23 replies on “Managing House Price Booms: The Role of Macroprudential Policies”
House price booms don’t grow out of thin air.They have a rock solid basis in reality,but reality as distorted by a misconception.
I have seen the argument made on a few occasions over the last year that there cannot, almost by definition, be a bubble if there is not a simultaneous dramatic loosening of credit conditions and increase in investor gearing.
I think it is a bit more subtle than that, in that a bubble can be initiated, and got under way, without increased gearing and credit expansion, by the perception that those conditions are about to occur – or in the case of the Irish property market, recur.
Commonly over the last year both Irish property investors and PPR seekers are prepared to acknowledge the likelyhood of muted wage increases over the next few years, little prospect of significant reductions in taxation, and no prospect of lower interest rates. They also acknowledge that housing costs (whether rent or typical mortgage payments) are towards the upper end of the sustainable range – and that all of the above are key drivers of property prices.
However, given that they could all see that Dublin property prices had started to increase rapidly, all of those considerations were generally dismissed as merely academic, and the higher prices rose, the more the animal spirits and paranoia about missing out dominated.
None of that will amaze seasoned market watchers, but pressing people on the question of what was going to allow the decision to buy pay off financially via the extected higher and higher prices (given all the aparent constraints) elicited the common expectation that as prices moved progressively higher the banks would be less nervous about mortgage lending and gearing up would fuel everything.
Often the response would not start with the banks but instead start along the lines of “Prices are going up now and I wouldn’t be surprised if they are back at the peak in a couple of years – they were there before.” …but on further discussion there seemed to be a subconscious confidence that if 95% LTVs or 5x LTIs would be needed for prices to go to the moon, then that was what would happen.
In summary I think expectations of a credit boom can cause bubbles or at least early bubble behaviour in prices of assets, even if those price movements are driven in individual transactions substantially by real money or modestly geared participants.
We have seen the beginning of a return to bubble psychology in Dublin over the last 18 months and Patrick Honohan and Cyril Roux are right to employ basic and simple to understand macro-prudential measures to guard against that. They and their staff should be encouraged to don the tin helmets and not fold under the outrageously one-sided and manipulative press and political reaction to their proposals.
It rather reminds me of the run up to the Euro when “Do you realise what will happen to interest rates and the housing market if you join – it will get out of control?!!” was greated with wide-eyed enthusiasm rather than caution at a potential source of destructive economic chaos.
Alan Greenspan’s doctrine held that bubbles cannot be prevented and that government’s task is merely to clean up afterward. Greenspan practice was to foster one bubble after another,until finally came along one so vast that it destroyed the global financial system on the way.
At it’s source,the global crisis was an American housing crisis,and not one of too little housing but of too much.
Below is the link to the elementary property valuation error that was the source of the global financial crisis and that bankrupted Ireland; http://www.independent.ie/opinion/letters/bubble-values-26826609.html
Re: Irish Banks
Ratna Sahay writes, in her conclusion:
. . . and dividend restrictions to enable banks to absorb the losses.
This is a tough one, I must admit.
There are various aspects to it.
Again, to relate this back to what actually happened in a place such as Ireland, during our credit bubble cycle, I think, would be an important aspect of the task facing an Oireachtas banking inquiry.
Let’s work through, the sequence, of what did happen in banking in Ireland a decade ago. What we witnessed, in Ireland was the share price of Irish banks rising up quite high over the period of high economic growth.
Taking what Sahay at the IMF has suggested, to have restrictions on dividends, . . . as a cheap means of banks raising capital in times of housing busts, which affect their book. So assuming, that we do go down this route, which seems sensible.
The great probability, I think, in an Irish context, for example, is that share value, and corporate valuation of Irish banks, could not have risen to the extent that they did in Ireland, . . . . had this suggested policy been in place.
I am sure that it will be examined and recorded by the Oireachtas banking inquiry, that Irish banks, continued to offer dividends to shareholders, even as they reported huge losses. It would be interesting, to examine, what was the thinking behind this. A this stage in events in the late 2000’s, we can assume that Irish banking share price valuation, was sliding downwards. And was it seen to be the case,at the time, that not, issuing those dividends might lead to the banks funding situation becoming even worse ? ? ?
What was the thinking here?
Assuming, by this stage also, that Irish banks, as corporations, were basically in trouble from a point of view of the structure of their funding capital anyhow, . . . being based overwhelmingly, on the notion, that share valuations may either grow, or continue to maintain, the very high levels that they had achieved, by the late 2000’s, . . that in theory, was based on some opinion, that Irish banks, were inherently valuable as corporations.
What it suggests, is that this problem to do with capital structure, deformities and distortions, is a large component of the problem in the round, which Irish banks, were staring at, in 2008, . . . in addition, to all of the losses, instability, and concentrations associated with the loan book itself.
The problem as the 2000’s progressed, it Ireland, for an Irish bank, was how to find a strategy to climb down, from the heights in had achieved, in market valuation. Climbing up the mount Everest, is one challenge, and climbing back down again, without falling in to the abyss, is another.
And what did the Irish banks do, with that spiral upwards of corporation valuation, on the journey to the top ? ? ? It used that upward progression of its share price valuation, to expand its loan book, and grow as an enterprise. As it went up the mountain, it (the banking system), increased the load it was carrying on its back. Unfortunately, by this stage, the more it appeared to increase its load, the more its market valuation appeared to increase also.
The question, for the Irish bank, on the upward portion of its journey, was whether, they had got a real, tangible market opportunity, . . . or not.
But, one can see, there is a tangle, of different factors at work here, . . . several things, which aren’t static, but are indeed, moving and shifting at different times. Many more, factors moving and shifting, it would appear, than the banks as medium sized corporations, were able to manage. BOH.
Re: The Knaves and Fools Theory
There has indeed, been a lot of nonsense about banking, about capitalism, about corporate government, finance and commerce, spoken in the aftermath to the credit boom of the 2000’s, both on this side of the Atlantic ocean, and the north American side too.
