There are lots of aspects of the performance of the Irish economy that people disagree about. However, I had been under the impression until this week that everyone agreed that Ireland experienced an exceptional increase in real housing prices in the during the period before the recession.
It turns out, however, that I was wrong. Not everyone agrees with this. Earlier this week, there was a discussion on this website of a paper by Carmen and Vince Reinhart, which reported some figures for real house price appreciation between 1997 and 2007.
Among the figures reported by the Reinharts on Table 4 of their paper were the following:
U. Kingdom +150.1pc
These figures have been debated elsewhere on this site but not in a way that would clarify the key fact. That Ireland really did have a larger increase in real house prices than these other countries is not that hard to check.
Here are the facts. The Department of the Environment reports that the average second hand house in the Republic of Ireland cost €102,711 in 1997 and cost €377,850 in 2007, an increase of 268%. 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 house price increase from 368 / 1.424 = 258. In other words, real Irish house prices rose by 158% from 1997 to 2007. And, for what it’s worth, the real increase from 1995 to 2007 was 246%.
So, yes we really did have a huge house price boom. Certainly a boom that was bigger than occurred in Spain, Sweden or France. Morgan Kelly didn’t just make it up.
Cue comments from house price boom deniers, flat earthers and folks who believe Elvis is alive and living with Michael Jackson …
55 replies on “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.
The numbers are (and have been) really clear.
What’s more interesting would be some stabs at answering the following three questions:
2. Are housing price booms of this type good for the economy?
3. If bad, what government policies/legislation/regulation can reduce them? If good, what government policies/legislation/regulation can encourage them?
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?
@ Celtic Phoenix:
“Property goes up with wage inflation. Seems simple to me.” This particular argument has been around a long time, and it has never been proved. It is simply taken as gospel by “economists.” Whelan says real home prices rose 246% in ten years. Real Irish wages are 17% below the EU average and 42% below Norway, according to the U.S. Bureau of Labor Statistics. In Ireland you have high prices and low wages. If there were a correlation between the price of labor (wages) and other prices (like property) then either home prices would be at their lowest level in history or wages at their highest.
Now, there is a clear correlation between low wages and something else: high profits. And the state does have a very vested interest in seeing that the high profits of commercial banks remain as high as possible.
Cue comments from house price boom deniers, flat earthers and folks who believe Elvis is alive and living with Michael Jackson
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
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.
Ooops, a Freudian slip.
In paragraph 5, line 5, I said ‘global depression’. Not so. What I should have said, of course, was ‘global recession’. I’ve been reading David McWilliams too much.
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.
“after a long period of stagnation or even falls, real house prices in Ireland took off in 1995,”
Not so sure myself. 1988 saw a number of housing developments in Dublin start. By 1991, house prices had risen substantially over 88/89 prices. The mini-recession in 92 knocked them back a bit but by 97 the ramp was rising and house prices began a rapid climb which culminated in the highs of late 06 very early 07.
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.
It may be useful to consider the debt generated to buy houses at peak activity 2005-2008 V 2001-2004
2005-2008 IBF Data
Number of mortages issued 673,616
2001-2004 DoE data
Number of loans paid 328,727
Years Av Loan Value total loans
2001 114.8 7.65
2002 136.6 10.81
2003 159.7 13.50
2004 171.7 16.92
2005 169.5 34.11
2006 195.4 39.87
2007 213.8 33.81
2008 208.9 23.05
2009 176.2 8.77
The blip in 2005 occurs when switching from DoE to IBF data.
When people talk about house prices, they mean the price of all houses out there, not some special subcomponent.
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.
@ allan harris & all
Maybe its too simplistic but all else being equal, if we take away the variable nature of credit, then surely property prices will only increase with wage inflation and population growth (which you cant really control, though you could use a policy approach eg more zoned land to accomodate).
Wasnt 100% mortgages & lending at 10 times salaries the real problem? It seems simple, we never allow banks to lend more than 3.5/4 times (often cited as an historical average) someones salary to them and only lend out 92% of the property price, then property prices go up with population growth and wage inflation.
