Robert Shiller: The Sickness Beneath the Slump Post author By John McHale Post date June 12, 2011 Robert Shiller has some interesting thoughts on house-price expectations here. Categories In Uncategorized Tags House-price expectations 49 Comments on Robert Shiller: The Sickness Beneath the Slump ← Patrick Honohan on Vincent Browne → Wolfgang Münchau: Why debt rescues will boost the scenario of a closer union 49 replies on “Robert Shiller: The Sickness Beneath the Slump” John, wouldn’t most people read that and think it was fairly obvious? I’m not being sarky, if there are people who are surprised by much in that article, their views would be interesting – what are they thinking? I have been ‘harping on’ about res property prices and values for some time now. Some former ‘friends’ no longer speak to me! Those that do still expect prices to stabilize! No amount of valid empirical evidence to the contrary can budge them. Its kinda sobering. Irrational expectations! Brian Snr. The implied conclusion, that expectations should be a function of interest rates is problematic. Interest rates themselves move according to monetary policy, thus tying house price to rates, would require an implausible level of prescience about the general economy. Solutions to property pricing problems, need to relate to the fundamental problematic characteristic of this asset class: inflexibility. There are daunting overhead costs, as well as legal issues, with changing the use of a property. Also the market is very ‘chunky’ and slow, thus poorly liquid. In areas of high intrinsic land value(e.g. city centres) regulation needs to be relaxed to allow rapid change of use(e.g. demolish a 2 storey residence and replace with 16 storey office). Similarily commerical should be readily convertible to residential. The liquidity of the overall market would be much improved by large investment firms owning hundreds/thousands of properties, e.g. ‘The D4 residential fund’ etc. New legal framework could aid in giving tenants better rights to rent from such, as this would benefit all. Then secondary trading in said funds, would provide liquid and transparent markets. The Irish Government is in an unprecedented global position to tackle property asset inflexibility: they own the properties/loans via Nama and the banks. They have huge political capital and mandate for change…yet not a peep ? @grumpy Don’t you think the piece contains a perspective on house-price dynamics that was sorely lacking during the bubble phase. There are many people who would have been saved from personal disaster if they had been tuned in to Shiller’s world view. This is also similar to the way of looking at the world inherent in Nyberg, and seem to recall that did not go over too well with many here. I woiuld agree that there is nothing really startling oin the piece, but it captures a basic behavioural-informed view that is far from the norm. The piece also suggests a significant and probably long-lasting undershoot in house prices that is surely worth some debate. If you look at what is happening in the US then you realize that the Irish market is not going to recover anytime soon. There they have a functioning banking system and prices continue to drop. I think the last Schiller report showed declines in the 17 largest cities yoy. We have a banking strategy ( the two pillars) where we have zombiefied the largest mortgage lender ILP and are about to inject more State cash into non-functioning financial institutions, one owned by the State and the other using all of it’s resources to try and stay out of State control. So why would you expect anything different. As Grumpy says ..it’s fairly obvious. Robert Kuttner has a really good piece on creditor-debtor conflicts in the past. He says that “Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover.” Post WW 1 the creditor class had its way. Post WW2 , guided by JM Keynes, the Bretton Woods arrangement, “created a global monetary system in which private financial speculators were denied the power to compel nations to pursue deflation. Cheap money and expansive investment kept America (and Europe) from sinking back into depression. ” Today, he says “that expansionary logic has been reversed and creditors are once again hegemonic. Banks want cheap money for themselves, draconian terms for others. The banker-afflicted European Union is punishing Greece rather than finding a way to let it grow.” He concludes by urging that “We need to democratize the money issue once again.” THe EU is certainly banker afflicted and the creditor class in Europe are likely to stunt the productive potential of many debt stressed countries, including Ireland, and lead to increasing divisions within the EU. The Irish government must stop following the worldwide creditor/banking agenda and canvas for support within Europe to “find ways to reduce the debt burden so that the productive power of the economy can recover.” http://prospect.org/cs/articles?article=debtors_prison# Shiller claims that in the 1960s the economics profession “embraced the theory that efficient markets formed by people holding rational expectations could explain virtually all economic activity” and cast aside concerns about bubbles and instability. That’s a bit sweeping. Maybe it’s a fair description of how the New Classicals behaved, but there were always pockets of sanity. Even if we exclude all heterodox economists and restrict attention to the really big names, the list of those who kept their heads includes Samuelson, Meade, Solow, Tobin and Krugman. Even Friedman, who certainly encouraged the likes of Lucas and Fama, had reservations about carrying that stuff to extremes. It’s not good to portray the entire profession as freshwater loons. It encourages people to seek enlightenment in all sorts of wrong places. @John McHale “it captures a basic behavioural-informed view that is far from the norm.” Er, only for someone who believes that there are rational actors in an efficient market play in the theatre of the absurd that is the DSGE. The norm for most people is to flip between “it’ll never end” and “it can’t last”… @John mch ” but it captures a basic behavioural-informed view that is far from the norm” Might this be an “academic” / “market” viewpoint thing? I know lots of people start out having been taught that “behavioral” is some sort of exotic approach, but it is run-of-the-mill mainstream now with loads of market participants – especially after the last 4 yrs. The norm for most people is to flip between “it’ll never end” and “it can’t last”… @ hoganmahew Perhaps the norm is just a slow person with no time. You’ve GOT, to know People to understand them. @John Mc I’m not sure that opinion or perspective was terribly lacking during the bubble phase. There were lots of people shouting warnings and pointing out that the growth was unsustainable. Remember the Economist cover, if nothing else? The big question is really why no-one in a position of authority paid any attention, particularly govt in places like Ireland. @Liam Delaney (if you happen to be reading) You will be delighted — and probably surprised — to hear that we are all behavioural economists now. 