Unfortunately, so little of conversations, even care to reflect upon what a bank, actually is, or less even, what the occupations of the different players, that comprise such a corporation, are.
Instead, of looking in a rear view mirror, all of the time, with a considerable benefit of hind sight, it might be prudent, to remind ourselves, of the parameters, inside of which any managing director, of any company, in any industry, any where, is obliged to work within.
And yeah, that even includes banking.
A large part of the challenge, associated with doing an Oireachtas banking inquiry, in Ireland, will be to examine things from the standpoint of the participants who were operating in real time, as opposed to viewing events as we can see them now, using our hind sight vision (and with all of the benefits, of having had years to go back and read contemporaneous accounts, retrospective histories and ideas from every angle, and political view point).
This is something, which military courts, are often charged with doing, for example.
Therefore, we can examine, from this remove, from the time, and from the events, what exactly the job that a chief executive, or financial controller, of a type of corporation, known as a bank, in Ireland, was doing (or not supposed to be doing).
Basically, it boils down to this.
From a point of view, of the individual, who is paid compensation to act as a managing executive, or a corporation, . . . their job, is to take the growth opportunities, as they are given to them, . . . and not for their own benefit as such, but on behalf of the shareholders (owners), or the said corporation, attempt, in so far is possible, and within resources, reasonable means and the confines of law, to exploit those growth opportunities that are seen to exist.
That is basically, standard operating procedure, if you are C-level executive, of a bank, a pharma corporation, a fund management company, or whatever it is.
In retrospect now, after the ship has sunk, and all of the valuable cargo, has disappeared beneath the waves, we know with the benefit of hindsight, that the job of that captain, should have been to steer their vessel as far away from rocks as was possible.
But we should ask ourselves, was that the contract? Was that really the job, which the C-level employee, was really asked to undertake?
If we want banks, to operate differently, perhaps we need to change, what the role of shareholders is, and what the roles of other players are also. Shareholders, at almost every opportunity, will demand more growth, and if opportunities for growth do exist, as they did for Irish banking corporations in the 2000’s, . . . shareholders will search high and low, for executive level personnel, whose basic raw skill, is turning such opportunity into tangible realization.
And one can’t fault the Irish banking management, for achieving some of the targets, which they were bound by, in their contracts – even if now, we are able to see, the tangible awfulness – which such tangible realizations, would entail.
The big question I would ask, is whether a significant portion, of Irish banks, should always be held, in public ownership (considering the exposure to risk, that that entails). Because recent history has aptly demonstrated, by now if nothing else, the fallacy that having Irish banks, completely in private ownership, would somehow insulate the commonality, from danger.
The idea of banking private ownership, in Ireland, to my mind, seems like nothing more than rather pointless, and expensive nickel plated concealment over basic reality. BOH.
Macro pru was taken out of storage recently. It isn’t a magic bullet and past use suggests the same. Surely the bigger issue is how to control private credit issuance so that when the eventual tired and emotional phase comes it doesn’t sink the official sector.
It all comes back to incentives and having a proper central bank with LOLR status and bank resolution capacity.
It is no rocket science.n
Re: Banking Funding Policy
The essential question, about banking organisations always is, why do they adopt the funding model, which they do?
When does something, that is called a bank, hold such a small sliver of capital, that represents it’s shareholding ownership, . . . and why in a bank, does their exist such elaborate and complex layering and tiering of different types of creditors?
There is focus, placed upon the notion that in Ireland, there are obligations, that are placed upon the country to recover for various levels of creditor, the losses they are deemed to have taken, in the process of giving loans to Irish banks.
If it is demonstrated, in the case of a corporation, that it behaved in a somewhat wreckless fashion, in respect of a nation, and in respect of the inhabitants of that same place, . . . then I accept, there is a question, in regards to the law, that governs over corporations and their mode of behaviour, . . . as to the extent to which the status, of shareholder, separates that groups from the being, that is known as the corporation.
What doesn’t happen, in the case of the class of the creditor, is that reversal of transmission, whereby, instead of a corporation owing something to a shareholder, that the shareholder, may owe something instead, to the corporation (and via, this circuitous route, back to an entire nation).
Furthermore, we observe, that in the case of the creditor, this debt paper, appears within markets, in which this legal entitlement to receive a stream of payments, is priced, and so it may be purchased.
There does happen to exist, a distance, between what is known as a creditor, and what is the corporation, a distance which is not in existence to anything like the same level, in the instance of shareholdings.
And so, we return to that question, that question about the funding, and also to a certain level, about the regulation,by the same nation, state or country, no less, of the entity, which we will term, a corporation, that happens to be a bank.
Why does the bank exist on such a minor sliver of shareholder’s capital?
And why does it issue such an overwhelming amount of complicated and multi-tiered credit paper?
People, who have studied finance, all of their lives, have looked at this question, and can’t answer it. There doesn’t appear to be any clear financial reason. And yet, attempts at regulation, to change the portions of equity, relative to credit paper, issued by banks has been slow and has been difficult.
All that we do know, is that banks, do operate as profit centers for very large amount of finance, and we do know, that the favored way ‘to own’, a corporation known as a bank, is not through its share issue, but rather indirectly, through the paper it issues to obtain credit.
In fact, to call it credit, to say that this paper that is issued by a bank, can in some way resemble the paper that is issued regularly by the nation, country, or state, I believe, is to stretch a point much too far. After all of it is done, and after all dust has settled, it is far more prudent to ask, who exactly does own a bank, and indirectly, who does really own a nation?
Have banks, as we know them, simply stopped being pure lenders? Have banks, merely come to serve as a mechanism, through which entire nations, and their contents, are traded? BOH.
“While there have been improvements in the labour market, the household sector remains highly indebted and
vulnerable to economic shocks, falls in income and increases in interest rates. The number and value of
mortgages in very long-term arrears (of 720 days and over) continues to rise and now accounts for a large
share of total arrears. The low inflation rate environment is not conducive to reducing debt burdens. The pace
of residential property prices rises has increased. It could give rise to expectations of further rises and could
lead to a misalignment of prices. The identification and removal of barriers to the provision of new housing is
needed to prevent house prices rising on an unsustainable path.”
