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.

John has helped you avoid one of those “Lets Not Get Philip Sued” moments it seems!!

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.

Agreed. I tried to extend my New Orleans analogy somewhat in a post on KW’s new thread. BOH.

http://www.irisheconomy.ie/index.php/2010/09/06/anglo%E2%80%99s-plan-to-save-subordinated-debt-holders/#comment-70806

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…

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.

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

bjg

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.

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.

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

“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”).

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.

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.

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.

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.

“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

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.

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.

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.

“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.

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.

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.

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.