Would this step not go a long way to ending the boom bust rubbish? Im open to correction.
As a country surely we want to eliminate this economic phenomina, it essentially amounts to a pyramid scheme. A pyramid scheme that leads to big inequalities in society. Pyramid schemes that most people have come to accept as something we can do nothing about.
ps. Sorry for the typos, the keyboard Im using is rubbish.
@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?
The UK house price figures are based on Nationwide’s BS – link here
The UK RPI figures are taken from their government statistics dept – link here
1) 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.
2) The rezoning system creates an artificial scarcity of land in a country that is 4% urbanised compared with say France where the level is 28%.
3) Ireland had the lowest number of dwellings per thousand inhabitants in the EU in 1980 and, despite the huge building boom, in 2006, it was at the bottom of the housing availability league. This was reflected in the relatively high average household size (3 persons in 2001), though this was far less than the 4 persons per dwelling in 1971. This historic lack of dwellings was a root cause of shortages and rising house prices.
4) The structure of dwelling types is unusual for the EU, in that there are very few flats and multi-occupancy structures. A large number of dwellings (45%) are detached houses (frequently single storey); a further 29% are semi-detached and 23% terraced. Only around 3% of dwellings, consequently, are flats. However, in Dublin a far higher ratio of 14% of dwellings are bedsits or flats. The general type of housing built, therefore, is highly land-intensive and leads to spread-out suburbs, both in the Greater Dublin area and other growth areas further afield, which have often come to act as dormitory settlements for local agglomerations.
5) Consultant economists DKM (Colm McCarthy) in 2000 produced a paper critical of planning authorities and advocated development as far out from the centre of Dublin as a 25-mile radius.
The paper pointed out that the M25 ring route around London is 25 miles from the centre of that city and contains within its circumference a city of eight million people. A similar ring around Dublin contains just one million people, indicating that Dublin’s future development should be in higher density along transport corridors.
6) UK’s Policy Exchange think tank, has argued that the Irish planning system creates too many ‘starter homes’, of often mediocre quality on monotonous estates, and allows insufficient quantities of larger, better quality properties.
The lack of better properties has fuelled house price inflation, it argued, so that the high headline housebuilding figures give a misleading picture of the true supply situation.
7) Ireland has worse housing conditions than other countries with similar living standards, with floor areas per person of around a fifth less than the western European average.
8) During the boom, apart from some improvement in insulation, the authorities shamefully allowed developers build apartments of poor quality with a minimum amount of storage space.
Inevitably, this sector of the market is experiencing the worst of the recession.
9) According to the annual Demographia report, according to national reporting agencies, the average new house constructed in Australia or the United States is approximately 2,200 square feet (over 200 square meters), including both detached houses and multiple units. New house sizes are nearly as large in New Zealand (1,900 square feet or 175 square meters), while new detached houses average 1,900 square feet (175 square meters) in Canada. However, new average house sizes are less than one-half that size in United Kingdom, (815 square feet or 76 square meters). This is only 15% larger than the hundreds of thousands of standardized flats built in tower blocks before 1990 by the East German government (700 square feet or 65 square meters). Irish new house sizes are, like their UK counterparts, also comparatively small, at 945 square feet (88 square meters). Moreover, new UK houses are the smallest in the former EU-15, while new Irish houses rank ninth out of 15.
New house sizes have dropped more than 30% in the United Kingdom since 1920. Ireland’s smallish houses were built at a time of unprecedented prosperity. At the same time, houses in Australia, Canada, New Zealand and the United States have continued to increase in size. Meanwhile, over the last 20 years, the average new detached house in Australia and New Zealand has increased by an amount to the average total size of a house in United Kingdom.
Irish zoning has allowed for 20 houses per acre (49 per hectare) an increase of 35 percent in just four years. Seven Dublin houses or six United Kingdom houses could be built on the average new house lot in Australia.
In 2007, the Dublin City Council proposed a 25% more floor space of apartments – – in typical Irish fashion, closing the stable door after the horse had bolted!