@ unfeasibly
If interest rates rise there’ll be all sort of shenanigans other than mortgage difficulties with companies dying off and serious volatility linked to exits from bond funds not all of which may be liquid.
The first requirement is a good quality statistics reporting agency operating at arms length from the gov’t of the day. Whether CSO fits the bill or not I do not know.
Household total credit market debt (mortgages, consumer credit and non mortgage loans) as a percentage of disposable income has to be reported on quarterly. Debt service ratio, interest paid on mortgage and non mortgage debt as a percentage of disposable income (Qrtrly).
Mortgage to value not to exceed 80%, no Line of Credit on the house where the LOC + Mortgage would exceed 70%. Mortgage to income calculated on 5 year rate not the variable rate. Loan to income is a minefield where the soundness of incomes are difficult to gauge, I will leave that to experts.
A public announcement by the Minister of Finance that the market is overheating and that under no circumstances will lenders be bailed out by taxpayers. (Not in EI you say, pity.)
The Governor of the CBI makes a public announcement that the market is overheated by 10-15-30% and the bank will be taking concrete steps to rein in the excesses. (Impossible in Ireland)
The common good demands that Ireland is not a country that is pricing housing at anything higher than the EU median. Instead of giving foreign workers tax breaks of 30% to compensate them for the hardship of living in Dublin the Gov’t should be working to make Dublin affordable for the indigenous inhabitants of Dublin. Too many side deals being made at the expense of the common good.
If conditions are good enough for the Irish they should be good enough for the foreigners. We have enough native inequality without fabricating more using foreigners.
Re: Workers in Dublin
Mickey Hickey wrote,
Instead of giving foreign workers tax breaks of 30% to compensate them for the hardship of living in Dublin, . . .
When one cares to put a couple of elements together (something which governments are careful not to do, as they prefer to firewall, between things using what are known as departments), one realizes that things are related. Things are not neatly segmented into departments. You mentioned above, soundness of incomes are difficult to gauge.Soundness, of the income is okay. The difficulty is, getting the sound income to replace, the income that you have just lost. Assistance given by the state in Ireland to bridge, individuals over these gaps, is considered more generous than elsewhere in the European Union. It also has to be contrasted too, with the fact that such a large amount of human resources, leak out of the simply in Ireland.
Many people in Ireland, re-locate to someplace where job security may not be good, . . . but where the ease of changing employment, might not be as challenging. The release valve of emigration solves one problem today. It also creates another one, in terms of the whole cycle, from the point of view of skills leakage. One can go back to the start of the song, . . . where you see a small country such as Ireland engage in the challenge, to re-import skills. This creates the industry known as housing and construction, especially in places such as Dublin. This is the thing, which politics, in Ireland has always been wrapped up in.
Housing, of a lot of labour, that is needs to be imported.
Training and education, does take on a different meaning, in a place like Ireland. We have trained a lot of builders, in the past here. The political emphasis on huge amounts of foreign direct investment, lures many of the brightest and best Irish citizens, into providing the multi-nationals with thing. Housing, . . . or factories or offices. Hundreds of thousands of the nation’s youth, get into that game.
It solves the employment shortage problem, that is for sure. For a time, it all seems to work. Then you go through another cycle. You loose large chunks of young population at a time, you need to create more factories, and you need to bring in more workers, more skills shortages. Correct me if I am wrong, but Canadians and Australians might do it differently. They import the labour to build the factories, and they ensure that they have the people that are required, to attract those installations, in the first place. We have got a lot of foreign direct investment here. We have also got a lot of things fairly backwards. BOH.
@ Unfeasibly
“I have seen the argument made on a few occasions over the last year that there cannot, almost by definition, be a bubble if there is not a simultaneous dramatic loosening of credit conditions and increase in investor gearing.”
One of the things about QE is that it makes it very hard to know the true state of an economy. CBs pump money in to encourage risk taking – that drives up asset prices, as monetary policy does. By some measures the UK stock market is in a bubble. By others it isn’t. Whether or not those asset prices are justified is unknowable. Will QE bring economies back to some sort of equilibrium? the jury is still out .
“Correct me if I am wrong, but Canadians and Australians might do it differently. They import the labour to build the factories, and they ensure that they have the people that are required, to attract those installations ….”
The US, UK and EU economies (maybe CND and AUS also) are essentially financialized and no longer need productive ‘factories’ – most* have already been ‘barged’ to East Asia where there are tens of millions of un-employed folk available. Cheap and not so-cheerful labour makes all the trash and other extraneous stuff we really do not need but are ‘encouraged’ to consume, using credit, since our wages and salaries seem to be somewhat depressed at the moment. Little problem: debt accumulates, is legally private property and it legislatativelly very difficult for most persons (but not companies) to either writedown or off their personal debts. Incomes decline but personal debt abides!
The intellectual arguments and rationale for so-called global Free Trade are formidable and seductive. They proffer the pleasant prospect of enhanced wages, salaries and improved standards of living for all, while there is a curious silence about how this utopia can in practice be achieved. It cannot! The partial (so far) globalization of Free Trade has proven to be more destructive of humans and their environments than all the 20th century wars combined. That’s some positive achievement.
But so many Big Folk have been completely suckered by this artful intellectual scam that our politicians and MNCs are even now negotiating an even more destructive free-trade agreement in secret, lest the ordinary folk object.
There is no escape from this downward, deflationary political/MNC directed economic spiral – short of the imposition of truely draconian tariffs and positive policies to completely retrict the import of anything that we can either grow or manufacture or supply. Not going to happen – but you never know with politicians.
Meanwhile: We have a juicy 25% increase in Dublin house prices! Cui bono?
* But not the major defence contractors. Now I wonder why?
I think, that the word one is searching for here, is naivety.
Naivety on the part of successive governments in Ireland, on almost every side of the political debate.
The point is, that one cannot operate successful foreign direct investment, policy in a country, and spend the bones of a decade, not providing additional housing stock, and not run the considerable risk, that urban natives who cannot code search engines, will find themselves outbid for homes to rent, or homes to purchase.
