This article by Martin Walsh in the Irish Times has some convincing analysis (unfortunately the graphics are not shown in the on-line version), and some thought-provoking comments on the Irish government policy conundrum regarding residential house prices. As Martin Walsh notes, to minimize expected future (state-owned) bank losses and Nama losses, policymakers must hope that prices have now fallen to their steady-state equilibrium level. But for the purposes of restoring competitiveness, continued house price decreases would be better.
“… it seems that there is a real dilemma at the heart of national policy. Do we prioritise competitiveness by bringing house prices back into line with incomes or keep them inflated in the hope of reducing further losses to the banks and Nama (National Asset Management Agency), as well as containing the extent of negative equity?”
Most importantly, by most long-term metrics, current house prices in Ireland still seem to be above sustainable levels.
What actions (if any) should Irish policymakers pursue regarding stabilizing the residential housing market, and to what ends?
84 replies on “Martin Walsh on Residential House Prices”
It’s a good article, but this kind of reasoning doesn’t appeal to me: “While higher incomes are a driver of house prices, prices themselves are a driver of demand for higher incomes. If house prices remain high relative to incomes this limits our ability to regain lost competitiveness.” Certainly workers may demand higher wages because house prices are high, but that shouldn’t cut much ice with their bosses. It’s not that Martin Walsh is wrong here. He’s largely right I think, but he is implicitly using an economic model and he ought to make it explicit.
If we plan to stay in the Eurozone then we have to face up to the fact that doing so commits us to the Hoover-Mellon strategy: liquidate everything. How else is internal devaluation supposed to work?
I would think the main issue would be to ensure buyers even at depressed levels – staunching the flow of emigrants would be job one I think. A substantial hole seems sure to open up in the property market if a big chunk of the first time buyer cohort simply doesn’t live in Ireland any more.
This question is absolutely key for the Irish economy.
It used to be the case that the professions were pressurised to push up income and thereby costs to clients, partly so that their practitioners could still buy houses in Dublin 4 or the posh part of Castleknock or wherever.
In this way, the house price boom did for Irish domestic competitiveness and now the costs are marooned right up there with Beverley Hills in some cases.
Ireland has a fundamental choice to make. Does it cut high costs and high pay rates, do something about negative equity/mortgage service problems and slide rapidly into line with Europe, or does it duck and dive and wheel and deal, trying every trick in the book to delay – prop up house prices, professional pay, civil service pay, plus the general costs that provide the money for all that – on the continuing assumption that the debt will be written off and there will be a bit global GDP run up that will allow status quos to be maintained?
Almost certainly it will be the latter. The reason is that all the powerful groupings more or less filled their boots along with the herd and unless it is possible to prove, really prove, to them that there is no alternative, they will steer political decision making in a conservative, reluctant, gradualist direction.
Ireland is just another version of Japan – but without the indigenous export industries and nascent Western consumer boom to export into.
There is no Irish leadership with vision.
Even after the falls to date the Economist still ranks Ireland as having one of the highest house price to income ratios in the world.
A related question is: which indicators should Irish policymakers pay most attention to figure out whether the residential housing market has stabilized or not? It’s not an obvious short list, at least to me. DE mentions house prices to incomes. Another might be mortgage payments/rents, another might be international comparisons. But there are others. Which ones would commenters look most closely at?
Thanks for the Economist link. Choosing the “house price to income ratio” option and then comparing Ireland to any reasonable peer group certainly reinforces the point of the Martin Walsh article. Ireland is a lovely place to live but can it really sustain this unusually high house price to income ratio over the long term?
“It’s a good article, but this kind of reasoning doesn’t appeal to me: “While higher incomes are a driver of house prices, prices themselves are a driver of demand for higher incomes.”
Were you not in Ireland for the social partnership agreements? What about tax cuts, mortgage interest relief increases, fiddling with stamp duty, CAT band increases, nursing home charges, investor tax relief. All these were diddles by government to reduce the effect of house prices without addressing prices themselves.
There are several of us on this site who could pen an accurate article about Irish res property prices v values and where the prices are headed. Think if we sent in a joint piece to IT we would be published? We would like ……..!
When in doubt print the legend, not the truth. Without access for accurate reporting the chicanery with respect to res property will continue until some gombeen yells – “No one saw this (prices at -50% of CURRENT prices) coming”!
“Inaccuracy is bad enough, but reporting that is based on assumptions is worse”. [Ed. Said].
Commenter Louise Reynolds has failed to notice that Martin’s stint as Head of Lending at the EBS ended in 2003.
@Stephen, the five “hard” analysis methods for valuing residential property
(1) Rent yields
(2) Multiple of incomes
(4) Cost of construction
(5) Demand:Supply equilibrium
The “hard” analysis methods are problematic because some elements are variable eg tax on income, income levels, rent levels, cost of land, cost of labour and building materials, population, wealth
The “soft” analysis is really to do with perception. So at the peak with homes costing 13x average salary or delivering yields of 1%, we were still queuing outside sales offices when new schemes were launched because we perceived property was still good value. In all likelihood on the way down the “soft” analysis will lead to an overshoot, placing values below the “hard” analysis.
Whilst house price stability is attractive, I think property being allowed find its own level is also attractive and may boost competitiveness.
Gregory O’Connor says,
Gregory, and all. What is the alternative way for the people of Ireland to invest their money/savings/wealth longer term, in order that it retain its spending capability and security as an asset? The important question is, apart from looking for answers to the collapse in housing prices is, . . . How many qualified economists here, would have told middle aged and mature people in Ireland a few years ago, that they were taking a grave risk by putting their savings/money/wealth into Irish bank shares? ? ? Putting ones nest egg into Irish banking shares, had the advantage of holding that asset in a liquid form, which matured over time, and at the same time offered a regular dividend – without the associated bother of putting the same money into a physical asset such as property, where you get hit for depreciation, upkeep and the trouble of finding tenant etc, in order to generate any income at all. As bad an all as property prices are at the moment, and as weak and all as the market is, . . . There is still some glimmer of hope that returns will be made, in small or larger measure. What hope have the shareholders of Irish banks? I suppose, the point I am making is that, as a shareholder you are exposed to the risk of being swamped out by large institutional shareholders, and silly, fast capital that comes along and makes poor decisions. With ownership of a property, you tend to own the asset outright. You don’t get swamped out, pushed out or otherwise abused by large institutional shareholders, as happened with Irish bank shares. But there must be some system, whereby people may own a share of a property (something more substantial and larger than a house), and not have one’s share made smaller over time, by the influx of silly money. I have in mind here, an idea in my mind, where some of the assets of local government around Ireland could be privatised in such a many, as to distribute ownership of facilities or physical structures, amongst many shareholders. I have in my mind, a scheme whereby the local authorities may sell their headquarter buildings (many of the new shiny ones built over the Celtic Tiger period), to some kind of limited liability partnership. It would have the advantage of the government being able to liquidize some of its investment in capital spending – and allow ordinary people, to have an alternative direction to move their savings, other than in acres and acres of detached two storey housing. It is a kind of scheme worth doing a feasibility for, many in one city, such as Limerick city? BOH.
In terms of measurements of wages to prices:
1. We need to know the median FTB wage. The FTB sector drives the rest; second-hand prices will settle related to new FTB prices. (You or I might not like the whole idea of ‘de ladder’, but it appears we are stuck with it.
We also need to pick a median house that an FTB would buy – it is, at best, disingenuous to pick on a ‘typical FTB couple on the average wage’ and then benchmark them on an average house price that includes mansions, ruins, and many, many, small and poorly located apartments.
2. We need to know what the maximum divergence of mortgage rates from ECB rates is going to be. It appears we have a much larger divergence currently than was anticipated by those who designed stress tests. It is not clear to me that we have yet reached maximum divergence, so it is not clear what the maximum stress-test interest rate should be. Certainly stress testing at 8% (3.5% above ECB base rates) should be baked in for Ireland, whatever the long-term cost of money turns out to be. It is not much use being able to pay the mortgage 90% of the time.