🙂 If you are not you should be! Being an economist who doesn’t consider the irrationality of humans in his models (I say his because invariably the female economists are more clued into this) is like being a doctor who diagnoses solely on the basis of lab tests and never asks the patient a question. Shiller has shown great intuition and foresight in identifying key issues and weaknesses in prevailing economic theories and policies. When others in the financial economics field thought of real estate as a boring, illiquid asset class with no decent data, he realized how important it was and how crucial it was to improve real estate data price quality. He was also (along with Leroy-Porter) the joint-first to identify the excess volatility anomaly in stock prices. I suspect Shiller’s advice to the Ireland now (at least one key piece of advice) would be to urge a fast-track a legislative change requiring full public disclosure of all real estate price transactions. He would say (based on my reading of his work) that that would help substantially to improve market quality and aid economic recovery. I am not speaking for him but that is my reading. @Liam D Real estate must be about the most auto-corollated asset class I can think of. 😉 @John Mch If you are “rational” and think you have spotted a bubble, should you buy or sell? Okay – so he completely misses regulatory capture, rampant corporate fraud, the financialisation of the American economy, corporate lobbying corrupting the legislature, the Too-Big-To-Fail/Too-Bent-To-Jail entwining of the corporate and political “elite” and wages falling in real terms forcing people to chase the hopium dragon. It’s only a bubble of irrational exuberance if you ignore the legalised looting. @Gregory Connor Getting asset prices published is something the Government should really do pronto(referendum if necesary). However…asset information is also needed, and for starters conveyancing/land registry in Ireland is an antiquated, paper based process. We need to move to eConveyancing, with high quality, standard metadata about the properties, available to all market participants. An illiquid and poorly transparent market helps no one in the long run. @grumpy Great question. In the late 90s I was part of a group that Andrei Shleifer would give a talk to every year. One year he told us the US stock market was significantly over valued. It then had some big percentage gain over the following year. At the next talk I gently reminded him of what he said the year before. I have never forgotten his reply (in a wonderful Russian accent): “The first rule of an overvalued market is that it can become more overvalued.” @ All, I would recommend Samuel L. Jackson’s movie Lakeview Terrace (released in 2008, but obvious conceived earlier as a project, around the height of the American housing bubble), as a movie which sort of captures the times. It is a kind of movie, I think, which could not have been made at any other time in American history. It depicts a kind of society, whereby the house was indeed an appreciating asset. People went to do their ‘day jobs’ far off, on some commute in the city. The city being depicted as some awful place, where people lived in a chaotic, lawless kind of state – because they could not live in places such as Lakeview Terrace. I highly recommend the scene where Jackson’s character decides to fight with the neighbour through a fence, using his chainsaw. Such was the emotion at the time, that appreciating housing assets, had to be protected from any risk, to the extent represented by the movie. BOH. http://www.imdb.com/title/tt0947802/ @ All, I would contrast the above 2008 movie, with one from 1984 starring Jessica Lange and Sam Sheppard, Country. To show how the depictions of America family values and life in general, altered over that 25 year period. Feel free to suggest any other titles, which may be of interest, along similar themes. BOH. low crop prices, pending FHA loans and a tornado all put pressure on the struggling family as they face hardship and the prospect of losing their home and livelihood. http://en.wikipedia.org/wiki/Country_(film) @Brian O’H David Mamet’s “Glengarry Glenross”. Why is this such a big surprise ? If most of society’s resourses go into useless consumption sinks what happens to technological development – it dies. We could be the very best Austrians in the world but if our surplus goes into buying useless shit you will be left with useless shit. The rise of monetarism after goverment spending became corpulent may have been necessary to increase efficiency but without technological productivity it ain’t got any point to it. Indeed there’s little point to any economic endeavors when they are net energy negative. The fact of the matter is that under Nixon and beyond revenue from debt has been dying and this malaise has been camouflaged by increased leverage. Eventually even gerbils get fed up with spinning wheels in a glass cage. The west needs the vision thing back again – if it does not it will wallow in its own excrement forever. We need a goal http://www.youtube.com/watch?v=wSv5383Dpvs @Gregory Connor I think even Mr. Shiller would struggle with the Irish response. Any new index could* only be forward looking, I suspect, so the bubble would be happily airbrushed out of history. *I say ‘could’, but I mean ‘will be to protect those who have already bought’… too many questions about how x could afford y on a public salary of zzzzzzzzzzzz The discussion above reminded me of the following. The Unknown Citizen by W. H. Auden (To JS/07 M 378 This Marble Monument Is Erected by the State) He was found by the Bureau of Statistics to be One against whom there was no official complaint, And all the reports on his conduct agree That, in the modern sense of an old-fashioned word, he was a saint, For in everything he did he served the Greater Community. Except for the War till the day he retired He worked in a factory and never got fired, But satisfied his employers, Fudge Motors Inc. Yet he wasn’t a scab or odd in his views, For his Union reports that he paid his dues, (Our report on his Union shows it was sound) And our Social Psychology workers found That he was popular with his mates and liked a drink. The Press are convinced that he bought a paper every day And that his reactions to advertisements were normal in every way. Policies taken out in his name prove that he was fully insured, And his Health-card shows he was once in hospital but left it cured. Both Producers Research and High-Grade Living declare He was fully sensible to the advantages of the Instalment Plan And had everything necessary to the Modern Man, A phonograph, a radio, a car and a frigidaire. Our researchers into Public Opinion are content That he held the proper opinions for the time of year; When there was peace, he was for peace: when there was war, he went. He was married and added five children to the population, Which our Eugenist says was the right number for a parent of his generation. And our teachers report