“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:
“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.”
Excellent work. It is my fault, rather than Karl Whelan’s, that we are using the DoEHLG figures, as I can’t access the ESRI ones, so I posted DoEHLG figures in the earlier thread. I used to be able to access the ESRI ones, but it is all changed and I can no longer. No doubt the fault is mine for not being able to wade through their new layout, which looks more like the control panel on a jet plane.
However, I can’t see your justification for using an 11-year period (1996 Q4 to 2007 Q4). Apart from the fact that 11 years would be a very unusual time period for analysis, the Reinharts’ paper says between 1997 and 2007. So, I think it is reasonable to assume that this is a 10-year period, unless it says otherwise somewhere in the small print. What do your calculations give for Ireland for the period 1997 Q4 to 2007 Q4? As I say, I can’t access it, so this is just guessing and subject to correction by whatever figure you give. But, suppose the nominal increase between 1996 Q4 and 1997 Q4 was 20%, which seems reasonable. That would bring the real increase in the decade between 1997 Q4 and 2007 Q4 to very close to the Reinharts’ figure. Less than 20%, and the difference increases.
Regardless, whether or not my figures or Karl Whelan’s are more representative isn’t really the issue. In fact, it is something of a red herring. It is the Reinharts’ figures that started the discussion. I merely quoted them verbatim in my original post. Other people then said their figures (not mine) were wrong. As they are professional researchers, and their paper was being acclaimed as a ‘great paper’ on the site before I posted some unpopular figures from it, it is reasonable to assume that they have done their research properly, unless evidence is found to the contrary. Should such evidence be found, then obviously they lose brownie points. Only they can answer questions about the data sources, the time-period covered, and the category of houses covered. Myself, yourself, and anyone else are simply speculating about them.
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 …
“Should such evidence be found, then obviously they lose brownie points. Only they can answer questions about the data sources, the time-period covered, and the category of houses covered. Myself, yourself, and anyone else are simply speculating about them.”
Maybe you care about the Reinharts’ reputation and their loss of brownie points with the tiny subset of the world’s economists that would come across this discussion. I don’t. And we don’t need the Reinharts to figure out what happened with Irish house prices.
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.
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.
Michael Hennigan says:
I think this point is very well made, and I believe it indicates the truth. In other parts of the world, where supply wasn’t such a problem in terms of housing stock, the conditions were not nearly as ripe for a boom in home prices. What is devastating to the Irish economy though, is how many young people were attracted away from other activities to become involved in all manner of aspects to do with the production of housing units in Ireland. The considerable skills they acquired having very little relevance in today’s context. Former Taoiseach Bertie Ahern was criticised widely for his move to allow once off rural dwellings, to move through the planning system. Taoiseach Ahern claimed it would relieve pressure for the demand of homes in the 2000s. But if you really look at what happened, it amounted to a massive transfer of wealth to landowners around Irish towns and urban centres. The once off rural housing policy enabled an awful lot of people to re-locate from their homes in urban areas to the surrounding commuter belt/countryside. If we had some decent spatial-geographical research done in Ireland, we would find this became a huge factor as the 2000s progressed. We would find many of the most priveleged in our society, abandon their homes in urban areas, in favour of building a short commute away on once-off plots. Those plots in the countryside sold for an astonishing amount of money also. In many cases the borrowers who bought the said plots, are under water now for hundreds of thousands of euro – many of whom, have not even laid a brick yet. Each story is like a mini-Glass bottle site in itself. We didn’t have a housing price bubble so much as an artificial surge in the price of land for housing – that was the biggest contributing factor.