3. We need to have some certainty on tax rates and reliefs. What will the impact of a property tax be (indeed, how will it be calculated?)? What will income and social tax rates run to? Will mortgage interest relief be extended?
The current bank method of calculating affordability seems still as bonkers as the bubble methods, if we are to believe DKM http://www.dkm.ie/uploads/pdf/reports/EBS_DKM_Affordability_Index_Publication_27th_Jan_2011.pdf
So I think some return to a grosser method that is less dependent on short-term/transitory influences would be welcome. A long-run average that excludes the bubble period (which I believe is correctly identified as starting in 1996) makes as much sense as any other.
Stabilizing the market:
1. Do no harm – no further distortions. Existing distortions to have an end date.
2. Rent relief to be set externally. Preferably somewhere far away. Finland maybe.
3. As negative or low equity is a problem, mechanisms to reduce it should be introduced – allowance for transfer of pension savings tax-free to reduce outstanding capital, for example.
4. A bankruptcy regime – one that sees an end to house purchase debt with an end to ownership – even if not necessarily an end to lifestyle debt that was rolled into the mortgage.
He is wrong about construction workers wages they went off the richter scale going up by over 300% and more during the “boom”. Reasons? Firstly, scarcity of trades as the number of units being built by developers went into exponential mode. Secondly, trade union “struck” rates for their trades and craft workers and these quickly spread to every site. Thirdly, the false perception that bosses were making a fortune from developments. They were but were loosing it just as quickly they just did not realise it. In the latter stages of the boom, Irish workers had literally priced themselves out of jobs on construction sites and their labour was largely substituted for cheaper immigrant labour or substitution techniques were applied such as using glass or preformed concrete elements instead of bricks/blocklaying. One newly elected prominent independent TD had very, few Irish workers on his sites. The greed and group think that Mr, Nyberg pointed out was exemplified by whole classes of professionals such as dentists, doctors barristers etc doubling up as property speculators and developers overnight. NAMA was then arranged to rescue property developers, auctioneers, solicitors, accountants and politicians.
The property market, as this article illustrates is a cancer at the heart of Irish society. It is killing the real economy. Lack of credit, incredible amounts of red tape, legacy commercial rents and rents completely detached from economic reality coupled with gouging by local authorities to support legacy staff numbers and salaries are insurmountable impediments to business start ups and causing businesses to fail every single week.
Our sons and daughters should be allowed to buy property at fire sale prices. This is the only way to cleanse the market. NAMA is now a mill stone round our necks and has shown itself to be a complete failure and surplus to requirements. It failed to meet any of its stated objectives, in fact, as soon as it was mooted banks stopped trying to manage their commercial loans. They misjudged its caustic effect and it was a heads in the sand notion of a way out of their dilemma. The average NAMA discount of 60% caused catastrophic losses, nationalisation, IMF/EU bailout (No. 1) and impending sovereign debt restructuring. They all follow each other as surely as night follows day. We should have slowed everything down in a realistic way, insured losses by copying the British, implemented debt for equity swaps with bond holders, restructured private debt by extending terms of loans and accepting reduced rents-without rolling up’s and interest penalties. We needed to look at creative but real way to deal deal with the problems. In a previous thread, some time ago, I was the only person to even mention the words “debt forgiveness” now whole pages of newspapers are dedicated to the topic. We needed outside investment and outside banks but they were made to feel as unwelcome as a leper colony. The money we were allowed borrow for NAMA at 1%, now 1.25% should have been used for economic stimulus. Instead, NAMA’s idea of stimulus is like trying to resuscitate someone from drowning by breathing carbon monoxide into their lungs. We were told property prices and reduced rents would effect pension funds. So what? Where is the NPRF now? How will pensions perform after we are forced to restructure? We need a fair and just society but instead tried shamelessly to save our old crony model, adopting Lehihan’s jaded and suicidal policy of trying to “restore banks to their former glory” instead of seeing the writing on the wall and the crisis as an opportunity. For what, it is worth, talking to friends, there are many, many people who simply do not believe the system is worth saving.
PS Barry Ritholz has a timely post on affordability indices and their worthlessness http://www.ritholtz.com/blog/2011/04/cheapest-homes-in-40-years-not-even-close/
Exploring the Economist house price to income ratio graph I note that it does depend upon the base year used for comparison. The chart chooses the first year available (1996 when comparing Ireland to other markets with equal or longer data histories). This can affect the comparison since in 1996 Irish affordability may have been relatively good compared to appropriate peers?
You also need to look at supply.
The floor is set by rental returns as those that cannot afford to buy rent. At the moment there is an oversupply of property in many areas.
The market in the south east of England has defied expectations (London prices actually increasing) because the population is rapidly growing .Add to that Housing Benefit payments and you see that housing must be treated like every other commodity.
More auctions like Allsops will give us a better indication of property values as these attract cash buyers looking for a return in the same way they would if they bought any other investment.
‘There is no Irish leadership with vision’.
We get the leadership we deserve. I heard on radio today that Patrick Pearse’s father was an Englishman and a Freethinker. It’s a funny old world.
Property remains an important status symbol and store of wealth in Ireland. We never had an industrial revolution. Maybe the cure is to tax property until people learn to invest in something more productive. In doing so, some means has to be found to protect those already in big diffs on a personal level. So that they are free to produce.
In an analogous way, the occupation of monoply ‘gatekeeper’ positions in state and pivate sectors needs to be taxed specifically, so that rent seeking becomes a less lucrative, and so less respectable, career. As you say, these sort of things will happen when everything else has been tried.
“which indicators should Irish policymakers pay most attention to figure out whether the residential housing market has stabilized or not?”
Are you really looking for whether an asset price has stabilised post slump by observing the value of some metrics?
You might be able to establish that prices are, or are not, at what would usually be regarded as sustainable, or even cheap, or expensive levels according to the historical records for those metrics – but as anyone who has dealt much in financial markets will know, that can be a good way to rationalise a decision that subsequently get you your head handed to you on a plate. Overshooting is common and you have to bear in mind that house prices are more autocorrelated than prices of most investable assets.
Even using yields id problematic since in the same way as a PE on an equity reflects a view about the future path of earnings, the future path of rents is uncertain.
On the narrow point about CAT bands, they had in effect tightened considerably over the years before 1999 when they were reorganised.
Indexation was available available from C.1975 to 1990 for CGT but denied for CAT from its introduction in 1976. Indexation for CAT would have increased threshold by approximately five times. The original class 1 threshold would have been 930,000 by 1999.
The only way Ireland was able to reach the ludicrous real estate prices was primarily through very generous credit. No one paid cash for the property. The bubble was inflated through the banks and look at them now. All the vaporized “value” is gone, long gone. And, it will never come back in a lifetime. Prices will continue to fall because there are not enough people with cash to buy at current prices to buoy the market. I find it laughable that NAMA is now going to finance the property recovery. That is kind of like a bank robber opening their own bank. Debt destruction is a very nasty business when you have no currency to devalue.
I think he misidentifies the policy dilemma slightly. The choice is not between competitiveness and reducing losses on the banks. It is between competitiveness and delaying recognising the banks’ remaining unrecognised losses. Playing games with the property market will not keep it inflated long enough for the banks and NAMA to cash out at what are still bubble prices.
There are many interested parties who benefit from the delay, but, in my view at least, they do not include the people of Ireland. While some Irish special interests benefit over the short run, the big picture is that the delay is causing serious economic and social damage.
I’d be interested to hear what marvellous mechanisms of national policy Mr Walsh seems to feel are capable of buoying up house prices at this stage. A few very simple points:
1. Lenders decide house prices, since in these transactions they supply 80-110% of the funding. Lenders aren’t lending and NAMA isn’t a bank.
2. A standard measure for decent value (call it equilibrium) house prices are between 12-15 times rental value for the area for two reasons, rents follow actual supply and demand much more quickly than house prices which are subject to artifical inflation, and professional property investors won’t touch anything they can’t get a 6-8% return on. Hence this is good value. We aren’t there yet by a long shot.