The point I would make, is I would find it strange in Dublin, if housing prices were not rising at rates of 25% per quarter.
If one can see a decade of non-production of housing, and demand and prices for housing was not exploding, . . . then, one would have to doubt, the news that we are creating all of these new foreign direct investment, employment openings (a news feed which the Irish government sends out, as regularly as showers of rain in the country).
The point I would make, is that one cannot run a successful foreign direct investment, policy, by logic, and not operate a successful housing, planning and development policy in parallel.
At least two whole government administrations now in Ireland, have had ministers for enterprise and employment who have engaged tirelessly to drive industrial, and enterprise policy (whilst ministers for environment, have largely sat on their hands, refusing to coordinate foreign direct investment policy, with construction policy).
To fully understand, you have to understand how construction operates. It operates by a system, of chieftains, who who are allowed to collect a tax, so to speak, (to gain the benefit of their slice of the action), out of the success of Ireland’s national foreign direct investment, policy.
The housing construction industry, is much less about providing housing for citizens. It is much more about a system of collection of local taxes. If we did operate a system, whereby local authorities were allowed to collect the same, then we probably would have a lot more to invest into proper infrastructure.
But these are taxes collected by the private sector.
A thirty percent tax break, to attract in skills, into Ireland, to underpin, a foreign direct investment policy, is supposed to flow back to the coffers of the local chieftain, class, who in turn are supposed to release some accommodation.
It is a medieval, legal, chieftain kind of skimming tax. It is a very strange mixture of the very modern, and the very ancient. A taxation spend aimed to underpin enterprise policy, converts into a gateway tax, extracted on the ground. We have managed to create this system, over time in Ireland. We, ourselves, have managed to create this. It is frankly, no wonder that it has attracted the attention from organized international funds either, who are able to buy up housing stock, at hundreds of units at a time.
It is important to appreciate, that we have set up this system in Ireland, a long time ago, by ourselves. And by now, it has managed to back fire, on us. BOH.
My take on the Dublin housing market after talking to yuppies that have an existing house and a good income is that the the consensus is they have to quickly buy in D4, Clontarf and couple of other currently trendy areas. It is a repeat of the Celtic Tiger mentality but confined to a few desirable areas and people who are very well off. There are also people who have bought a bigger house in a “better” area and are now renting out the old house as they wait for the recovery. I am basing this on what my Kerry relatives living in Dublin are doing which is a small snapshot. I try to refrain from telling them that NAMA and individuals are hoarding property which will hit the market like a landslide when interest rates go up. De ja vu all over again or a replay of 2000 to 2010 except this time the upper middle class will bear the brunt.
Re: Landslide
@ Mickey Hickey,
There are several things, several components, that you have to consider. I’ll try and describe this multitude of factors, all happening at the same time, as briefly and as well as I can.
A) Low interest rates in savings accounts, driving money into other forms of investment as you mentioned.
B) Broken system of mortgage lending, cash buyer only micro market created, consisting of a very tiny, non-representative number of transactions.
C) Dip in prices of houses in Dublin, which represented a ‘window’ of opportunity to buy at relatively good value, in terms of the trend witnessed in Dublin, over almost two decades.
And the big one, that everyone forgets about, which has less to do with Ireland, and more to do with global and European context.
D) Conversion of cash into an asset that will retain more spending power, of the cash, in the case of large loss of value of the currency.
The last one, is probably a much larger one than the low interest rate, factor, which can’t be excluded but is secondary. The low interest rate factor reinforces the behavior and belief that it makes sense to convert cash, into something physical such as property. But from a point of view of the individual or individuals holding on to cash, what one thinks about overwhelmingly, is that risk that you are holding, . . . that is best illustrated by what happened in the Russian economy this week, or in the South African economy almost two decades ago.
We haven’t experienced one of these de-valuation events along those lines in Ireland for a while. I don’t fully understand what did happen in the United Kingdom in the early 1990’s, but I do know that some very strange things happened in the UK economy, in the early 1990’s, and I would be interested in reading a good history of this some time.
I am really coming at it, from the point of view of construction tender price trends, for things like government capital investment programs in the United Kingdom, where the index reached a peak in 1989, and fell off a cliff, taking a whole decade to recover (bearing in mind, that this fall in the tender price index, had already begun and was quite deep, BEFORE, the British pound was de-valued).
But that has never really happened to the construction price index (it normally follows closely to the CPI in Britain).
In summary, the media covers a lot of stories in Ireland, about pension products that never really worked out for purchasers of those investment products (combinations of stock market crashes, and low interest rates hitting the pension industry with a wallop).
That is, a pension product for the kids, when they reach age eighteen years, which had a hundred pounds or euros invested in it, for almost two decades worth, ending up being worth less than the money invested.
There are a lot of reason therefore, over the course of the decade since 2001, and that crash, in the markets, why people began to accumulate cash, instead of doing other things with their money, . . . and that leads over time, to the accumulation of the kind of risk, which I describe above, whereby the Roubel, event takes place, and the cash saving takes a wallop.
People out there, are really, just trying to measure and balance all of these risks, as best as they can, in a world that is changing a lot in many dimensions, and age old strategies for what to do with money, and savings, evaporate into thin air. Given the decade, and turbulence that came before this decade, a large amount of cash was accumulated, and it has to go somewhere to mitigate present currency risks, and given the low interest rates too, . . . in ends up going into home purchases in Dublin (public auctions, as seen on Irish television, selling off of large portfolios of property on a given day). BOH.
It is now becoming more and more agreed that shortage of supply is the main cause of current rising house prices. Restrictions on mortgage lending are irrelevant and may make the situation worse by restricting supply.
And yesterday the Central Bank said (I believe only one link per post is allowed):
“shortage of supply is the major reason for rising prices”
Both identical to what I have posted here for months.