that he never interfered with their education. Was he free? Was he happy? The question is absurd: Had anything been wrong, we should certainly have heard. @ Gavin Kostick, Thanks for that recommendation. I was thinking about my earlier two recommendations, and a couple of the bullet points in their comparison would sound something like as follows. In 1984, the emphasis was generally upon the family and their ability (or struggle), to have some form of productive output. Namely, that of agriculture in the case of the Country movie. But by 2008, the home itself had become a productive asset, just as Bob Shiller talks about in this sentence. Consider this: Home prices rose nearly 10 percent a year on average in the United States from 1997 to 2006, long enough for many people to become accustomed to the pace and to view it as normal. The conventional 30-year fixed mortgage rate averaged 6.8 percent over those years, far below the appreciation rate on housing, so even if you had a substantial mortgage, you were becoming wealthier by the day, at least on paper. A theorist whose books I saw in a bookstore the other day (so he must have a readership on this island), is David Harvey. He talks a lot about how labour was effectively broken in the 70s and 80s. After which, the challenge was to give labour the sort of buying power it has lost in real wage terms, in order to consume the produce they made in their employment. It was a sour victory, that of capital winning over labour outright. That theme is evident in the movie Country, of labour being beaten into the ground, as a matter of nationwide policy. What I realised though, upon thinking about both movies, is that in the 1984 movie, the character of the local financial representative was a real person. He was a real member of the community, and the narrative focussed around the idea of the relationship which had existed, (based on trust and human decency), between the farmer and his source of finance, had eroded completely. There is sort of a happy ending at the end, where the FHA loan officer gives in, and informs his regional manager, that he cannot treat the community like he is being asked to, and quits the job. What I noticed about the 2008 movie, was that the person that was the financial rep, in the local community, was no longer present as a character in the narrative any longer. There was a shift of focus away from the productive ‘reason for being’ of people also. The role of Samuel L. Jackson’s character, as the city police officer is a very shallow two dimensional sort of one. As I mentioned, the disconnect is expressed between the ideal neighbour in which he wishes to raise his family and the environment in which he goes to work each day. I am not familiar with the plot line of Glengarry Glenross, except to say, there is a strong theme of signing the people up for finance and a way of life, in that movie, I imagine. Which may fit in with the 2008 theme as I described. That of capital as something employed to keep populations accustomed to a way of life, a standard of living. Rather than the old fashioned way, of capital as something made available to the smaller producer, to ensure security of supply of certain essentials such as food and raw materials needed for general well being. BOH. We need to get away from all this concern about house prices staying up or recovering. It is only of concern to banks/liquidators/Mama and the ECB. It is useless for the real economy. The best thing that could happen the real economy right now would be for house prices to fall another 50% or maybe 70%. People would then start to buy them. And the people that bought them at a real low price would have some money left over to start living again, working for reasonable wages and spending some new found discretionary income. It would be good news all round. It would help put the FIRE out. Even the unknown citizen might splash out. Robert Frank, a professor of economics at Cornell University, who has done a lot of research work on executive pay and inequality, links housing with expenditure cascades throughout the economy. The median full-time US male worker aged 25-64 earned about $48,000 in 2009 – – about the same as in 1969 after adjusting for inflation. However allowing for the jump in non-participation in the workforce among males as manufacturing jobs fell, the median wage of the American male has declined by almost $13,000 after accounting for inflation in the four decades since 1969 – – a fall of 28%! Frank says one cost of the rising pay gap is that it has spawned expenditure cascades that have made it more difficult to achieve basic goals. Step one in the development of such a cascade in the housing market, for example, was that higher incomes led executives and other top earners to spend more on housing. That shifted the frame of reference that defines adequate housing for those just below them, so they, too, spent more on housing, and so on, all the way down the income ladder. The median size of a newly constructed single-family house, which stood at 1,600 square feet in 1980, had grown to more than 2,300 square feet by 2007. Since the median wage was essentially stagnant during this period, this growth cannot be explained by growth in income. The economist says middle-income families felt they had to spend more on housing because other families like them were spending more. And those families were spending more because of an expenditure cascade launched by higher spending at the top. Failure to keep pace meant sending one’s children to inferior schools, a step few middle-income parents were willing to take. Equity release in a rising market enabled people to keep up with the Joneses. MH writes, Step one in the development of such a cascade in the housing market, for example, was that higher incomes led executives and other top earners to spend more on housing. From my memory of reading Shiller on this subject, he argued that the unit cost per square foot of house, has remained very stable over the past century or so. What has changed however, is the average amount of square footage of housing consumed by individuals has gone up, and up. In the context of executives who directed a lot more of their spending towards housing, that may fit into that trend, of the house being an appreciating asset, an investment – rather than buying the square footage that one actually requires to live in. We can see it too I suppose, in the concept of the apartment block as investment property. That is, the apartment blocks which are sold out, and you pass by in the evening time and it is quite obvious that noone lives in them. In that context, is it any wonder that we should find the likes of Davy stockbrokers rounded up investors in groups, and involving them in mezzaine finance deals with Dublin developers during Ireland’s credit boom? I remember, quite a lot of penthouses, in even the less desireable parts of the docklands area in Dublin, were un-furnished, empty, idle investment properties all through the boom. People didn’t even care what rent was generated off of them. My question is this, in