3. Adam Smith recognised long ago that expensive houses do nothing for an economy and only serve to destroy productive capital that might be used to supply real jobs. “A dwelling-house, as such, contributes nothing to the revenue of its inhabitant. If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue. [If rented,] the revenue of the whole body of the people can never be in the smallest degree increased by it.”
This is basic stuff. There is no relationship between salaries and house prices, comparing a graph of the two over the last ten years is evidence of that. And even if there were, all it would be doing is pumping useful capital into the banks for their own benefit.
It is over folks, and we’ll not see its like again this generation, and hopefully never again. Wrong isn’t even the word for the article.
If you want to reduce mortgages without having the taxpayer shoulder the burden, it’s quite simple. Let whoever holds the debt upstream now, and more fool them for taking it on, take a haircut, and reduce mortgage amounts outstanding commensurately. Adjust such legislation as needs adjusting as far as equivalence between senior bonds and depositors go, and to hell with the putative vulture funds, time for an education in the dictionary definition of “sovereign”.
The ECB has taken the reins of the bailout and they hold their own bondholders higher than the sovereigns, while the EU and IMF are sheepishly twiddling their thumbs in the background (the ones that are not trying to force our hand on corporation tax as we speak, an issue which has exactly zero to do with causing the crisis, and might very well hold the key to getting out of it). I don’t see how any Irish citizen could give a fig for the opinions of any of them at this stage.
I’ve genuinely tried to be in favour of the EU as much as possible, but recent events have convinced me we might be better off reducing our exposure to their stupidity as much as possible.
And a couple more salient quotes:
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs.” — Thomas Jefferson
“Let me issue and control a nation’s money and I care not who writes the laws.” — Mayer Amschel Rothschild, 1790
If there is no economic growth, there will be reduced demand for all classes of property and prices will continue to slump. If you prioritise competitiveness and job creation the economic engine may kick start again,which should increase demand for all classes of property.
You have to wonder if the Economist has real current Irish houses prices or the asking prices/indices which probably haven’t really shown the full extent of the fall. Better data collection here is needed.
A good article – I like the way Mr Walsh tries to give an actual figure for the over-valuation of property, a pity that it was not published two years ago.
Even as a non economist with no interest in property the contradictory nature of the aims of NAMA (protecting asset prices, keeping the banks solvent) and the state as a whole (reducing the cost of living/services/doing business, keeping the state solvent) seemed obvious from at least September 2009. I had assumed that there were exotic calculations that showed the undertaking was not financial suicide, instead, William Goldman style, it indicated that “Nobody Knows Anything”.
Now the state is quite literally “invested” in sustaining a new property bubble (sorry, “recovery”), both to try and lose less of the funds used to create NAMA and to prevent mortgage default from becoming a more attractive option, thus starving our zombie banking system of the productive human flesh that it needs to keep shambling, until it finally collapses a long way from the rest of the European banking system and private international capital.
It is M. C. Escher economics? Voodoo is already taken.
But why should Irish policymakers (a.k.a. the ECB) even want to stabilize house prices? Why not just let them fall, all the way to the bottom if neccessary.
Irish commentators still seem to have a hangup on house prices. They still think that rising house prices are a good thing. They are not; they are a very, very bad thing.
Inversely, falling house prices–and especially falling rents–are a good thing by and large. The cost of living falls and people can spend money on other things. Negative equity is a state of mind, as regardless of the value of the house, it is the interest rates which determine whether the mortgage is affordable. For most outside the Property Ascendancy, falling house prices and rents are ultimately a good thing.
So I don’t think the government should bother re-inflating the housing bubble. Let the whole thing crash if neccessary. People will buy if the prices falls low enough (e.g. < €50,000), and society will benefit from increased home-ownership. Bankers, landlords, and the property industry will lose out, but these are parasitic and unproductive elements of the economy anyway, and can and should be ignored.
I challenge anyone who thinks that falling house prices are a bad thing to justify their position with clear reasons, showing how falling property prices objectively impact negatively on people’s lives and the general economy. I’m interesting in hearing why people are so afraid of what I for one see as a good thing.
@ Gregory O’Connor
“Ireland is a lovely place to live…”
However, if the size of living space is an important part of quality of life, then we do not rank highly.
A country that is 4% urbanised is stangely short of land with floor areas per person of around a fifth less than the western European average, even though a large number of dwellings are detached houses.
The 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 fuelled house price inflation, it argued, so that the high headline housebuilding figures gave a misleading picture of the true supply situation.
@ Stephen Kinsella
The trend of rising single adult households is likely to continue.
The authors of the annual Demographia hoousing report says that historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been 3.0 or less times median household incomes in the principal affordability indexes (historical data has not been identified for Hong Kong). This affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in the past decade in Australia, Ireland, New Zealand, and the United Kingdom and in some markets of Canada and the United States.
Co-author Hugh Pavelitch commneted this morning on price dips in Melbourne and Sydney where housing prices reached overall California levels at excess of 9 times household earnings.
He says housing should not exceed 3 times gross annual household earnings or the total value of usually occupied stock (rental and owned) 1.5 times GDP. With Australia’s GDP in the order of $A1.2 trillion, it’s housing stock value should not exceed about $A1.8 trillion – not the current $A4.1 trillion + or 3.41 times GDP, according to RBA (central bank) figures.
In 2006, an international survey compared over 300 metro areas using the standard of a 2,200 square foot, 4 bedroom, 2 ½ bath home that would be typical in an area favoured by a management level family. It found that for the cost in Dublin, at US$1,406,497, you could have bought nine similar houses in Houston, Texas, three in Amsterdam, two in Sydney and almost two in Tokyo.
In March 2011, in Houston, luxury home sales boosted the average price of a single-family home for a third straight month. The average price rose 3.3 percent from March 2010 to $217,597, the highest level for a March in Houston. The March single-family home median price—the figure at which half of the homes sold for more and half sold for less—dipped 1.7 percent year-over-year to $150,900.
The average price for an Irish house nationally in Quarter 4, 2010 was €191,776.
The US national median existing-home price for all housing types was $159,600 in March, down 5.9 percent from March 2010. The median sales price of new houses sold in March 2011 was $213,800; the average sales price was $246,800.
According to the US Census Bureau, the average size of a new US home built in 2006 was 2,469 square feet.
The average floor space of a new UK home (includes houses as well as flats) is just 818 sf; Ireland is 900sf; Denmark is highest with 1,475 sft and Greece comes second with 1,361sf. In France, it is more than 1,200sft with 3 times Ireland’s level of urbanisation.
@ Robert Browne
In full agreement with all you say – including comments re the system not being worth saving.
Can we stand back for a moment, please? A residential dwelling unit provides a flow of housing services. In a properly functioning economy these services must be avaialble to all citizens and residents at affordable prices. Any effective development in policy must seek to limit the dominance of the ownership of residential property as an investment opportunity over the basic and essential requirement to provide a flow of housing services.
Many moons ago (6 Dec. 2005) when I made a submission to the then Oireachtas Cttee on Communications, Marine and Natural Resources on energy policy and regulation
I argued the case for privatising these businesses (in particular, the network components) as a means of diversifying investment portfolios away from the one-eyed focus on property:
“…it is now time for a properly regulated private sector to have an opportunity to invest in these business. I have been led to believe that there is a considerable amount of investment and pension funds available. These are probably flowing into the construction and property markets and creating bubbles therein. It would make much more sense to have some of that private sector investment channelled into network industries in Ireland.”
Not seeking to be wise after the event, but we need to shift the thinking.
Over the next few years the 10-year interest only mortgages favoured by many buy-to-let investors will end and payments of interest plus capital will commence – unless the banks have other plans. Those who expected to cash in on property appreciation will be disappointed. Marrying this unpleasant reality with existing vacant house stock can only produce more price instability in my opinion. How can prices not fall further in this scenario? And while The Irish Times likes to cheerlead on high end sales in Ailsbury and Shrewsbury, the reality is that the rest of the country is not D4.