Here’s my suggestion. Appoint someone who has no interest in ideology, but who has a track record in getting things done, as housing tzar, with a mandate to get the annual number of new houses constructed up to 30k minimum. I recommend Bertie Ahern for the position. I also recommend bringing back the Galway tent. There was no housing shortage when it was up and running. Close personal links between the government and builders/developers are a highly effective way of ensuring that the building industry builds enough for the growing population’s needs. In the past few years builders/developers have been demonised, and the current housing shortage is the result. There is also an office shortage developing and just yesterday it was reported that Ireland urgently needs more hotels to be built to cope with growing tourist numbers.
It also begs the question: what happened the 350k empty houses Ireland was supposed to have when FF left office?
There should be a Dail enquiry to find out.
I suggest that they never existed in anything like the numbers claimed. If they had genuinely existed, there couldn’t possibly be a housing shortage now.
Meanwhile, down at the Ranching Landlords’ Ball …
‘A venture between Goldman Sachs and CarVal Investors is understood to be poised to purchase about €1 billion of real estate loans linked to the former Anglo Irish Bank.
The venture is the preferred bidder for the loans, which are being sold by the special liquidators of Irish Bank Resolution Corp. at a discount it’s understood.
Some of the world’s biggest investors are flocking to Ireland, buying unwanted real estate assets as the country recovers from western Europe’s biggest housing crash. This week, Royal Bank of Scotland Group Plc agreed to sell Irish real estate loans with a face value of £4.8 billion to Cerberus, while Blackstone Group purchased office buildings in south Dublin from a group of investors.
Spokesmen for Goldman Sachs, CarVal and IBRC declined to comment.
“The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad. Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view. Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it.”
Groupthink and pressure to get business done are lethal. No financial asset, including Dublin housing, has an intrinsic value regardless of the economic context. We are in a very uncertain economic situation and it’s really important to keep a lid on excessive risk taking.
I also think the state of financial modelling is a mess and if you are interested I would refer you to what John Kay has written on the topic.
@JohnThe Optimist
There are a lot of unoccupied houses scattered around the country. This has always been the case, I put it down to lack of property tax and other fixed monthly costs that are common outside of Ireland such as Water/Sewage Connection, Electricity Connection and Gas Connection (Connection + Usage). Well built semidetached dwellings in built up areas close to amenities are selling for Euro 80k to 100k outside of Dublin. I could not put a number on it but people are emigrating which makes the problem worse, people tell me it is as bad as the 1950s’.
@ JTO
I imagine a chunk of them are in the West. Where we don’t need them and where the path of least resistance to avail of Bertie’s property bonanza was. The housing shortage is in Dublin City, where the private jobs are being created and the family homes aren’t/weren’t created.
I’m from a small village in the West. It had about 700 residents and 600 houses. Most of which are 3-bed semis family sized homes. A lot of which were Section 23 aka empty for most of the year ‘holiday homes’.
Incidentally, of the 60 in my leaving cert year, 2000, 25 are in Greater Dublin, 15 are in Australia, 10 in UK, 1 in New Zealand, 1 in Japan, 3 in Europe. Those at home, which I define as within 20k of the village, 5 out of 60, are either nurses/teachers/guards or on the dole & doing nixers.
Untold Story
That’s Legal wrote,
Incidentally, of the 60 in my leaving cert year, 2000, 25 are in Greater Dublin, 15 are in Australia, 10 in UK, 1 in New Zealand, 1 in Japan, 3 in Europe. Those at home, which I define as within 20k of the village, 5 out of 60, are either nurses/teachers/guards or on the dole & doing nixers.
David McWilliams, when he began to publish his theories about Ireland around a decade ago, started from the vantage point of Dublin city, and began to work his way, as best as he could out into the surrounding country side, into what he termed deck-land.
There has never, ever been a treatise written, which works from the other end of the island, and examines what happened to all of those ‘disappeared’ population, that you have described. More often than not, this demographic trend over a long period of time, has been skillfully swept underneath the rug. BOH.
23 replies on “Managing House Price Booms: The Role of Macroprudential Policies”
House price booms don’t grow out of thin air.They have a rock solid basis in reality,but reality as distorted by a misconception.
I have seen the argument made on a few occasions over the last year that there cannot, almost by definition, be a bubble if there is not a simultaneous dramatic loosening of credit conditions and increase in investor gearing.
I think it is a bit more subtle than that, in that a bubble can be initiated, and got under way, without increased gearing and credit expansion, by the perception that those conditions are about to occur – or in the case of the Irish property market, recur.
Commonly over the last year both Irish property investors and PPR seekers are prepared to acknowledge the likelyhood of muted wage increases over the next few years, little prospect of significant reductions in taxation, and no prospect of lower interest rates. They also acknowledge that housing costs (whether rent or typical mortgage payments) are towards the upper end of the sustainable range – and that all of the above are key drivers of property prices.
However, given that they could all see that Dublin property prices had started to increase rapidly, all of those considerations were generally dismissed as merely academic, and the higher prices rose, the more the animal spirits and paranoia about missing out dominated.
None of that will amaze seasoned market watchers, but pressing people on the question of what was going to allow the decision to buy pay off financially via the extected higher and higher prices (given all the aparent constraints) elicited the common expectation that as prices moved progressively higher the banks would be less nervous about mortgage lending and gearing up would fuel everything.
Often the response would not start with the banks but instead start along the lines of “Prices are going up now and I wouldn’t be surprised if they are back at the peak in a couple of years – they were there before.” …but on further discussion there seemed to be a subconscious confidence that if 95% LTVs or 5x LTIs would be needed for prices to go to the moon, then that was what would happen.
In summary I think expectations of a credit boom can cause bubbles or at least early bubble behaviour in prices of assets, even if those price movements are driven in individual transactions substantially by real money or modestly geared participants.
We have seen the beginning of a return to bubble psychology in Dublin over the last 18 months and Patrick Honohan and Cyril Roux are right to employ basic and simple to understand macro-prudential measures to guard against that. They and their staff should be encouraged to don the tin helmets and not fold under the outrageously one-sided and manipulative press and political reaction to their proposals.