I heard on radio this morning that Ciaran Cuffe’s blog had to be edited to remove an entry to do with property tax. It seems strange that anyone who has a mind to engage in a realistic debate in Ireland with regards to proper management of housing and living environments, is not going to be the most popular. Yet, on the other hand there is a lack of honest debate about the point, the president of the planning institute in Ireland makes. If we want to have our urban authority’s capable of funding themselves and providing the best services and so forth – why is it, that we allow the most priveleged in society to simply detach from urban locations – and to isolate themselves out on their own private plots in the countryside? How are local authorities in towns expected to create any sustainable tax base to provide facilities, if their best source of income is driven away from urban areas by policy? It is quite clear to me, that many families who were adequately housed already in urban areas, used the period of available credit in the 2000s to re-mortgage themselves and pay exorbitant monies for plots in the countryside. You can still see the legacy of that in parts of the country, where on DAFT website for instance, sites in country laneways around Ireland still ask for hundreds of thousands of euro. Who is going to pay this? Contrast that on the other hand, with deputy Cuffe who is forced to remove a blog entry in relation to property tax. And it gives you some idea of our perceptions here in Ireland in 2010. BOH.
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.
I suppose to put this into Ciaran Cuffe-esque language, we spent a lot of money in Ireland, to help us to get from place ‘A’ to place ‘B’. Without investing much money in making ‘A’ or ‘B’ any better, when we arrived. With relation to once off rural housing, what you find is a family unit almost comfortable living in a housing unit in the urban centre. Lets call that location ‘A’ for the sake of argument. We encouraged the same family through policy to forsake their home in location ‘A’ for a different one at ‘B’. The motivation being, to be able to send your kids to better schools at ‘B’ rather than in ‘A’. Of course, location ‘B’ came at the considerable price tag, of hundreds of euro worth of borrowing for the plot on which to build. In other words, rural landowners at location ‘B’, became the rich benefactors of a lack of standards in education facilities at location ‘A’. The net result, we have the landowner who pocketed the money. The borrower under water who bought the plot, and the local authority in the urban area which has lost an entire income bracket from its jurisdiction. Is anyone a real winner? BOH.
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.
You see, if i’d known that statistical analysis could create such heated debate, i’d have paid a lot more attention in my Statistics class in UCD back in the day…
Sterling work as ever from Jagdip and JtO, both of whom have an amazing grasp of the figures.
@ Celtic Phoenix
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.
Earning 50k when marginal taxes are 60% and interest rates are 10% is a very different situation to when marginal taxes are 41% and interest rates are 4%. Add in increased interest reliefs as well and the picture changes further. But whatever way it is structured, you’re right that we do need much more strict rules on just how much people can borrow when buying a home.
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.
@ celtic phoenix
“then property prices go up with population growth and wage inflation.”
This assumes that all price increases are caused by wage inflation. Wages are a price of labor, and therefore, are determined by supply and demand, like all prices.
The insane speculation in housing is simply part of the business boom and bust cycle that has been going on for the past 200 yrs. It is a pyramid scheme, and a pyramid which collapses every ten years onto the heads of the people who built the pyramid. Millions of pyramid workers are thrown out of work, the labor supply increases and wages go down. Some pyramid owners go bankrupt and are bought up by bigger pyramid owners, who then try to establish a monopoly.
Then the whole process starts again only to collapse in another ten years.
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.
Given that house prices in many other countries were falling in 2007, I suspect the date period in question is 1 Jan 1997 to 1 Jan 2007.
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
NEW ZEALAND 104%
% Change in Real House Prices Trough to 2006 (for countries with trough in period 1991 to 1997)
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.
Oops. That second table should be:
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.
Despite the blunders, the point is well made. If you looking to show the extent of a bubble, an arbitrary period over a fixed time is not appropriate across countries. If, however, you are looking to show that during a fixed timeframe a number of economies experienced serious bubble (i.e. it was exogenous factors rather than specifically endogenous (if I have those the right way round!)), then it is a valid comparison – it is not designed to show the extent of the bubbles, just that multiple bubbles existed during a specified timeframe.
“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.
would there be any method to the base salary multiple, or are we solely going to use the 3.5/4 times metric simply because we used to use it previously? 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.