The cult of property investment is a huge handicap. Irish people have unrealistic expectations about property. I thought this FT snippet was interesting.
“the fact that long-term house prices tend to track general consumer price inflation, so ultimately offer little real appreciation, is not something often heard from estate agents.”
In the EZ with price inflation the focus, there isn’t going to be any long term real appreciation of prices, once some kind of stability is reached.
Where does Martin get his figures from? A Census-weighted average of asking prices for early 2011 has the average price at €210,000 and that will probably be €200,000 for Q2 2011, when he was writing. This is a big difference from the €250,000 he uses, particularly if he believes his €180,000 “target”… and as asking prices they are surely an upper bound.
What would have been more instructive is doing his analysis using the data from the Allsop’s sale. I wrote a lot-by-lot analysis on my own blog (http://www.ronanlyons.com/2011/04/17/what-the-friday-firesale-tells-us-about-irelands-property-market/). I found that prices achieved were about 65% below the peak and up to 30% below prevailing asking prices.
Three other comments on the dangers of becoming overly focused on one statistic or ratio:
(1) National averages hide the very different conditions currently prevailing in different parts of the market. We will probably see some regional property markets thriving (in a transactions sense) at the same time others still languish.
(2) I am as big a fan of yields for a measure of property market equilibrium as anyone. But I would be wary of assuming that one yield fits all properties. Whatever the reasons (actually part of the research I’m now doing), higher bedroom homes have lower yields. We may find equilibrium yields for large family homes remain puzzlingly low.
(3) Whatever about international comparisons, historical comparisons based on price-income ratios will be misleading in an economy where tht typical household has moved from 1.3 earners to 1.6 earners over the past generation and where lending is based on household income, not individual income.
@ BO’H: “But there must be some system, whereby people may own a share of a property (something more substantial and larger than a house), and not have one’s share made smaller over time, by the influx of silly money.”
There is indeed Brian. A metal standard (silver?). But we sure a’int going there anytime soon. The FIRE will ensure that. The FIRE is holding our legislator’s testicles – and when you hold a man’s testicles … his mind and heart follow! Now if the majority of our pols were of an alternative gender …. ??
Most of the commentators on this site know whom, why and what caused our current financial and economic catastrophe. Now its time for something different. Its time to get rough with the politicians. No (meaningful) political reform ensures that BAU will continue (it never stopped, nor hardly paused!). Its that simple. No reforms, no change.
Local Gov is a total shambles (for a modern – slightly democratic, state). You cannot, will not, reform LG without serious, significant and meaningful reform at the national gov level. The significant Oireachteas, executive and parliamentary reforms we desperately need are only likely if the current financial and economic situation deteriorates to the point that the citizens go out on the streets with pots and pans and force the situation toward reform. Otherwise? Go back to bed! I’d still buy a few pots ‘n pans though!
As for res property prices (and values). How about a little morality?. How about a modicum of prudent risk management? Occam’s Razor anyone? Funny how the (relatively) simple tried-and-tested processes get side-lined. Its back to politics again I’m afraid!
“On the narrow point about CAT bands, they had in effect tightened considerably over the years before 1999 when they were reorganised.”
Fair enough; I only returned in 2000 – even then (before they were expanded again) I was astonished at the free interspousal transfers and the large allowance to each child (not just a lump sum allowance to be divided individually, but an individual allowance).
Contrast with the UK: http://www.hmrc.gov.uk/inheritancetax/intro/basics.htm
Never mind the difference in rates. Still, they’re a monarchy and we’re a republic…
In a recent piece, some collaborators and myself found that the probability of a house price slump bottoming out is well explained statistically by 5 variables:
The size of the previous bubble (off the chart)
GDP growth (promises to be anaemic for some time to come)
interest rates (going up)
the growth in private credit (the banks are still deleveraging)
the cumulative fall in house prices to date.
The last is the only variable helping to bring about an eventual bottoming out of the market. So, if the government wants the market to stabilize/bottom out, it should not interfere with falling house prices.
David Norris in the Radio 4 programme put Ireland’s situation in a nutshell when he commented that the events leading up to the bailout revealed “the intellectual and political vacuum at the heart of the Irish establishment”.
Grumpy puts the choices now facing the country rather well and I would be inclined to share his pessimism as to which one will be made.
However, the two articles by Martin Walsh go some way towards filling the vacuum to which David Norris refers. This is more than be said, for example, of the debate running on another thread of the merits of the new supposed groupthink as opposed to the old.
Groupthink is not the problem but national myopia. (If there can be any doubt in this matter, I suggest listening to the podcast of the Marian Finucane show for Easter Sunday and the comments in respect of the Eu/IMF 67 billion euro “not being a big number for them” i.e. a reference, one would presume, to our fairy godmother(s) in Europe and elsewhere, who should have just added it to the numbers they were accepting nationally with regard to bailing out their own banks).
If this national myopia is to be overcome, the country has to put on its glasses, look at its real situation in the context of the federal European enterprise which it has chosen to join – the euro – from which it cannot withdraw without risking catastrophic consequences for the economy.
It is gratifying, in particular, to note that the focus of the government’s “diplomatic onslaught” has seemingly shifted from explaining Ireland’s position to Europe (they understand it only too well) to the much more pressing need of explaining Europe to Ireland.
A lot is happening in Europe and internationally in the financial area as a recent paper by Karel Lannoo, the head of CEPS, explains.
If Paul De Grauwe is right in his analysis (cf. link below), there is a design flaw at the heart of the euro which may cause it to fall apart. Put simply, he suggests that membership of the euro puts countries that have to borrow on the markets (i.e. all member countries other than the limited number with a major creditor status and could choose not to), as the euro is presently constructed, in the same position as emerging economies that have to borrow in foreign currencies. I do not know how true this is but, in the absence of a single euro bond market which draws on the collective credit of all participants rather than the CDO structure of the present EFSF, it seems to be borne out by the facts on the ground viz. that of imposing drastic internal devaluations on the poorest boys in the class.
For ease of reference, two links, the first to the letter to the Financial Times some months ago in relation to the EFSF by its head, Klaus Regling, and the second to the article by De Grauwe.
There is an interesting comment at page 8 of the Lannoo paper;
“However, it is not through launching attacks against Credit Rating Agencies that the situation will improve, as some policy makers have done, but rather, as the US did with Dodd-Frank, to abolish reference to ratings in regulation”.
Perhaps a reason for the difference is that rental property might be of a lower quality than owner-occupied property. There may be some sorting going on.
I’ve no idea if its true, just a suggestion.
Prof. Robert Shiller has produced an index which shows that in real terms, prices for US homes changed very little over the period from the 1890 to the mid-1990s.
IMF research has shown that after peaks and troughs, the real price of a particular house in Amsterdam, only doubled in 350 years:
The cult of property investment may be cured if tenant rights are reinforced, it’s no accident that Germans/ French are prepared to rent long term whereas it is an aberration in Ireland (unless you are on the economic bottom rung). Maybe the promised Landlord Tenant act may advance the situation.
So far the only reform that has taken place was the Gormley’s Planning Act (that Phil Hogan apparently needs to ‘review’).
The political practices that kept us mired in poverty for over fifty years are still alive and well. EU membership gave us a twenty year reprieve as we adapted to prevailing practices within the Union. I see moves like reduction of the minimum wage rescinded, six hundred primary schools with under 50 enrollment slated for closure and now the Minister is making speeches saying they are exempt. Quangos thriving at taxpayer expense despite the election promises that they would be culled. Exorbitant severance packages and pensions still being paid at taxpayer expense. The politicians sitting on their hands whining that their hands are tied. Their brains are addled and as long as the taxpayers pay the idiocy will not stop.
Propping up property prices guarantees twenty years of stagnation a la Japan. Politically profitable in the short run but disastrous for the economy in the medium to long term.