relation to Ireland, just how much of the available capital, was tied up in such ways? I heard Martin Wolf express a similar concern in a recent lecture of his. That perhaps the non-financial corporates in the western world aren’t using their capital for production any longer. There are much better returns, and easier returns to be had, from simply being a lender to the government. The same governments, which in the western world are almost all broke anyhow. My question is as follows though. If governments end up selling items such as state assets, what good are those kinds of items to the kinds of investors who might buy them? Those such as the non-financial corporates mentioned by Martin Wolf? BOH. @Michael H Didn’t you have stats on finfact.ie to show that Irish houses had been getting smaller? @ Hugh Sheehy Hugh, You make an interesting point as house space in Ireland got smaller even though the number of single dwellings at 45% was large. By 2006, Irish houses were among the most expensive in the developed world and of the lowest quality. The system where land for development is made artifically scarce in a country with plenty of land, remains unreformed. The ignorant blanket anti-high rise post-Ballymun ban, has also been a big factor. Consultant economists DKM (Colm McCarthy) in 2000 produced a paper critical of planning authorities and advocated development as far out from the centre of Dublin as a 25-mile radius. The paper pointed out that the M25 ring route around London is 25 miles from the centre of that city and contains within its circumference a city of 8m people. A similar ring around Dublin contains just 1m people, indicating that Dublin’s future development should have been in higher density concentrations along transport corridors. @JMcH: You posed a question about undershoot. This is a feature of the correction of res property prices as they ‘revert to mean’. Evidence is available to confirm. MH’s piece about ‘mean wages’ should be studied with great care. Wages down, res property prices up? The conclusion is that credit must have increased, hence debt levels. Credit is a one-off event, but debts increase exponentially. Something very dodgey here! The received illusion is that ‘growth’ will resume any time soon. Actually it will definitely resume by Christmas! Really! 😉 And all will be well? I guess not. I expect no trough followed by an upturn back to trend. Res property values and prices will decline and decline and decline, until those who have stable incomes can afford to purchase (they will need 25% of purchase price in cash savings) and will only get x2.5 times a single salary (or an equivalent loan based on rental yield). This leaves the unfortunate Negative Equitors to stew until there is a political settlement. We will be waiting some time for a legal exit for these folk. Any practical resolution (Jubilee or write-off) simply sticks in some people’s craws. Who pays, and all that nonsense. Economists would invoke the concept of Sunk Cost, and demand we move on. Funny that. Brian Snr. @Hugh Sheehy Didn’t you (Michael Hennigan) have stats on finfact.ie to show that Irish houses had been getting smaller? @Michael Hennigan You (Hugh Sheehy) make an interesting point as house space in Ireland got smaller even though the number of single dwellings at 45% was large. By 2006, Irish houses were among the most expensive in the developed world and of the lowest quality. @John McHale My post is not in any way a rebuttal of your comments, simply a rebuttal of those of Hugh Sheehy and Michael Hennigan. However, I would like to draw your attention to one of the tables below on housing affordability (or cost overburden rate, as the EU call it), as it is highly relevant to the thread, and wonder what you make of it. JTO again: Sorry to rain on yet another parade here, but Hugh Sheehy’s and Michael Hennigan’s claims are nothing more than preposterous drivel. If certain economists came out of their dark cellars and drove around the countryside now and again, they’d see how preposterous some of their claims are. Houses in Ireland have been getting bigger, not smaller. As, simultaneous to this, household sizes have been getting smaller (i.e. the number of persons per household has been falling), overcrowding has been falling rapidly. This was given by Professor Brendan Walsh, in his recent paper on mortality, as one of the reasons for the dramatic fall in mortality in Ireland in the past decade. These are the figures from the 1971 and 2006 census. They give the number of houses in Ireland, categorised by number of rooms per house. 1971: 1-room: 17,074 2-room: 42,370 3-room: 111,261 4-room: 219,092 5-room: 152,838 6-room: 109,413 7-room: 42,164 8-room: 17,054 9-room: 6,408 10-room: 8,689 total number of houses: 726,363 total number of rooms: 3,308,775 total number of rooms per house: 4.555 total number of persons per household: 4.100 total number of rooms per person: 1.111 percentage of houses with 1 or 2 rooms: 8.184% percentage of houses with 8 or more rooms: 4.426% 2006 (excluding a very small percentage not stated): 1-room: 20,893 2-room: 61,757 3-room: 123,655 4-room: 160,878 5-room: 354,089 6-room: 281,531 7-room: 200,869 8-room: 121,819 9-room: 51,548 10-room: 39,813 total number of houses: 1,416,852 total number of rooms: 7,861,230 total number of rooms per house: 5.548 total number of persons per household: 1.899 total number of rooms per person: 1.854 percentage of houses with 1 or 2 rooms: 5.833% percentage of houses with 8 or more rooms: 15.046% So, between 1971 and 2006, the average number of rooms per house rose from 4.555 to 5.548, while the number of persons per house fell from 4.100 to 2.899, resulting in the average number of rooms per person in the Ireland rising by 66.9 per cent (from 1.111 in 1971 to 1.854 in 2006). The percentage of houses with 1 or 2 rooms only, fell by one-third, while the percentage with 8 or more rooms almost quadrupled. In 1971, there were almost twice as many houses with 1 or 2 rooms as there were houses with 8 or more rooms. By 2006, there were almost three times as many houses with 8 or more rooms as there were houses with 1 or 2 rooms. Regarding quality and cost, the most comprehensive report ever produced on housing conditions in the EU was published a few months ago. It is entitled: “HOUSING CONDITIONS IN THE EU27 IN 2009”. Finfacts was the only media outlet in Ireland to report it (link below). So, full marks and congratulations to Michael Hennigan for that. Unfortunately, despite reporting it on his own website, he doesn’t appear to have read it. These are some of the main tables contained in the report. Ireland ranks near the top and above the EU average under every heading, and above the UK under all but one headings. HOUSING CONDITIONS IN THE EU27 IN 2009 http://www.finfacts.ie/irishfinancenews/article_1021715.shtml Al tables from: HOUSING CONDITIONS IN THE EU27 IN 2009 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses exceeding EU-defined overcrowding rate:  Cyprus 1.0%  Neth’lands 1.7%  Spain 3.2%  IRELAND 3.6% <<<<  Belgium 4.0%  Malta 4.0%  Finland 6.0%  Luxembourg 6.5%  Germany 7.0%  U. Kingdom 7.0%  Denmark 7.5%  France 9.5%  Sweden 11.0%  Austria 13.0%  Portugal 14.0%  Italy 24.0%  Greece 25.0%  Czech Rep. 26.5%  Slovenia 37.5%  Slovakia 39.6%  Estonia 41.5%  Bulgaria 47.0%  Lithuania 49.0%  Poland 49.0%  Hungary 55.0%  Romania 55.3%  Latvia 57.7% [ ] EU27 17.8% JTO note: So this one confirms the figures I gave above regarding the large increase in the number of rooms per person in Ireland. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses exceeeding EU-defined cost overburden rate: defined (by EU) as: percentage of population living in a household where the total cost of housing exceeds 40 per cent of their equivalised disposable income  Cyprus 2.5%  Malta 3.6%  Luxembourg 3.7%  France 3.9%  Slovenia 3.9%  IRELAND 4.1% <<<<  Estonia 4.4%  Finland 4.6%  Austria 5.1%  Lithuania 5.5%  Portugal 6.3%  Bulgaria 7.2%  Italy 7.6%  Poland 8.2%  Latvia 8.6%  Belgium 8.7%  Hungary 8.9%  Czech Rep. 9.0%  Slovakia 9.4%  Sweden 10.2%  Spain 10.9%  Neth’lands 13.2%  Romania 15.5%  U. Kingdom 16.7%  Greece 22.2%  Germany 23.6%  Denmark 24.4% [ ] EU27 12.2% JTO note: This one is highly relevant to the original subject matter of the thread. It would be interesting to hear John mcHale’s opinion. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses with leaking roof:  Finland 4.9%  Sweden 6.6%  Slovakia 6.6%  Denmark 7.8%  Malta 10.0%  France 12.6%  IRELAND 13.2% <<<<  Germany 14.0%  Neth’lands 14.2%  Hungary 14.5%  U. Kingdom 14.6%  Czech Rep. 14.6%  Belgium 15.2%  Austria 15.3%  Luxembourg 17.5%  Greece 17.6%  Spain 17.6%  Poland 17.6%  Portugal 19.7%  Estonia 20.2%  Italy 20.5%  Lithuania 21.3%  Romania 22.0%  Bulgaria 23.9%  Latvia 25.7%  Cyprus 29.4%  Slovenia 30.6% [ ] EU27 15.9% $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses wth NO bath/shower:  Neth’lands 0.0%  Spain 0.0%  Luxembourg 0.2%  U. Kingdom 0.2%  Malta 0.2%  Germany 0.3%  Slovakia 0.3%  Italy 0.4%  Sweden 0.5%  Czech Rep. 0.5%  IRELAND 0.6% <<<<  France 0.6%  Slovenia 0.6%  Austria 0.7%  Denmark 0.7%  Cyprus 0.7%  Belgium 0.9%  Finland 1.0%  Greece 1.1%  Portugal 2.7%  Hungary 4.2%  Poland 5.6%  Estonia 12.8%  Bulgaria 15.6%  Lithuania 15.9%  Latvia 18.2%  Romania 41.2% [ ] EU27 3.1% $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses with NO flush toilet:  Denmark 0.0%  Neth’lands 0.0%  Spain 0.0%  Sweden 0.0%  Malta 0.0%  Italy 0.2%  IRELAND 0.3% <<<<  U. Kingdom 0.5%  Belgium 0.6%  Slovenia 0.6%  Cyprus 0.7%  Czech Rep. 0.7%  Finland 0.8%  France 0.8%  Luxembourg 0.8%  Slovakia 1.1%  Germany 1.2%  Austria 1.3%  Greece 1.8%  Portugal 2.4%  Poland 4.8%  Hungary 7.1%  Estonia 12.2%  Latvia 16.6%  Lithuania 17.2%  Bulgaria 26.2%  Romania 42.5% [ ] EU27 3.5% $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses suffereing from darkness:  Slovakia 3.5%  Neth’lands 3.7%  Czech Rep. 4.3%  Finland 4.4%  Denmark 4.5%  Estonia 4.7%  Germany 4.8%  IRELAND 5.6% <<<<  Cyprus 5.7%  Sweden 6.1%  Austria 6.5%  Greece 6.7%  Malta 6.7%  Belgium 6.8%  Spain 6.9%  Luxembourg 7.0%  France 7.5%  Italy 7.9%  Poland 8.3%  Hungary 8.4%  Portugal 8.6%  Romania 8.7%  Lithuania 8.8%  Bulgaria 9.6%  U. Kingdom 10.6%  Latvia 10.9%  Slovenia 15.5% [ ] EU27 7.3% $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ percentage of houses suffering from noise:  IRELAND 10.4% <<<<  Estonia 12.7%  Hungary 13.2%  Sweden 13.7%  Finland 14.9%  Lithuania 16.1%  Bulgaria 16.2%  Slovenia 16.7%  Poland 17.7%  Czech Rep. 18.7%  France 18.9%  Latvia 19.1%  Belgium 19.4%  Denmark 19.4%  U. Kingdom 20.5%  Austria 20.9%  Luxembourg 21.2%  Slovakia 21.9%  Spain 22.8%  Greece 23.5%  Portugal 23.9%  Neth’lands 25.3%  Germany 25.8%  Italy 26.0%  Malta 27.8%  Cyprus 31.4%  Romania 34.9% [ ] EU27 22.2% JTO note: This one is highly relevant to the matter of housing density, detached suburban houses and one-off houses in the country. Economists and environmentalists seem unable to get it into their heads that most people in Ireland do not want to live in high-density housing or tall appartment blocks in city centres. They want their own space. This table shows one of the reasons why. By doing so, one gets peace and quiet. Most people in Ireland do not wish to live on the third floor of a 10-story appartment block, where you are woken at 3am because the air hostess in the appartment above is throwing an orgy. They want nice detached suburban houses or one-off houses in the country, where they get peace and quiet, and nice garden to practice their golf swing in. I am certainly planning to build am extremely large (even larger now that prices have come down) and very ostentatious one-off house in Donegal when I retire in a few years time, and will do so regardless of whether or not marxist economists and environmentalists in Dublin 4 declare such illegal by that time. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Oppos, a typo in my last post – should be: total number of persons per household (in 2006): 2.899 other figures not affected If you follow the cycles you could see it was a bubble and was going to end in tears. If you had property you would have sold and gone into gold and silver which had started a bull run in 2001. Sure they were printing money by the hour and debasing the dollar and we all know where that leads, BIG DEFICITS. But then again John MCHale would refer to me as a conspiracy theroist. Ooops, another typo: total number of rooms per person (in 2006): should be 1.914 (not 1.854) This actually strengthens the argument I was putting – I was under-estimating the increase when I wrote “the average number of rooms per person in the Ireland rose by 66.9 per cent between 1971 and 2006”. It should be 72.3 per cent. @Michael Hennigan Re: Robert Frank Not sure who’s the chicken and who is the egg, but Elizabeth Warren has been banging on about the collapse of the middle class for a good while: http://www.finfacts.ie/irelandbusinessnews/publish/article_10005314.shtml @jto no need to accuse people of making claims that are preposterous drivel. All I was referring to was the data at the above link from finfacts. A little moderation and courtesy wouldn’t go amiss. @ JohnTheOptimist Dont confuse space per person and size of housing units. Drive around… Sorry, it’s a mistake that many apartments built during the boom had limited storage and car space; low area size and when the bubble burst, the Dublin City Council mandated minimum areas. In Carroll’s Gas Works’ units visible from the DART, people have to story bicycles on their balconies. The Royal Institution of Chartered Surveyors must also be talking rubbish; maybe avg new house size is as big as in Denmark — believe that and you are an ass. Open your eyes and compare new 3 bed s/d builds since the 80’s in Dublin with no garage space and smaller gardens with Sandymount and older estates in Stillorgan. As for acoustics, again get out of your sheltered workshop and compare ld apartments and new mainly infereior ones — energy insulation is the one feature where there has been an improvement. http://www.demographia.com/db-intlhouse.htm @ hoganmahew There are others including Emmanuel