It rather reminds me of the run up to the Euro when “Do you realise what will happen to interest rates and the housing market if you join – it will get out of control?!!” was greated with wide-eyed enthusiasm rather than caution at a potential source of destructive economic chaos.
Alan Greenspan’s doctrine held that bubbles cannot be prevented and that government’s task is merely to clean up afterward. Greenspan practice was to foster one bubble after another,until finally came along one so vast that it destroyed the global financial system on the way.
At it’s source,the global crisis was an American housing crisis,and not one of too little housing but of too much.
Below is the link to the elementary property valuation error that was the source of the global financial crisis and that bankrupted Ireland;
http://www.independent.ie/opinion/letters/bubble-values-26826609.html
Re: Irish Banks
Ratna Sahay writes, in her conclusion:
This is a tough one, I must admit.
There are various aspects to it.
Again, to relate this back to what actually happened in a place such as Ireland, during our credit bubble cycle, I think, would be an important aspect of the task facing an Oireachtas banking inquiry.
Let’s work through, the sequence, of what did happen in banking in Ireland a decade ago. What we witnessed, in Ireland was the share price of Irish banks rising up quite high over the period of high economic growth.
Taking what Sahay at the IMF has suggested, to have restrictions on dividends, . . . as a cheap means of banks raising capital in times of housing busts, which affect their book. So assuming, that we do go down this route, which seems sensible.
The great probability, I think, in an Irish context, for example, is that share value, and corporate valuation of Irish banks, could not have risen to the extent that they did in Ireland, . . . . had this suggested policy been in place.
I am sure that it will be examined and recorded by the Oireachtas banking inquiry, that Irish banks, continued to offer dividends to shareholders, even as they reported huge losses. It would be interesting, to examine, what was the thinking behind this. A this stage in events in the late 2000’s, we can assume that Irish banking share price valuation, was sliding downwards. And was it seen to be the case, at the time, that not, issuing those dividends might lead to the banks funding situation becoming even worse ? ? ?
What was the thinking here?
Assuming, by this stage also, that Irish banks, as corporations, were basically in trouble from a point of view of the structure of their funding capital anyhow, . . . being based overwhelmingly, on the notion, that share valuations may either grow, or continue to maintain, the very high levels that they had achieved, by the late 2000’s, . . that in theory, was based on some opinion, that Irish banks, were inherently valuable as corporations.
What it suggests, is that this problem to do with capital structure, deformities and distortions, is a large component of the problem in the round, which Irish banks, were staring at, in 2008, . . . in addition, to all of the losses, instability, and concentrations associated with the loan book itself.
The problem as the 2000’s progressed, it Ireland, for an Irish bank, was how to find a strategy to climb down, from the heights in had achieved, in market valuation. Climbing up the mount Everest, is one challenge, and climbing back down again, without falling in to the abyss, is another.
And what did the Irish banks do, with that spiral upwards of corporation valuation, on the journey to the top ? ? ? It used that upward progression of its share price valuation, to expand its loan book, and grow as an enterprise. As it went up the mountain, it (the banking system), increased the load it was carrying on its back. Unfortunately, by this stage, the more it appeared to increase its load, the more its market valuation appeared to increase also.
The question, for the Irish bank, on the upward portion of its journey, was whether, they had got a real, tangible market opportunity, . . . or not.
But, one can see, there is a tangle, of different factors at work here, . . . several things, which aren’t static, but are indeed, moving and shifting at different times. Many more, factors moving and shifting, it would appear, than the banks as medium sized corporations, were able to manage. BOH.
Re: The Knaves and Fools Theory
There has indeed, been a lot of nonsense about banking, about capitalism, about corporate government, finance and commerce, spoken in the aftermath to the credit boom of the 2000’s, both on this side of the Atlantic ocean, and the north American side too.
Unfortunately, so little of conversations, even care to reflect upon what a bank, actually is, or less even, what the occupations of the different players, that comprise such a corporation, are.
Instead, of looking in a rear view mirror, all of the time, with a considerable benefit of hind sight, it might be prudent, to remind ourselves, of the parameters, inside of which any managing director, of any company, in any industry, any where, is obliged to work within.
And yeah, that even includes banking.
A large part of the challenge, associated with doing an Oireachtas banking inquiry, in Ireland, will be to examine things from the standpoint of the participants who were operating in real time, as opposed to viewing events as we can see them now, using our hind sight vision (and with all of the benefits, of having had years to go back and read contemporaneous accounts, retrospective histories and ideas from every angle, and political view point).
This is something, which military courts, are often charged with doing, for example.
Therefore, we can examine, from this remove, from the time, and from the events, what exactly the job that a chief executive, or financial controller, of a type of corporation, known as a bank, in Ireland, was doing (or not supposed to be doing).
Basically, it boils down to this.
From a point of view, of the individual, who is paid compensation to act as a managing executive, or a corporation, . . . their job, is to take the growth opportunities, as they are given to them, . . . and not for their own benefit as such, but on behalf of the shareholders (owners), or the said corporation, attempt, in so far is possible, and within resources, reasonable means and the confines of law, to exploit those growth opportunities that are seen to exist.
That is basically, standard operating procedure, if you are C-level executive, of a bank, a pharma corporation, a fund management company, or whatever it is.
In retrospect now, after the ship has sunk, and all of the valuable cargo, has disappeared beneath the waves, we know with the benefit of hindsight, that the job of that captain, should have been to steer their vessel as far away from rocks as was possible.
But we should ask ourselves, was that the contract? Was that really the job, which the C-level employee, was really asked to undertake?
If we want banks, to operate differently, perhaps we need to change, what the role of shareholders is, and what the roles of other players are also. Shareholders, at almost every opportunity, will demand more growth, and if opportunities for growth do exist, as they did for Irish banking corporations in the 2000’s, . . . shareholders will search high and low, for executive level personnel, whose basic raw skill, is turning such opportunity into tangible realization.
And one can’t fault the Irish banking management, for achieving some of the targets, which they were bound by, in their contracts – even if now, we are able to see, the tangible awfulness – which such tangible realizations, would entail.