The uncomfortable decisions are not being implemented as the politicians wait for outside intervention so as they can say “The ABC or XYZ made us do it. Much like Lenihan and the FF crew throwing mud at the ECB and Asmussen, asininity run amok.
Ireland is becoming a sad joke, saddled with sad sack leadership.
I agree that the government has no business controlling the price of housing, but I think you’re going a tad overboard saying that bankers, landlords and the property industry are parasites. All three are essential to the economy. If you’d like to live somewhere, you’ll need the property industry to produce housing. If you’d like to buy that place, you’ll need a banker to give you a loan. If you’d like to rent it, you’ll need a landlord to rent it to you. The only problem with the three is that we’ve apparently not got the best of them in Ireland…
‘…If you want to reduce mortgages without having the taxpayer shoulder the burden, it’s quite simple. Let whoever holds the debt upstream now, and more fool them for taking it on, take a haircut, and reduce mortgage amounts outstanding commensurately. Adjust such legislation as needs adjusting as far as equivalence between senior bonds and depositors go, and to hell with the putative vulture funds, time for an education in the dictionary definition of “sovereign”.
I agree this sounds a very reasonable route to take however any idea on the size of the write down on average this would/could generate and would it be enough to bring mortgage debts back in line with house valuations considering the fact that in my view 66% PTT falls are the minimum falls required to have the 7% long term rental yield relationship restored (taking on board Ronan Lyons’ view above that one yield does not fit all house types into account).
I should add, in case there is a view that my comment above is rather off topic, that it is, in fact, very much related to the issue of property prices in Ireland. The choice of economic model for Ireland is between the Anglo-Saxon (UK & US or Boston model) and the Schwabian (or Berlin) one and membership of the euro dictates that the choice for Ireland be the second. The differences between the two models are enormous, especially the attitude to credit i.e. debt. This is reflected in the structure of housing finance and the attitude to housing in general. There is no indication whatsoever that official thinking is even aware of the choice to be made not to mind considering how to go about making it.
At the bottom of page 2 of the Lannoo paper, reference will be found to the fact that the new supervisory agencies cannot take decisions that “impinge on the fiscal responsibilities” of the Member States. This reflects the jealously guarded sovereignty in tax matters of the member states, Germany, France and the UK being well to the fore in this regard. This does not, of course, stop the first two (with some tacit acquiescence from the third) in some arm-twisting of Ireland with regard to corporation tax. It is this sort of intergovernmental behaviour, mixing unrelated policy issues and implying a different law for the big (and rich, at least for the time being) countries and the rest, which is by far the biggest risk not alone to the future of the euro but to the European project in its entirety.
As to which school of groupthink is dominant at any one time in Ireland, the reality is that the standing of the economic debate in Ireland is not such as would make anyone outside Ireland really care. The only way to correct this is to change the nature of the debate and to insert it in its wider European context.
@ Michael Hennigan
Lex covered this a while ago
“Real Norwegian house prices declined for the first half of the 20th century, recovered to their 1900 level shortly before the millennium, then continued higher in the global boom.
In Amsterdam, the banks of the Herengracht canal have supported high-quality property since the 17th century. Again prices have fluctuated, but values expressed in real guilders were the same in the 1770s, 1870s and 1970s. “
Thanks for that, that is certainly one explanation. Hopefully, controlling for quality (e.g. size, BER, etc) and amenities (a list as long as a long arm!), the extent of the difference due to other factors should be evident. Ultimately, it may come down to buyers factoring in a greater range of amenities in the price than renters do in the yield, due to search costs in the property market.
The blog Calculated Risk today provides an analytical approach to US housing prices below:
Can anyone think of a single reason why Dublin shouldn’t have the cheapest property prices of any EU capital city?
I sure as hell can’t.
@ Ronan L
Are you familiar with the Mortensen Pissarides labour matching model? I used it for my PhD thesis on labour issues, and is fairly standard in labour economics. Its meant for labour markets, but I think it could be easily adapted to housing. Eg, instead of unemployment you have vacant houses.
We just don’t know what the true price is given the distortions of obscene credit growth over the decades.
I would suggest a divorce of term accounts from their shadow assets , leaving the bonds to consummate with their concubines – the conversion of these term deposits to goverment money , some sort of trade barrier to outside credit at least until cash buyers in this juristiction can determine the true price of these assets.
And soon we can forget about the horror of balance sheet recessions as they are the offspring of credit monsters and have little to do with the real physical economy other then episodes of Titanic malinvestment orgys.
Over 40% of the Irish population live in a house without a mortgage compared with about 13% in Sweden and 9% in the Netherlands.
Eurostat reported today that Sweden had a 0% deficit/surplus in 2010 and a public debt to GDP ratio of 39.9%; the Netherlands had the lowest unemployment rate in Feb at 4.5%
Not directly related to first point but impressive.
However, does it suggest a good capacity for an Irish property tax?
@ Jake Watts
When 40% of existing home sales are forced sales, there is a problem.
Supply of new homes is at the 1967 level.
Yes, there’s a bit of exciting work being done at the moment incorporating search costs into the property market. (Pissarides’ colleague Rachel Ngai has work on hot and cold seasons, for example: http://econ.lse.ac.uk/staff/rngai/index_own.html)
I’m still about six months shy of that stage yet – have to get my first paper done – but I am (nerdily) looking forward to getting to that part!
The reduction in the minimum wage was an act of utter brainlessness, counterproductive in terms of both the demand side (because small businesses mostly sell to the domestic market, and the individual benefits would be swamped by the collective loss) and the supply side (because it acted as a disincentive to get work instead of staying on social welfare).
Oh, and it was bad for the exchequer as well.
On the issue of rental yields on larger homes, my pet hypothesis is that a lot of the supply at this level is driven by property owners finding they have an empty home on their hands that they don’t want to sell for reasons that may not be primarily commercial. This generates an oversupply in this section of the market, and also leads to the sort of quality problem that Rory suggests. An old family home tarted up a bit is less likely to be in good condition than the modern home bought for rental that dominates the smaller end of the market.
What an excellent question.
The answer. That other celebrity got it right. First we get the bank bailout, then the Irish elite bailout, then the Euro bank bailout, .
All three have a keen interest in keeping Irish property prices high. To the detriment of the vast majority of Irish citizens, particularly the younger generation.
The sow that eats its own farrow.
‘Grumpy puts the choices now facing the country rather well and I would be inclined to share his pessimism as to which one will be made’
Indeed he does. Our complacent elite will be tempted to make the worst choice. As you rightly reiterate, however, we elected to join the EC, which has consequences. One of them might be an obligation to work our options through a bit more clearly. Less bluffing, wangling and posing hopefully.
Many thanks for the Lannoo paper.
@ Celebrity Economist
Our high wages?
PS Is that you Brian?..
As Kevin O’Rourke points out, low prices are primiarily about low credit availability, we mostly buy property with borrowed money after all, obviously a reasonably high level of supply, interest rates, unemployment, immigration and national uneconomic uncertainity doesn’t help.
Nor does withholding supply (NAMA), in fact it makes it worse, the longer the correction is dragged out the worse it is for long term values.
Though I think you’re all forgetting the ‘Bull McCabe’ factor. We have a lot of one dimensional investores in this country, absolutely obsessed with property, an obsession which for a time appeared to be a choice but for many now has becoming a kind of desperation.
You could see a micro cosum of all that is wrong down in the Shelbourne the week before last. There was a general sense of mayhem outside before the thing began, people afraid to be left behind, Joe O’Shea was doing a piece on the steps for RTE asking rhetorical questions like ‘Is this the start of the next boom’.
As the place got packed, and queues formed outside, Space, the Irish estate agents were letting buddies (in suits) that arrived late, in. Which of course infuriated the average punter that was being asked for a passport and a cheque book, or simply being told the place was too full.
Lot number 9 (I think) was sold from outside the Shelbourne on the street, the first time ever according to the auctioneer, something he repeated when the auction had to be stoped for 10 minutes because the gardai showed up concered about the mob that had gathered outside. At one point a girl next to me explained her horror at realizing just how much negative equity she is in, the look on her face was hauntng, but ‘she needed to know’.