Saez of UC Berkeley who has produced a lot of interesting data on inequality. @Hugh Sheehy Having re-read your posts, I exclude you from the charge of ‘preposterous drivel’ and apologise for including you under that charge earlier, as I can see now that you were only enquiring of Michael Hennigan as to his claims. However, I certainly don’t withdraw it in relation to Michael Hennigan. MH made 3 claims earlier: (a) ‘house space in Ireland has got smaller’ (b) ‘Irish houses among the most expensive in the developed world’ (c) ‘Irish houses are of the lowest quality (in the developed world)’ These claims are indeed preposterous drivel. They are based entirely an MH’s anti-FF and anti-developer hostility and not on any hard statistics. I gave a mass of statistics from Irish census reports and from a recent EU report, reported on his own website, completely refuting these claims. His reply to this mass of statistics is that they must be wrong, because you can see flats from the Dart where people store bicycles on balconies. WOW! For the record, the proportion of people living in flats in Ireland is by far the lowest in the EU, just 3% v 41% in the EU. http://www.finfacts.ie/irishfinancenews/subCategories/article_1021715_printer.shtml ‘ Michael Hennigan wrote: In Carroll’s Gas Works’ units visible from the DART, people have to story bicycles on their balconies. Micheal, I think you would find that there would be sufficient underground space built, of a suitable sort, to cater for bicycles in the basement. But what you would also find, that at sub-surface level a kind of poker game was played, with selling spaces on a lease type of agreement (or more accurately put, as part of commercial leases). As far as the local authority knew, the spaces in the basement were intended to be provided for the residents. But in reality, they were usually used as sweeteners, and stuck onto lease agreements for commercial units, at street level. That is, one commercial tenant may take 1000 sq. meters on a 30 year lease, a long with 25 car spaces, in basements in various developments scattered around the area. I assume, those were to be used by the staff who worked in the commercial units. But it strongly possible, they were simply rented out again, and became another little sideline for the leaseholder. A way to earn back a bit, on the rent they were paying for the commercial unit. As you can imagine, the income from a city centre car space, is pretty stable. A bit like a corporate box at Croke park. Same sort of model. The apartment units overhead, effectively lost their claim to the basement as a resource, and necessary adjunct service space to the unit in the multistorey block. An analogy that would be easy for Dubliners to visualise, would be that of the 1980s, and the horrible trend whereby Georgian terrace properties would sell the mews site for development. It effectively ruined the Georgian terrace property, because it removed an essential part of the system, that the Georgian lifestyle entailed. I.e. That waste and vehicles etc, could come and go, via the rear entrance. Which kept the front area of the property, looking as it aught to. A single aspect Georgian terrace property no matter how large it is, is kind of handicapped, as are the multistorey apartment blocks, which lost their necessary allocation of space in the service areas. The funny thing is, that this game only started, after Dublin City Council had introduced its policies regarding mixed use development in the city. That is retail/commercial space at ground floor level, with multistorey residential overhead. Before that, the developers had not been in the commercial space racket. The developers were probably forced down that route by the planning rules. What the planners failed to realize was that in order for the commercial units to function properly, it needed the issue of parking for the commercial units to be addressed. What the Dublin planners did instead of allocating some more spaces towards the commercial units – they in fact, made sure that the commercial units got almost none. This is what resulted in the residential car parking spaces getting robbed, in order to service the commercial units. And hence, you now can see the bike on the balcony in what was a very expensive residential project to construct. BOH. @ MH, That other aspect about it, which is probably unfair to occupants, is the fact that they pay overheads of maintenance charges for upkeep of the same basement and service areas of the development, which may be used by the store manager at a shop down the street, and not be accessible to the occupant in their residential unit at all! BOH. This is an interesting thread as it reveals many aspects of the failure of ‘mainstream economics’ as it is practised now. The now shrinking middle class were fed a housing bubble (to give them a false sense of increasing wealth) and a diet of debt to conceal their continuously declining share of the economic pie. “Let them eat credit” as Rajhuram Ragan put it. This was the case in the US, UK, Spain and Ireland. Add to this the zeal with which those at the top of the pile (who were coining it as income inequality increased) embedded the ‘efficient market hypothesis’ in the policy and regulatory arena – aided by ‘useful idiot’, but well-rewarded economists. And on top of this we have the unthinking policy mantra of encouraging competition and consumer choice in all markets providing utility services – and, in addition to the usual utility services, I would add basic retail banking, insurance and fnancial services. And all sold on the basis of “maximising innovation, enterprise and job creation”. It is also interesting that many seem to perceive the problem as being pesky ordinary consumers and citizens who behaved irrationally and bought all this guff. It is not their fault. The guff was propogated by those who exercise economic and political power and influence becasue it was in thier interests. Most politicians, to varying extents, have been bought. Individual consumers and citizens are individualised, atomised and disenfranchised and have no potential to develop and apply collective action in defence of their interests. Economists need to shelve their models of competition and consumers choice and dust down and up-date their models of oligopoly. But any benefits generated flow to them and not to consumers. Vast areas of modern economies are in the control of oligopolists who give the impression of competing to supply products and services that are virtually undifferentiable. And they need to dispense with the bloodless entities they employ – firms, suppliers, producers, etc. – and analyse the oligopolists in terms of the economic and political power they exercise. We might then begin to discern the basic outlines of effective and realistic public policy. I expect we are all familiar with the extension of Keynes’s aphorism that “In the long run we are all dead” that goes “This is the long run, Keynes is dead and we’re all f****d”. Hayek’s “Road to Serfdom”, which still remains a Neocon foundation text, provided a