickled at the heat (with little actual light) that their table has generated here. Otherwise this thread will just endlessly recycle what are beginning to look like fixed positions and “angels on a pinhead” arguments about which quarter of which year is relevant.

In any event whether the Reinharts’ Table 4 is right or wrong it makes no difference to applying their conclusions to Ireland. As has been said above the argument here isn’t about whether Ireland had a housing bubble (that fact is indisputable) but what its relative size was.

It’s good to know that a hypothetical economy in which house prices and the general CPI both increased 1000% over 10 years would not have had a housing boom.

@JTO

Yes I would agree with that and yes we were both looking at the same CSO CPI series – Oct, Nov, Dec 1996 are all showing (oddly) at 100.0 but I made a slip on the Dec 2007 index and yours is correct at 146.1 and mine of 142.1 was wrong.

And surprisingly (to me at least) taking the Nationwide BS numbers between end Dec 1997 and end Dec 2007 and adjusting for UK RPI gives you 123% which isn’t 150% but is still greater than the Irish real increase. The reversal comes about because there was a 18% increase in prices in Ireland in 1997 in nominal terms and inflation for the 12 months was only 1.9% compared to the UK where prices only went up by 13% and inflation was 4%.

And given the principle that the UK had higher real increases from end 12/97 to end 12/07, I don’t feel a need to investigate further – perhaps R&R were using the Halifax or UK Land Registry series though the difference between the Nationwide’s 123% and R&R’s 150% is considerable.

I think it is worth observing the following:

1) The 10 year % growth in the PTSB-ESRI index is highly sensitive to the start and end dates chosen. While the nominal price index increased by 208% between Q4 1997 and Q4 2007, it increased by 266% between Q1 1997 and Q1 2007, and 363% the decade from Q1 1996 to Q1 2006. Extracted from this context, the number at issue from the R&R paper means almost nothing.

2) While I think a 10 year period starting in 2007 is fit for purpose in the context of the R&R paper, it is difficult to see any good rationale for using it as an important indicator in any examination of the Irish house price bubble. It misses the steep house price growth from 1994 to 1997 that segued into the house price bubble.

3) Comparative data on real house price growth, published by BIS in 2008, offers a contrasting view. The data only extend to 2006, but it is possible to extract interesting tabulations such as the following.

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%

% Change in Real House Prices Trough to 2006 (for countries with trough in period 1991 to 1997)
IRELAND 297%
DENMARK 254%
NORWAY 237%
GB 233%
SPAIN 208%
FRANCE 207%
SWEDEN 204%
AUSTRALIA 192%
FINLAND 184%
USA 170%
CANADA 158%
ITALY 153%

4) I’m concerned that the CPI may not be a good deflator in the particular context we are looking at here. There was something of a bubble in Irish consumer prices, as well as property prices, over the period to 2007, and I’m not sure that it is justifiable to use bubble consumer prices as a basis for deflating bubble property prices. If we were, for example, to use the euro area HICP instead, the extent of the bubble in real Irish property prices would appear significantly greater.

Looks like today is a day for minor blunders on my part. That 363% in para 1 above should read 285%. The full paragraph should therefore read:
1) The 10 year % growth in the PTSB-ESRI index is highly sensitive to the start and end dates chosen. While the nominal price index increased by 208% between Q4 1997 and Q4 2007, it increased by 266% between Q1 1997 and Q1 2007, and 285% the decade from Q1 1996 to Q1 2006. Extracted from this context, the number at issue from the R&R paper means almost nothing.