The big question I would ask, is whether a significant portion, of Irish banks, should always be held, in public ownership (considering the exposure to risk, that that entails). Because recent history has aptly demonstrated, by now if nothing else, the fallacy that having Irish banks, completely in private ownership, would somehow insulate the commonality, from danger.
The idea of banking private ownership, in Ireland, to my mind, seems like nothing more than rather pointless, and expensive nickel plated concealment over basic reality. BOH.
Macro pru was taken out of storage recently. It isn’t a magic bullet and past use suggests the same. Surely the bigger issue is how to control private credit issuance so that when the eventual tired and emotional phase comes it doesn’t sink the official sector.
It all comes back to incentives and having a proper central bank with LOLR status and bank resolution capacity.
It is no rocket science.n
Re: Banking Funding Policy
The essential question, about banking organisations always is, why do they adopt the funding model, which they do?
When does something, that is called a bank, hold such a small sliver of capital, that represents it’s shareholding ownership, . . . and why in a bank, does their exist such elaborate and complex layering and tiering of different types of creditors?
There is focus, placed upon the notion that in Ireland, there are obligations, that are placed upon the country to recover for various levels of creditor, the losses they are deemed to have taken, in the process of giving loans to Irish banks.
If it is demonstrated, in the case of a corporation, that it behaved in a somewhat wreckless fashion, in respect of a nation, and in respect of the inhabitants of that same place, . . . then I accept, there is a question, in regards to the law, that governs over corporations and their mode of behaviour, . . . as to the extent to which the status, of shareholder, separates that groups from the being, that is known as the corporation.
What doesn’t happen, in the case of the class of the creditor, is that reversal of transmission, whereby, instead of a corporation owing something to a shareholder, that the shareholder, may owe something instead, to the corporation (and via, this circuitous route, back to an entire nation).
Furthermore, we observe, that in the case of the creditor, this debt paper, appears within markets, in which this legal entitlement to receive a stream of payments, is priced, and so it may be purchased.
There does happen to exist, a distance, between what is known as a creditor, and what is the corporation, a distance which is not in existence to anything like the same level, in the instance of shareholdings.
And so, we return to that question, that question about the funding, and also to a certain level, about the regulation, by the same nation, state or country, no less, of the entity, which we will term, a corporation, that happens to be a bank.
Why does the bank exist on such a minor sliver of shareholder’s capital?
And why does it issue such an overwhelming amount of complicated and multi-tiered credit paper?
People, who have studied finance, all of their lives, have looked at this question, and can’t answer it. There doesn’t appear to be any clear financial reason. And yet, attempts at regulation, to change the portions of equity, relative to credit paper, issued by banks has been slow and has been difficult.
All that we do know, is that banks, do operate as profit centers for very large amount of finance, and we do know, that the favored way ‘to own’, a corporation known as a bank, is not through its share issue, but rather indirectly, through the paper it issues to obtain credit.
In fact, to call it credit, to say that this paper that is issued by a bank, can in some way resemble the paper that is issued regularly by the nation, country, or state, I believe, is to stretch a point much too far. After all of it is done, and after all dust has settled, it is far more prudent to ask, who exactly does own a bank, and indirectly, who does really own a nation?
Have banks, as we know them, simply stopped being pure lenders? Have banks, merely come to serve as a mechanism, through which entire nations, and their contents, are traded? BOH.
https://static.rasset.ie/documents/business/centralbankmacroreview.pdf
“While there have been improvements in the labour market, the household sector remains highly indebted and
vulnerable to economic shocks, falls in income and increases in interest rates. The number and value of
mortgages in very long-term arrears (of 720 days and over) continues to rise and now accounts for a large
share of total arrears. The low inflation rate environment is not conducive to reducing debt burdens. The pace
of residential property prices rises has increased. It could give rise to expectations of further rises and could
lead to a misalignment of prices. The identification and removal of barriers to the provision of new housing is
needed to prevent house prices rising on an unsustainable path.”
@ unfeasibly
If interest rates rise there’ll be all sort of shenanigans other than mortgage difficulties with companies dying off and serious volatility linked to exits from bond funds not all of which may be liquid.
The first requirement is a good quality statistics reporting agency operating at arms length from the gov’t of the day. Whether CSO fits the bill or not I do not know.
Household total credit market debt (mortgages, consumer credit and non mortgage loans) as a percentage of disposable income has to be reported on quarterly. Debt service ratio, interest paid on mortgage and non mortgage debt as a percentage of disposable income (Qrtrly).
Mortgage to value not to exceed 80%, no Line of Credit on the house where the LOC + Mortgage would exceed 70%. Mortgage to income calculated on 5 year rate not the variable rate. Loan to income is a minefield where the soundness of incomes are difficult to gauge, I will leave that to experts.
A public announcement by the Minister of Finance that the market is overheating and that under no circumstances will lenders be bailed out by taxpayers. (Not in EI you say, pity.)
The Governor of the CBI makes a public announcement that the market is overheated by 10-15-30% and the bank will be taking concrete steps to rein in the excesses. (Impossible in Ireland)
The common good demands that Ireland is not a country that is pricing housing at anything higher than the EU median. Instead of giving foreign workers tax breaks of 30% to compensate them for the hardship of living in Dublin the Gov’t should be working to make Dublin affordable for the indigenous inhabitants of Dublin. Too many side deals being made at the expense of the common good.
If conditions are good enough for the Irish they should be good enough for the foreigners. We have enough native inequality without fabricating more using foreigners.
Re: Workers in Dublin
Mickey Hickey wrote,
When one cares to put a couple of elements together (something which governments are careful not to do, as they prefer to firewall, between things using what are known as departments), one realizes that things are related. Things are not neatly segmented into departments. You mentioned above, soundness of incomes are difficult to gauge. Soundness, of the income is okay. The difficulty is, getting the sound income to replace, the income that you have just lost. Assistance given by the state in Ireland to bridge, individuals over these gaps, is considered more generous than elsewhere in the European Union. It also has to be contrasted too, with the fact that such a large amount of human resources, leak out of the simply in Ireland.