particular antidote to Keynes’s sanguinity about the long run. But we have ended up in a serfdom alright, but one that Hayek did not envisage. One ruled by the abuse of competitive market forces that he extolled. @ PH: “Economists need to shelve their models of competition and consumers choice and dust down and up-date their models of oligopoly. But any benefits generated flow to them and not to consumers.” How about they shred the lot and incinerate. The Michaelis-Menten model of enzyme kinetics gives an identical asymptote to a labour/employment econ model I encountered (can’t rem exact model). But I was startled by the similarity. Now, I fancy one would not ask a modern biochemist to predict some aspect of economic behaviour based on th M-M model even though it does provides accurate quantitative outcomes. But we do for the econs who use a similar model. If you ever wondered where the quantitative nonsense may have originated, read Schumpeter’s ‘The Common Sense of Economics’; vol 1, (1) of Econometrica! Then skip forward to his History of Econ Analysis -p6ff where he artfully attempts a reversal! Even he must have had second thoughts. @ david burke: The writing was on the internet from as early as 1999, but was solidifying by 2002. There for anyone to read. There were possibly as many as a dozen different commentators warning about a bad outcome. Each had a somewhat different approach, but if you distilled out the commonalities you obtained a very bad sludge. Looks like they were somewhat wrong: going to be worse than they probabilized (sic). Gold is OK long: though some CBs will attempt to crash the price – and may succeed for several months. Some hedgies are holding gold futures (but not physical coin). They will have to sell out soon. But production has declined, demand is steady and price volatility is low. Buy 1 oz coins if price gets near or below $1000 oz. Brian Snr. @ JtO The statistics I was looking at from this article (http://www.finfacts.ie/irelandbusinessnews/publish/article_10005314.shtml) and are not necessarily contradictory with the ones you quoted. Irish housing becoming smaller as the boom progressed doesn’t mean that Irish housing didn’t improve in aggregate between 1971 and 2009. My own experience as a house hunter is that the housing built late in the boom is generally small, and often badly built. That’s certainly the implication of the Policy Exchange data in the link above, where new housing in Ireland was significantly smaller than in other countries and was getting smaller over time. However, I have no reason to doubt that the data you quote on the improvement in Ireland’s housing stock between 1971 and 2009 is also true. @All It’s all very well to agonise about efficient market hypotheses, etc., but as I mentioned and What Goes Up also mentioned, in a real context where regulatory “involvement” in the market is as important as it can be in a property market, it’s hard for a hypothetical sensible person to know how to react to evidence of odd market behaviour. That there was a bubble was fairly clear. The key issue then is how long the bubble will last, as shown in all those academic simulations of bubbles. In Ireland, as in a few other places, the govt’s efforts to keep the bubble inflating were noteworthy and probably helped to reset many people’s expectations on future house price growth. Unfortunately, the long term turns up eventually and these growth trends were not sustainable. Again, this was always fairly obvious and even though my monologue on the topic (half way down the page) http://goo.gl/nkivL wasn’t an early one, it’s evidence that the problem was obvious enough even to laymen like me. So, again, why did govts do precisely the wrong thing in places like Ireland and how could they claim to be caught by surprise when the bubble burst? @Hugh Sheehy I apoloise for the length of time it has taken me to get back, but I spent last night googling to find the source of the statistics quoted in the link you gave. Having finally done so late last night, I have no hesitation in describing them also as ‘preposterous drivel’. Lest you take offence, I can assure that this comment is not in any way directed at you. You are not the source of the statistics, but simply supplying a link to them, which is perfectly reasonable. In the article written by Michael Hennigan, that is causing such heated debate on the other thread, Michael writes: “However, there are facts and facts.” “Facts are very important.” “Fact-checking is a hassle which is often avoided by commentators.” “When widely followed public figures feel free to say anything, without any fact-checking, we have a problem. It becomes impossible to think intelligently about big issues, let alone act on them. Facts, opinions and fabrications just blend together.” I totally agree with Michael Hennigan on this. I am sure that you do. It may be that, living in Kilkenny, one is less exposed to the baser side of human nature at an early age and, as a result, having faith in the goodness of human nature, one is more willing to accept as ‘fact’ anything that is presented as ‘fact’ by apparently reasonable people. However, living one’s formative years in Belfast, one quickly learns to be more cynical and to realise how widespread is the art of black propaganda, and to never accept any ‘fact’ presented by a vested interest as actual fact, until one has thoroughly checked it out oneself. This I invariably do and, thanks to the internet, it is now quite easy to do. Nearly all my posts on this site are the result of doing exactly that, triggered by the reporting of some ‘fact’, either on this site or in the media, that, on investigation, turns out to be not fact at all, but simply a fabrication. This is one such. The claim is made that houses got smaller during the Celtic Tiger boom and a link is given to the source of this claim. However, it turms out that the source is a UK political-campaigning organisation, called Policy Exchange. That in itself does not disprove the claim. However, what makes it doubly suspicious is the total absence of any source for the claim. I never ever accept any ‘fact’ from any organisation, particularily a political-campaigning one, unless a reliable source is given for the statistics on which the ‘fact’ is based. In this case, there is none. So, my next step was to google over and over, searching for some reliable statistics regarding the trend of house sizes in Ireland during the Celtic Tiger boom. I finally found them. The CSO publish quarterly statistics for average floor space of houses and appartments for which planning permissions are given. Their figures go back to 1993 and up to 2010. This is the link to the most recent set of figures published. http://www.cso.ie/releasespublications/documents/construction/current/planperm.pdf The CSO figures are for average floor space per unit (house or appartment) in square metres. They give separate figures for houses and appartments. The figures from 1993 to 2010 are: houses: 1993: 125.8 1994: 129.2 1995: 129.2 1996: 127.8 1997: 138.7 1998: 139.5 1999: not available 2000: not available 