@Eoin
“im not a fan of the “X times salary” maximum lending limit. Its simply too blunt. Affordability is at the end of the day the key component, so i’d rather a rule based on something more like “mortgage repayment as a % of after tax take home pay”. This would take account of people’s individual circumstances re taxation as well as the prevailing interest rates at the time. This interest rate could also include a stress testing of say 2.5% or so. ”
Well, I see a couple of problems with this:
1. This is the metric that was used. All the variables you talk about (net salary, interest rates) are external to the influence of both the borrowers and the bank and very over time. Given that a mortgage in Ireland was up to 40 years in length, that is a long time for a snapshot of the figures to remain in place.
2. In June 2003, the ECB refi rate dropped to 2%. It stayed there for 18 months. In July 2008, the rate hit 4.25% There’s a big difference between a stress test of 4.5%+margin and 6.75%+ margin. It would be better, I think to stress test based on a fixed mortgage rate (i.e. a maximum expected rate over a sustained period).
3. Likewise tax rates (and mortgage interest relief, rent-a-room and any of the other property reliefs) are in the gift of the government. As goverment finances change, so does net salary. Indeed, government can apply additional ownership taxes – property taxes, bin charges, water rates.
4. In a global economy, even within the eurozone, salary rates are not going to rise much beyond the rate of inflation (at least not sustainably so). That leaves promotion/personal productivity improvement to increase personal income. So we can not bank on greatly increased future wealth prospects to reduce the effective burden as might have happened in more inflationary times.
5. In an open, trade-dependent economy, we are likely to be affected by international conditions such that bonuses, profit share etc. are not guaranteed year-in year-out.
6. The last three bring us back to a basic conservative multiple of base salary. I don’t see any other way of measuring affordability over a 25-40 year timespan.

@Eoin
“The problem in recent years wasn’t down to the affordability metric being “wrong”, it was down to the fact that there was no maximum lending metric being used by the banks at all.”
This is simply untrue. The criteria were changed from a salary multiple to an affordability criteria like the one you propose in the early 2000s (if I remember the date correctly). This allowed bonuses, rent-a-room, parental support to be factored in to affordability. The stress test was a 2% rise. So the criteria you are proposing have already failed and are anyway inapproporiate to a long-term loan. Now, if you were proposing only fixed or at least long-term (e.g. 10+ year) fixed-rate mortgages, then it perhaps might work, but this would lead to an immediate increase to the ceiling of the stress test, no?

“Lots of people are having trouble paying off their mortgages, and very few of them are down to interest rates having increased, taxes being massively increased, or reliefs being massively cut back”
Dun, dun, dun, you ain’t seen nothing yet…

“Given that interest rates and taxes are still close to all time lows”
Really, you expect this situation to persist?

Either we are going japanese and you are right about interest rates, but who wants to live in a japanned economy? What will that do to tax rates to pay for the debt that will be (has already been) issued? Or you are wrong about interest rates and separately about taxes too.

The cost of bailing out the banks will be higher taxes.
The cost of an international recovery will be higher interest rates.

Be careful what you wish for 😀

Eoin says:

However, on that last point about base salary vs bonsuses etc, some scheme or model may have to be created to allow people with heavy bonus/commissioned jobs to still be able to get a mortgage.

It is very true. How many people do you know who worked in Ireland over the past decade or so, and tirelessly pursued their dream to get to the pinnacle of their profession or business. Only to find when they reached their goal, it was not all that they expected. Off hand, I can think of as many as the fingers on one hand. If I tried, I could probably think of as many as the fingers on both. It was a recurring theme towards the end of the Celtic Tiger – that apart from contraction of the economy, recession etc – that many, many people were making life decisions to step down a gear and that often meant a stepping down in salary of huge increments at a time. I.e. A half or one third of their original earning capacity – that drop was traded off against, better hours and more time spent with family etc. I was a little shocked myself, in discovering how rapid the turnover of human resources is at the top levels. And how drastic the changes in earning power are, when moving from the top down to the intermediate levels. A good source of opinion here, should be the human resources directors who have clocked up sufficient real life experience at various companies. Interviewing the human resources professional who give lenders an indication of the real situation out there. Just a thought. BOH.

I’d agree with keeping rules simple and robust.

However, the biggest current problem is that developers built too much and to do so they managed to borrow too much. Defaulting mortgage holders is the next problem….

Bubbles can be burst with information. I doubt that developers would have wanted to build and banks would have funded the ghost estates if they would have known what kind of oversupply Ireland would end up with.

Eoin says,

No its not, because you’re missing my point. If we had had a hard rule on ‘mortgage repayment as a % of after tax take home pay off base salary’ it would’ve worked, but the point is that we didn’t have a hard rule, it was done on an ad hoc basis and was basically up to the lending bank to decide if the amount lent out was appropriate.