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. People have simply lost their jobs, were never able to really keep up with their payments that well in the first place, have had large additional expenditure arise (ie kids), or were given mortgages based on future earnings (ie the ‘professional mortgage’). Also, for clarity, i would also not include bonuses in my model/metric, it would be after tax take home pay on base salary. My simple point is that at least mine is a dynanmic metric, while the base salary multiple is not. Given that interest rates anbd taxes are still close to all time lows, mine would actually reduce down lending in the coming years, while your suggestion would see the same amount being able to lend even though affordability was getting worse, no?
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.
“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 😀
I agree with hoganmahew.
If the financial crisis has taught us anything, it is that rules should be clear and robust, because there will always be clever financial innovators who will attempt to bend them.
A simple salary multiplier and an LTV threshold are all that is required to ensure credit creation remains anchored to the fundamentals in the economy. It might not be perfect for every loan, but that is not possible in any event.
On the overall issue, may I just add my shock and disappointment that we are still debating the precise magnitude of the housing boom. This is like debated whether the sun was at 12 or 13 in the Spanish sky, as we nurse our blistering shoulders with aloe gel back at the hotel.
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.
Also worth throwing into the thought process of this thread perhaps, is an analogy. Think of that movie starring Mickie Rourke, The Wrestler. It is a sad story, but also a very real one. I witnessed a lot of people in the construction industry in Ireland during the Celtic Tiger, who really wanted to be out of the fast lane. But in order to keep in the game, they kept on loading themselves up with more debt they had to repay. That in turn forced them to go for the interview for the bigger salary. It forced them, not be remain loyal to their current employer, but to take risk and chase after short term, more lucrative contracts. It was kind of chicken and egg, egg and chicken sort of stuff. And it did remind me a lot of Mickie Rourke’s character in The Wrestler. You knew by the scars these guys were wearing, they had been through this cycle of en-debtedness and work-out, many times. There life really was, sailing close to the wind. Which was do-able in Ireland up until 2008. As inflation of wages and borrowing kept on going higher. If I could recognise these characters in real life in Ireland, then it means the banks could definitely recognise them – and were effectively the guys who owned the stadium, the championship and the tour. They engaged the same wrestlers in their contracts. In a way, the Mickie Rourke character in The Wrestler, is a pretty good approximation for the whole of Ireland right now. 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.
“Really, you expect this situation to persist?”
Eh, think you’re reading me wrong, that was sort of my point – it will not persist, ie affordability will get worse in the future, hence a dynamic metric will account for this. You’d still be lending the same amount out even when interest rates are 3% higher and taxes are 5-10% higher.
“Dun, dun, dun, you ain’t seen nothing yet…”
But this hasn’t caused our current problems, right?
“This is simply untrue”
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’m not against hard rules, actually the opposite, but i dont see whats wrong with making them more rather than less dynamic. If we’d kept it at x% and no higher, then banks could not have overlent to the same extent, but while a guideline or two may have been issued, banks could ultimately lend out if they felt they could justify it themselves (ie “he’ll earn more in the coming years”).
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.
If the New Orleans natural disaster is a fitting analogy for the credit bubble in Ireland, there are no prizes for guessing who were the ‘looters’ in the aftermath. BOH.
“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.
Just in case it has escaped anyone’s attention ….
RTE says it will broadcast a television programme, first of a series, this evening (06092010) at 21:35 this evening:
Freefall: Documentary series looking at the property bubble and Irish banks’ lending practices which contributed to the economic crisis of 2008
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.
Not only that, but it has been admitted both that Anglo, BoI, AIB, the two Brians and the wooden Cabinet all knew that Anglo was insolvent! This is reasonably shocking stuff. We’ve been told for two years that the banking system was solvent, that Anglo was solvent, that it was a temporary loss of confidence as a result of Ledermans etc. How many lies is that?
It’s one think to gamble on a transparent, but expensive, quick resolution of bank debts with the state taking the pain. It’s another to lie through that process about a key part of it…
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).
@ Frank Galton,
Agreed. I tried to extend my New Orleans analogy somewhat in a post on KW’s new thread. BOH.
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.
John has helped you avoid one of those “Lets Not Get Philip Sued” moments it seems!!
@ 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.