2001: 149.2 2002: 143.6 2003: 147.1 2004: 147.8 2005: 149.1 2006: 158.7 2007: 163.9 2008: 168.6 2009: 171.3 2010: 190.3 appartments: 1993: 59.6 1994: 61.4 1995: 64.8 1996: 68.7 1997: 71.4 1998: 69.5 1999: not available 2000: not available 2001: 78.2 2002: 77.9 2003: 79.3 2004: 76.7 2005: 78.2 2006: 81.1 2007: 85.0 2008: 85.4 2009: 93.6 2010: 91.5 So, both houses and appartments increased by about 50 per cent in average floor area between 1993 and 2010. This fits in with the other figures I gave above, relating to the average number of rooms per house and the level of overcrowding given in the EI housing report. At this stage, it looks as though the figure of 87.8 square metres, that the Policy Exchange is giving for the average dwelling size in Ireland, is actually the figure for the average appartment size only. As the CSO figures given above show, the average house size in Ireland is approximately twice the average appartment size. In addiion, only a very small percentage of dwellings in Ireland are appartments. The vast majority are houses, whose average size, according to the CSO figures, is now more than twice the figure of 87.8 square metres that is given by Policy Exchange, and on which Michael Hennigan bases his claim about Ireland having small house sizes. So, following the policy that Michael Hennigan advocated in his article on the other thread, namely to never accept a ‘fact’ as ‘fact’ until one has gone through the ‘hassle’ (MH’s word) of fact-checking, I have no hesitation in describing the Policy Exchange claims about falling house size in Ireland as ‘preposterous drivel’. However, no offence is intended at you. Ego battles between prominent commentators aside, I have a few coments on the actually Robert Shiller article, which I think have nothing to do with the floor space in Ireland debate, but perhaps might interest those of us less concerned with bicycles on balconies of Dublin flats. This article is largely based on Shiller’s suvey of buyers, for which it seems to me there is a fundamental problem: In any zero-sum market, there are x buyers and x sellers, distributing losses and gains which sum to zero. Insofar as there is a speculative component to that market, the buyers are by definition optimists and the sellers are pessimists in relation to future market movements. So, if you want a true guage of market sentiment, you should conduct the survey among an equal number of buyers and sellers, and see how close to zero you get. With that thought in mind, I read as far as the paragraph in which Shiller writes: The 3 percent figure is well below prevailing rates for 30-year mortgages, now hovering between 4.5 and 5 percent. when I realised what nonsense he was spouting. Benchmarking expectations of future price increases solely against lending rates ignores completely the very basic and essential fact that housing assets produce an investment return, known as “rent”. Thus, what matters, in terms of assessing the degree of speculative logic driving buyers’ decisions, is not the expectations of increases versus the lending rates, but rather the extent to which the capitalisation rate on rental investment is below the mortgage interest. My investor friends assure me that in many market segments cap rates in the US are hovering around 5%, which would suggest that delta price expectations are near-zero – sort of what you would expect in this market environment. Whence Shiller’s 3%, in that case? Like I said, maybe he just forgot to ask the sellers where they thought the market was heading… @ JtO Interesting data. I’m obviously not looking at the right houses. Ludwig Heinrich Edler wrote, Thus, what matters, in terms of assessing the degree of speculative logic driving buyers’ decisions, is not the expectations of increases versus the lending rates, but rather the extent to which the capitalisation rate on rental investment is below the mortgage interest. I agree. We should view property at all times as a broad continuum between the polar extremes of rent or buy. Peter Schiff writes a lot about the housing bubble in California during the mid-2000s. He has a couple of funny expressions, which somehow ring very true with the Irish bubble also. For instance, he talked about the fact that in California you had to fill out all sorts of paperwork in order to rent a (residential) property. But almost none at all, if you wanted to buy a property (and you didn’t even have the money). Schiff used to say, that if you needed money in California during the bubble years, you simply put your name down to own a residential property, and sold it shortly after. It was a sure thing. If you were to investigate almost every small or large town around Ireland, you would find everyone from window cleaners to the local shopkeeper, were engaged in precisely that game. How do you think we ended up with so many ghost estates in this country? The purpose of a ghost estate was not to provide housing or shelter. It was only to provide the speculative window in which the local people flipped assets. Journalist Neil Callanan used to tell the story of how many de facto business people in Ireland during the bubble, where encouraged by banks such as Anglo to get out of the business they were in, and engage in the property game instead. So you had (innocent) folk who knew how to run a public house, restaurant or groccery shop, ended up becoming landlords. If Bob Shiller has said anything useful at all about this crisis, it is that education of basic finance has to become a corner stone, in the future, if western capitalist society as we know, is to have any opportunity at survival at all. I trully believe that also. You only have to turn on the national radio show, The Joe Duffy show, today on June 14th 2011, a mere three years after the crash in Ireland to understand that society here has not learned a thing. The problem with the crash in Ireland was not that it was severe, but as other commentators at the Irish Economy blog have frequently pointed out, it was not severe enough. On the The Joe Duffy show, today, you could listen in full audio as the ‘mattress money’ that still exists in Ireland was queueing up, in advance to take a piece of the action in a €450 million project in the wilderness of middle Ireland. We are on the pig’s back again. I got a stomach full of this under my old employer with the speculative gamble on Greencore shares, and the plans to convert sugar factory sites in places like Mallow, into exclusive developments. Make no mistake about it, there is enough of loose, highly speculative cash lying about in Ireland in the wait for the next trickster to come along, to make it all burn. Internationally, I can imagine this phenomenon of the gambling Irish, is quite widely recognised, and that certain kinds of financial houses have already devised neat strategies to remove from our grasp whatever few pennies might still be lying around. I expect in time, it will fully run it’s course, and like a human being on an addiction, we’ll have to hit absolute rock bottom, before any common sense is beaten in. BOH. Comments are closed.