I like the use of analogies as some people might have twigged by now. What we had in Ireland in terms of lending, was like the water which burst through the levies in New Orleans in 2005 and swamped the entire urban area. What the police force found, there was a breakdown of all systems they used to coordinate and disseminate orders amongst the ranks. It resulted in a situation where members of the law and order force had to make up their own orders and try and carry them out. A documentary on PBS is worth looking at to understand how basic systems tend to break down, when we have these natural disasters of any kind. What happened in Ireland in terms of personal credit, can only be described in terms akin to a natural disaster. BOH.

http://video.pbs.org/video/1573979464

@Eoin
“affordability will get worse in the future, hence a dynamic metric will account for this. ”
The problem, though, is that many, many mortgages have been given out on a snapshot of affordability at a point in time which bears no relationship to current conditions. Mortgage interest rates for SVRs have already moved more than the stress test amount without a change in the base rate. After tax incomes have fallen. Other expenses have increased, also reducing after-tax income.

As I say, if you were looking at affordability for a fixed payment mortgage, it would be fine to use a snapshot. As it is, though, you are taking two variables and expecting to have a predictible outcome. In the past, the variables might have worked in opposition to each other (though it didn’t really hold true in the ‘eighties that interest rates and tax rates were in opposition), but given that interest rates are determined largely by other economies (and after-tax income to some degree also), I don’t see how you can look on tuesday week at Brian’s (not his real name) salary and say “you can afford 40% of your current after-tax income and an increase in mortgage rates of 2.5%”. Because come budget 2011, Brian’s after tax income is going to take a hit. Come Q2 next year either Brian’s salary is going to take a hit (because the European economy is not growing) or interest rates are going to rise (because it is not).

And we had hard and fast rules. They kept changing, though. First from a low salary multiple to a low affordability to goosing the affordability with rent-a-room, bonuses etc. Those rules existed. That the CB & FR had their eyes closed most of the time is neither here nor there. The affordability rules did exist, but they were inappropriate to times of exceptional low interest rates (and mortgage margins) and exceptional low taxation.

That is why I am saying that if you want to use affordability, you must peg it to what you consider to be likely extremes – e.g. 6% ECB base rate, bank margin at 3%, no change in salary, effective tax rate at 45%, something like that. Then you can take a high percentage of remaining income as affordability – basically you are checking that the borrower can survive stress.

There is no point in giving someone a mortgage that they can afford today, but that it is likely that they will not be able to afford in two year’s time.

@ BjG

one of the revelations from tonight will be that Seanie asked BoI to takeover Anglo the day before the guarantee came in. He obviously saw the writing on the wall.

I hope that RTE understands the difference between “illiquid” and “insolvent” and is not setting up the government for an easy Tuesday morning refudiation (as Sarah Palin would say).

While fully recognising the point that some posters are making, namely that we should use an earlier starting-date for analysing Irish house prices, are all agreed now that the Reinharts’ figures for Ireland are indeed correct and not ‘patently obviously false’? Albeit, that the Reinharts should have specified more clearly that their figures were for end-1997 to end-2007, rather than 1997 to 2007. This is common enough practice, but I find it a little irritating when researchers don’t specify their time-periods precisely.

Even though they are professional researchers, I doubt if the Reinharts care in the slightest that their figures have been described as ‘patently obviously false’ on an Irish blog. However, they are Americans (I assume, at least they work there), and Americans are often quick to reach for their lawyer. At least, now that the accuracy of their figures has been established and posted here, that possibility has been eliminated.

@ Eoin and JTO

I guess you’re joking but just in case people don’t realise, academics, even American ones, really don’t sue each other over claims that people have gotten things wrong.

As for the “patently obviously false” claim, I had done the annual 2007/1997 calculations for both DoE and ESRI and the figures were far off from the RR estimates — I didn’t disagree with their figure on a whim. I did not anticipate that any way of doing this calculation would have given such a radically different answer. It seems now that the Reinharts calculated December 2007 over December 1997 which would be a really bad way to capture the extent of the Irish house price boom since prices fell for all of 2007. So this did give a radically different answer.

But, fair enough, I’m happy to say that the Reinharts seem to have based their calculation on some particular combination of house price figures from the years 1997 and 2007.

Beyond that, the various other figures quoted here have, I think, got the key point across: The Irish house price boom was boomier than anywhere else once assessed properly from its start to finish. JTO’s insinuation that Morgan Kelly made up the exceptional nature of the Irish house boom is incorrect.