Most were cash buyers and Irish men, 80% (apparently).
I will go out on a limb here and guess most buyers think that this is like any other slump, most don’t realise that the ‘cuts’ so far have been hysteria not austerity, most believe Germany will eventually take the hit and the music will start again for the professional/developer class in Dublin, most know nothing of economics, most believe prices/yields are fantastic, a lot have been preprogrammed by a decade and a half of price rises and have grown up with phrases like ‘rent is dead money’ and ‘there not making land anymore’ ringing in their ears.
I would bet we have a higher than average level of rent seeker, wealth to IQ level and cute whorism in this economy too, not to mention low levels of creativity.
When it doesn’t suit the powers that be, considered opinion is dismissed as a lack of patriotism. Perhaps it’s down to Ireland being the biggest village in the world or the leaving cert, after all, aside from footballers, celebrities and movie stars our children (under our direction) want to be lawyers, docters, fund managers and accountants not entrepenuers, engineers, teachers, scientists and programmers. Who could blame them (or us) it’s been a great life so far for all those professions. Besides our society doesn’t exactly reward creativity, intelligence or reasoned opinion, in fact it laughs about them with the lads down the pub while buying everyone a round and talking about what yacht their going to buy wuth their pension.
Sorry for the spelling mistakes people.
Because it has the most overpaid property and legal industry professionals in the world of course.
I note Martin Walsh uses a 3% real interest rate, based on “UK long term risk free real interest rates … over the last three centuries”.
But assets are priced based on current forward interest rates, not long term averages. Long term risk free real interest rates for the EZ are currently around 1.3% (e.g. France’s 2020 OAT€i). If he had used this number instead, he would calculate an economic value of 27 times rent, on which basis house prices (on his numbers) are now below economic value…
So (i) small changes to the inputs make big changes to the conclusion; and (ii) there is a plausible economic argument that house prices have already corrected to their fundamental level (although they may well continue to overshoot on the downside).
“..But assets are priced based on current forward interest rates, not long term averages..”
Not so sure this tallies with mean reversion beliefs.
In most cases it makes more sense to look at the risk premium over the long bond yield as a guide to where risky asset returns should/will average into the future.
In Irelands case (not EZ) the work done at Credit Suisse they would suggest that over the long term the risk premium attached to equity type investments is 2.9% above Govt Bonds.
Long run returns on Irish Govt bonds in Ireland have averaged 5.2% Nominal and 0.9% real since 1900.
So real equity long term returns should average 3.8%.
We know that property type investments should command higher returns due to increased illiquidity and market risk (as current experience testifies) so take your pick but an additional 1% to 2% over and above 3.8% sounds reasonable to me leaving a long run real return of 4.8% to 5.3% – say 5% which leaves a multiple of 20 times.
This differs somewhat however from evidence on the ground which indicates long run averages slightly above 7% – a multiple of c14 times.
The problem with this type of analysis is that more recent averages give a very different picture. Since 1986 equity risk premiums have been 0.5% over bonds in Ireland and over the last decade they have been -6.2% suggesting that equity type investments at the market level have given investors very poor risk adjusted returns against ‘risk free’ alternatives.
The issue now of course is that the ‘risk free’ alternatives being Irish Govt bonds are anything but risk free – default talk is now being reflected in expected risk and related returns with the 10 year now at 10.63% today.
So at todays levels and applying long run equity risk premiums over long run bond returns would suggest risk returns today at 2.9% + 10.63% = 13.53%, add an additional 1% to 2% to account for illiquidity and market risk it really suggests property returns closer to 15% i.e. multiples of 6.6 times rent.
So your final comment is correct changes in inputs can have dramatic effects on outcomes however no analysis would suggest to me that multiples above long run averages of 14 times witnessed in the market over the longer term are a place investors should really really ever venture.
Which is why banks which lent money at the top of the market at multiples of close to 100 times rent looks completely off the wall.
@ Ronan L
thanks for the link
Supporting things physical needs a physical thing: lintel => acrojack. Res property prices are? Now there’s a question – virtual values or real prices? I strongly suspect the former. The latter (if known and incorporated) might cause a significant level of bowel discomfiture.
Real res property prices are supported by –
1. Real incomes – nett of taxes and levies and property taxes, real interest rate, etc. … (fill in any gaps).
2. Real demand: Appropriate size for number of residents, location close to work, schools, etc. …..
3. Real cash savings to pay the deposit and transaction costs of sale of your existing, and/or purchase of property. Depends whether you are a current owner or not.
4. Real credit availability – in a strongly, tightly regulated market with real Due Diligence processes. No funny stuff with loans, appraisals, incomes for res properties. That’s what got us into the present mess. A massive +325% Bubble!
5. Real Register of Res Property salses/purchases – the value of the transaction cost paid to Registrar and full disclosure of property details (nature, location). No ‘ifs’, ‘buts’ or ‘exceptions’ on this one. Else you still have a virtual market.
Very quick check. Cui Bono on these? Non-bono?
You will only get a ‘real price’ market, when all details are available for – Open Viewing – (sorry about the Freudian!).
Back to politics again. That’s where it has to start. No real reform movements in Leinster House; then its no change! Because if the ‘reform’ would result in a dramatic decline in res property virtual values – to the real price level, that would be follow through to a loss of a lot of votes – from those that do the voting that is. The INHS (household survey) is most enlightening on this question of ‘who’ votes. Clue: they are not the ‘houseless’.
Another consideration for the government would be a possible property tax. In Sweden we used to have a property tax based on the property value (price). High property value -> High property tax. If a similar model were to be implemented in Ireland then maybe rising property prices would not always be welcomed by the general population.
How is it going with the property database? I’m sceptical about claiming the bottom has been reached as there are no definite numbers on the supply side & on the demand side I’d wait for the result of the census.
A substantial property tax would have been an excellent idea before or during the boom. As things stand it might just kick a bunch of people into default on their mortgages.
Kevin Walsh says,
It is not only the market participants known as punters or buyers, or purchasers of residential property – who we have to consider carefully – in how we design taxation, how we design standards to be achieved – and the timing for bringing in these schemes and policies. I wrote a blog entry a while ago, to try and convince the community here at Irish Economy blog, what I am talking about. See link below. BOH.
@ Kevin Walsh
Domestic demand and supply is the least of our worries as we already experienced decades of poverty based on a fixation with domestic supply and demand. Prosperity for Ireland and the whole of Western Europe depends on high value exports which in turn are dependent on a well educated and trained, cost competitive work force. Taking in each others washing, trading potatoes and turf amongst ourselves, building houses for each other never got us out of poverty. Exports of goods and services was our recent salvation thanks to the EU. We then blew a property bubble which sucked in 15% to 20% of the work force and paid inflated wages. We should thank AI, Bertie and the FF crew, twas great craic while it lasted. As wages rose manufacturing hollowed out, export oriented services weakened. Then building collapsed and we are headed back to a domestic supply and demand scenario that we are only too familiar with and that is little demand matched by little supply.
So we now have a number of idee fixe amongst them high minimum wages, 600 primary schools with 50 or fewer enrollment, a public service wage structure that is unaffordable, quangos galore to provide jobs for the girls and boys and on and on. All untouchable which would be fine if all of Western Europe was equeally dysfunctional. We have deficits increasing monthly, debt increasing monthly and a gov’t that is singing from the hymn book ” Let us dig a hole that it will take us fifty years to get out of”.
In the light of the 40% of homes with no mortgages, lets think about that.
That leaves about 60% with mortgages. Lets assume about 20% of these are in difficulty. That is about 12% of the total houses.
Ergo about 88% of homes paying. Lets say minimum 80% collected.
If part of the property tax were used to buy equity in the houses that are not paying mortgages, then one would also create a small potential long term rental income from those houses.
If you export somebody else must consume – trade is net neutral.
If I export my wealth I get poorer , if I consume my wealth I get poorer.
We need to divorce the concept of wealth with exports and /or consumption.
We need the above for revenue but by themselves they do not create wealth.
In essence how can we improve domestic wealth is the question we should be asking ourselfs not how to beat some false metric dreamt up by some Dork in a suit.
@ MH: I endorse comments by DofC.
Big, like a really very big problem with ‘exports’ is that Chindia – with their multiple millions of ‘workers’, has us (developed economies) by the manufacturing testicles. Supply and Demand and all that jazz. Millions of new labour entrants => lower pay => cheap (shoody) goods! So we cannot compete any more, except with stuff where we have a Comparative Advantage (as they say!) – like agri products. That’s down on the farm, low wage stuff. Who want’s to go there then? Not I!!!
We have lots of ‘unemployed’ folk (mostly in the wrong locations!) but we need to use this factor intensively. Have to ‘de-centralise’ the population – not the civil servants! That’s politics. Not economics. Next!
A property tax is a salient issue – but completely off target. What do you need to pay a tax? Oh! Yes, that would be an income. So where does your income come from? Renting your own home to yourself? Some reality please.
What you could use is a Land Tax – based on actual use. But this still leaves the income issue un-resolved.
Basically, what we need is a fundamental re-drafting of our taxation (and our spending!). Its our spending bit that needs curbing. Once we get control of spending, then we can sort out the taxation issue. Its all down to politics – again, and again.
Who trusts our politicians? Not many it seems.
The credit bubble of the 80s , 90s and 00s built China and indeed Asia , Japan being the prototype
It was designed that way back in the early 70s – the CBs clients got burned in the 50s and 60s when they produced credit but was absorbed by workers pay rather then debt.
Volcker and particullary Greenspan oversaw a massive increase in derivatives so that workers could be bypassed by the markets directly as then the markets could benefit from both wage deflation and yet continue to benefit from demand – yielding both sides of the income stream.
This was at the core of the equities / bank explosion of the 80s and 90s
The problem is the global supply chain built up during this period is inherently inefficient as it is based on a falsehood built on a lie.
There is no real physical reason why the great lakes has little heavy Industry now while China with less physical advantages has growing Industry.
The entire trade matrix has been screwed up by a grossly overvalued dollar.
What happens to Ireland now I have no idea as our industrial policey has been based on feeding off the scraps of this mutant trade – (we had no choice)
Perhaps we will find employment as Asian industry begins to die from lack of external demand.
Remember the dollar has been blowing bubbles since WW II – its just meet a little problem now as the globe is a sphere and therefore the problems have come full circle.
With credit dying and goverment money replacing it at least in the States we may heal slowly from this debacle ……. I hope.
The Euro masters however want to have private money replace goverment money.
If the Euro CBs want this they better start buying the stuff as there is not enough money in the Euro system at present to pay the debts, creating economic havoc.
I posted this earlier but it seems that it got lost during the website 3-day Easter break. You have an error somewhere in your data for long-term EZ interest rates. Go to the ECB website which gives the forward curve for EZ AAA-rated government debt securities. Instantaneous forward rates max at about 4.54% at the ten-year horizon and then decline slightly to approximately 4% at the longest end.
Martin Walsh has written a great informative and well researched article article but unfortunately (IMHO) it loses merit with the following sentence:
“From 1953-1996 (i.e before the bubble) the average of ratio of price of new houses in Dublin to average industrial earnings was 5.3. That is also where it was in 1996. In 2006 it reached 13.7 and by 2010 it had fallen back to 7.4”.
Consequentle we may be looking at a reverse mirror image of the gambling we saw in the years prior to 2007 by betting that prices have further to fall.. Here are some reasons which incline me to think this way:
1) IMHO 1953-1996 is a very “long window” and does not isolate the “boom” of the 1970`s.
2) During the 1950ś and 1960ś the population was regularly declining with a consequent effect on housing demand.
3)I was quite surprised recently to discover that a number of houses which I consider to be in upper middle class areas of Dublin were actually originally “council houses” in 1950ś and 1960`s which would mean that a ratio of the price of these houses can not be applied to “average industrial earnings”.
4)Net take home income as a percentage of salary in 1996 (i.e money left in ones pocket after income tax) was less than in 2010.
5)Interest rates in 1996 were higher than they have ever been at any time since 1999.
6)There is greater participation by women in the workforce than at any time between 1953-1996 which has had a consequent effect on “average house hold income”.
7) Everyday items such as cars, telephones, electronic household items are more affordable than they ever were between 1953 and 1996 which also has a consequent effect on overall housing costs.
8) The trafffic conjestion, scarcity of available construnction space , urban sprawl, distance from services/wok etc in Dublin of 2011 has more in common with cities like New York and London of the late 1980`s than the Dublin of 20 years ago. Back then I coul easily park at night in central Dublin and did not consider a 15 minute drive to work withiin Dublin city during rush hour to be excessively quick. However whenever I was in New York or London I found commuting (by public transport) to be extremely stressful and time consuming.
9) Housing laws (i.e energy certificates, insulation etc) in recent years mean that the quality of an “average house” is different than the “average house” for most of the period referred to in the article.
10)Housing expectations : people expect a lot more from an “average house” than they did in previous generations.
11)Supply and demand . 2010 was a brutal economic year and I have no doubt that history will reveal that Irish people are now less anxious than they were in 2010. After all 1993 was the start of the Celtic Tiger but how many of us knew that at the time?Therefore if “ratios” of 7.4 were paid for “average houses” in Dublin during the economic climate of 2010 which also offered a lot of choice to buyers it is hard to assume that those “ratios” were excessive.
However, despite writing these counter arguments, I have no wish to diminish the entire article which I am glad I took the time to read. It appears to have been well researched, and I found it very informative.
“IMF research has shown that after peaks and troughs the real price of a particular house in Amsterdam only doubled in 350 years”
I wonder if the “real price” increase in Amsterdam was due to changes in population density, improved quality of house (eg indoor plumbing, electricity,acceptable square meter living space per person etc) or a combination of both.
“In Sweden we used to have a property tax based on the property value (price)”
It would be interesting to discover if this property tax was introduced before or after (possibly because of?) the banking collapse 20 years ago which I understand also followed a real estate bubble in the 1980`s.
@Levonian: “Martin Walsh has written a great informative and well researched article article”.
I beg to differ on this. My un-censored opinion; Crapola. It omits the most important and significant detail – information on the lending policies, agreed by senior management and board level personnel of the financial institutions that were actually lending into the res property mortgage market. These need to be published – un-redacted! How about the property appraisals as well? Who paid for those?
What is also required is a forensic examination of a random sample of complete sets of mortgage origination documentations (1000?) from each of the res property lending institutions to establish how they decided on the amounts, and nature of the mortgage loans they gave out. Wonder if there are two sets of signatures on those docs: lender’s and purchaser’s. Takes two. What would that indicate?
We know what caused the 325% bubble in Irish res property. Sheer incompetence, reckless pursuit of ‘market share’, complete disregard for credit risk, a ‘blind’ regulator, a deplorable lack of political scutiny and oversight – and of course “Irrational Exuberance” on the part of the dopey borrowers. Reminds me of the Keystone Cops. Only its not at all funny. Its an unmitigated social, political and financial disaster of heroic proportions.
The last thing we need right now are more ‘legends’. We (the taxpayers and other citizens of this state) need to be told the truth about our 1996 – 2000 and 2002 – 2006 massive res property Ponzi scheme. Who benefitted – and how? We know who is paying though. But why?
This disgraceful episode has some distance to go yet.
the old property tax was introduced in 1984, the change from its predecessor was that the central state instead of the kommun (city) received the taxes and set a uniform level across Sweden.
About the bubble in Sweden in the early 90s:
The property tax might have held down some of the property price increases but…. In November 1985 a limit on the amounts banks were allowed to lend was removed. What happened was more or less the same as in Ireland: A lot of money was lent out & towards the end of the bubble the rent from the properties could not service the loans – the expected increase in the value of the property had been used to justify the approval of the loan.
The bubble burst for a couple of reasons. What is certain is that in a tax-reform in 1990/1991 the allowable tax-deduction for interest paid halved. This can possibly be seen as either:
-bursting the bubble earlier and therefore a reduced cost
-causing a bigger price-fall when the bubble burst and therefore an increased cost
Or possibly having no effect, all bubbles burst so it might just have been a coincidence.
The tax-reform in 1990/1991 was substantial (income taxes, VAT, etc were all changed) so if the reform affected the property market/bubble then it might be that the impact was not foreseen.
Btw, the property tax has now been removed. Instead there is now a property fee. The difference is that the fee is capped & the tax was not. One of the committees that evaluated the new law before passing it on to the parliament actually said that it might more accurately be described as a tax, but as an election had been won on (among other things) the removal of the property tax it is since 2007 known as the property fee.
@ Gregory Connor
I think you’re looking at nominal rates. Real rates are about 2.5% (inflation expectation) lower.
Martin Walsh implicitly assumes that rents grow in line with inflation (which is arguably a tad conservative).
Curiously what his doesn’t tell you is just how low the industrial wage was in Dublin during the early period compared to the public sector wage. In Clontarf or Rathmines in the early to mid 60s, a decent house cost in the region of £3,600.
@ DOC & BW
A hard unforgiving look at the history of Ireland leads to unflattering findings. Raiding for slaves on nearby coasts was one of our early successful endeavours. The Vikings took over that business and shipped tens of thousands of Irish, Welsh, Scots and English to the Arab empire. This was our first big export and transhipment business. Tens of thousands Irishmen volunteered to fight for the Swedes, French and others in the centuries prior to the famine. The biggest export boom (emigrants) before or since occurred during the Famine. This was followed by a steady stream of emigrants with the mid fifties rate over 50,000 per year . The emigration rate is now near the 1950s’ rate which was considered to be a disaster at the time. In practice our reliable comparative advantage was and is able bodied men and women. This is a disgraceful state of affairs that would not be acceptable in any self respecting country.
Japan is a country much like Ireland in that it is meagerly endowed with natural resources. Japan has a high standard of living and rarely during its long history were its people forced to emigrate. Japan did have famines and civil wars but these were managed intelligently and did not lead to an exodus or death rates as high as we had in Ireland. Japan continues to prosper based on its well educated and trained workforce and competent government that ensures the workforce is cost competitive.
In Ireland we have to accept that it is essential that we have a well educated, trained and cost competitive workforce. Competent government is crucial since we do not have the choice of closing our borders to the rest of the world. We did that with disastrous results from 1932 to 1973. The EU saved us from ourselves but even the EU could not save us from incompetent government. We got the gov’t we voted for so we are all equeal opportunity fantasists with visions of rewards from cronyism, nepotism, fraud and corruption permeating our delusions.
India is a country that could never be understood by foreigners. From what I have been exposed to I have deduced that there are three (there are actually hundreds) categories 50 to 100 million living a developed country life style, three hundred million living in abject poverty with children going hungry and growing up mentally and physically crippled, with the rest living in poverty by developed country standards. The Indian middle class today have a lifestyle similar to the Irish in the 1950s. India is not a fearsome competitor.
China is a fearsome competitor but not for long, China is rapidly moving upmarket and will be importing low value products within a decade. Internal consumption and a high income work force will result in China becoming the Germany/Japan of the world shortly after 2020.
I ask you does this mean we should go back to cutting turf; growing cabbage, potatoes, oats and barley, building the Irish car and meeting the rest of our manufactured good needs from handymen and arts and crafts operatives.
The 70 to 80 million Irish around the world are competing very well and not afraid of the competition. Only in Ireland do we have low expectations of ourselves, our government and the big sprawling, bawling untamed world out there. We produced a lot of hermits, usually holy men over the centuries, let us not turn the country into a refuge for people who have difficulty with reality.
@ MH: Thanks for your thoughtful, and very informative comment. Enlightnment is always to be welcomed – even if the facts be a tad difficult to accept.
The question you pose (implicity) is what is our ‘problem’? I have no idea. It probably has no single answer, its to complex. But there should be some clues. Demograpics? Possibly, but hardly a clinching reason. An adjacent Island, with a long history of political and commercial interaction? There must be something there. Left as a backwater by industrial developments elsewhere and open exits to the most rapidly growing economies of the times? Our ‘education’ system? Joe Lee wrote about our ‘development’ following our ‘independence’. Pretty depressing reading. Need to get a historian on the job.
Japan: There be dragons. Their simultaneous and parallel levels of social sophistication and military savagery were well known. They are (still) a deeply xenophobic nation.
China: A dangerous mercantalist state. It has a doomed future, too many folk and a shortage of resources. It is probably going to go the way you described for India (very depressing).
Ireland is a state too, we ceased being a nation a long while back. Small number of folk. Limited energy resources and lots of land and potable water (if the agri sector would only ease off on the fertilizer and E coli). If your figures on the numbers of Irish-connected ex-pats is correct – then we have done well. In a relative sense, since that is how the econs describe trade: relative this v relative that.
“…let us not turn the country into a refuge for people who have difficulty with reality.”
I think we may have achieved this objective. The Irish do not lack enthusiasm, drive or ability. Its something else. Thanks again for the interesting comment. Lots to think about there.
People who do not have a difficulty with reality do not understand reality, they understand a reality
The world is both a sophisticated and unsophisticated place.
I generally aim to counter the morality tales used to explain the crisis as our betters use Pavlov dog techniques to cage the Irish animals in a box.
But what if the dog became selfaware ?
A) Talk bout history repeating itself! Increase in Swedish bank lending in 1985 compared with increase in bank lending wihin Ireland from 2005. Also the differing opinions over the effect of tax changes in 1990/91 bears an uncanny resemblance to the Irish coalition row over stamp duty in 2006/2007.
B)I hope the new Irish finance minister has a direct phoneline to Stockholm and if so it is tempting to speculate about what unofficial opinions he is receiving regarding Irelandś continued membership of the Euro and the best way forward in this banking crisis.
I remember the discussion you and I had about the pros and cons of Euro membership exactly two years ago when we were in another country which has since joined the Euro. I am still hopeful (but no longer as confident) that the ECB will “cop itself on” by federalizing European bank debt. If the ECB does not, I hope the Irish Government knows where the lifeboats are situated before MV Euro keels over.
the guy who dealt with the Swedish property crisis was in Ireland in the early days of the crisis, the previous government listened to him but they decided to ‘improve’ on how to deal with the aftermath of a property-bubble. So they’ve had the benefit of his experience. Personally I wouldn’t ask the current Swedish government for economic advise:
Parts of the Swedish economy are booming, the budget is close to balancing and there might even be some surplus. That is all good except for some problems with the infrastructure, believe it or not but Sweden has been surprised by it being cold and snowing during the winter…..
The government now has a choice between increasing the spend on maintenance of the current infrastructure combined with investment in improved infrastructure or lowering the taxes. One of the options is good for re-election, the other might be better in the long-term. The government has announced plans to cut taxes. Difficult to tell if the chosen option is the best one, it does seem that they’ve chosen the option that is more likely to keep them popular in the short-term….
As for how they dealt with the current global finance crisis:
They sold insurance and made a profit on it as the insurance wasn’t called in. High risk, low return and introducing moral hazard. In the crisis in the 90s it was done differently: High risk, high return and owners knew that if they failed to govern their banks then the state would take equity in return for any help.
& some claim that there is a property boom in Sweden now. The government response? Wait & see. Cooling off of a property-market is not a vote-winner anywhere…. History might repeat itself in Sweden, memories fade and some lessons might be forgotten.
If advise is needed, then I’d rather ask the Swedish fiscal council than the Swedish minister of finance. The council and the minister have had a few disagreements, one believes he needs to be popular and the other has nothing to lose by being honest 😉