Many people in Ireland, re-locate to someplace where job security may not be good, . . . but where the ease of changing employment, might not be as challenging. The release valve of emigration solves one problem today. It also creates another one, in terms of the whole cycle, from the point of view of skills leakage. One can go back to the start of the song, . . . where you see a small country such as Ireland engage in the challenge, to re-import skills. This creates the industry known as housing and construction, especially in places such as Dublin. This is the thing, which politics, in Ireland has always been wrapped up in.
Housing, of a lot of labour, that is needs to be imported.
Training and education, does take on a different meaning, in a place like Ireland. We have trained a lot of builders, in the past here. The political emphasis on huge amounts of foreign direct investment, lures many of the brightest and best Irish citizens, into providing the multi-nationals with thing. Housing, . . . or factories or offices. Hundreds of thousands of the nation’s youth, get into that game.
It solves the employment shortage problem, that is for sure. For a time, it all seems to work. Then you go through another cycle. You loose large chunks of young population at a time, you need to create more factories, and you need to bring in more workers, more skills shortages. Correct me if I am wrong, but Canadians and Australians might do it differently. They import the labour to build the factories, and they ensure that they have the people that are required, to attract those installations, in the first place. We have got a lot of foreign direct investment here. We have also got a lot of things fairly backwards. BOH.
@ Unfeasibly
“I have seen the argument made on a few occasions over the last year that there cannot, almost by definition, be a bubble if there is not a simultaneous dramatic loosening of credit conditions and increase in investor gearing.”
One of the things about QE is that it makes it very hard to know the true state of an economy. CBs pump money in to encourage risk taking – that drives up asset prices, as monetary policy does. By some measures the UK stock market is in a bubble. By others it isn’t. Whether or not those asset prices are justified is unknowable. Will QE bring economies back to some sort of equilibrium? the jury is still out .
“Correct me if I am wrong, but Canadians and Australians might do it differently. They import the labour to build the factories, and they ensure that they have the people that are required, to attract those installations ….”
The US, UK and EU economies (maybe CND and AUS also) are essentially financialized and no longer need productive ‘factories’ – most* have already been ‘barged’ to East Asia where there are tens of millions of un-employed folk available. Cheap and not so-cheerful labour makes all the trash and other extraneous stuff we really do not need but are ‘encouraged’ to consume, using credit, since our wages and salaries seem to be somewhat depressed at the moment. Little problem: debt accumulates, is legally private property and it legislatativelly very difficult for most persons (but not companies) to either writedown or off their personal debts. Incomes decline but personal debt abides!
The intellectual arguments and rationale for so-called global Free Trade are formidable and seductive. They proffer the pleasant prospect of enhanced wages, salaries and improved standards of living for all, while there is a curious silence about how this utopia can in practice be achieved. It cannot! The partial (so far) globalization of Free Trade has proven to be more destructive of humans and their environments than all the 20th century wars combined. That’s some positive achievement.
But so many Big Folk have been completely suckered by this artful intellectual scam that our politicians and MNCs are even now negotiating an even more destructive free-trade agreement in secret, lest the ordinary folk object.
There is no escape from this downward, deflationary political/MNC directed economic spiral – short of the imposition of truely draconian tariffs and positive policies to completely retrict the import of anything that we can either grow or manufacture or supply. Not going to happen – but you never know with politicians.
Meanwhile: We have a juicy 25% increase in Dublin house prices! Cui bono?
* But not the major defence contractors. Now I wonder why?
Crazy Jens ar mire
http://www.ft.com/intl/cms/s/0/08f93276-8521-11e4-bb63-00144feabdc0.html
Re: Medieval
@ Brian Woods Snr,
I think, that the word one is searching for here, is naivety.
Naivety on the part of successive governments in Ireland, on almost every side of the political debate.
The point is, that one cannot operate successful foreign direct investment, policy in a country, and spend the bones of a decade, not providing additional housing stock, and not run the considerable risk, that urban natives who cannot code search engines, will find themselves outbid for homes to rent, or homes to purchase.
The point I would make, is I would find it strange in Dublin, if housing prices were not rising at rates of 25% per quarter.
If one can see a decade of non-production of housing, and demand and prices for housing was not exploding, . . . then, one would have to doubt, the news that we are creating all of these new foreign direct investment, employment openings (a news feed which the Irish government sends out, as regularly as showers of rain in the country).
The point I would make, is that one cannot run a successful foreign direct investment, policy, by logic, and not operate a successful housing, planning and development policy in parallel.
At least two whole government administrations now in Ireland, have had ministers for enterprise and employment who have engaged tirelessly to drive industrial, and enterprise policy (whilst ministers for environment, have largely sat on their hands, refusing to coordinate foreign direct investment policy, with construction policy).
To fully understand, you have to understand how construction operates. It operates by a system, of chieftains, who who are allowed to collect a tax, so to speak, (to gain the benefit of their slice of the action), out of the success of Ireland’s national foreign direct investment, policy.
The housing construction industry, is much less about providing housing for citizens. It is much more about a system of collection of local taxes. If we did operate a system, whereby local authorities were allowed to collect the same, then we probably would have a lot more to invest into proper infrastructure.
But these are taxes collected by the private sector.
A thirty percent tax break, to attract in skills, into Ireland, to underpin, a foreign direct investment policy, is supposed to flow back to the coffers of the local chieftain, class, who in turn are supposed to release some accommodation.
It is a medieval, legal, chieftain kind of skimming tax. It is a very strange mixture of the very modern, and the very ancient. A taxation spend aimed to underpin enterprise policy, converts into a gateway tax, extracted on the ground. We have managed to create this system, over time in Ireland. We, ourselves, have managed to create this. It is frankly, no wonder that it has attracted the attention from organized international funds either, who are able to buy up housing stock, at hundreds of units at a time.
It is important to appreciate, that we have set up this system in Ireland, a long time ago, by ourselves. And by now, it has managed to back fire, on us. BOH.
My take on the Dublin housing market after talking to yuppies that have an existing house and a good income is that the the consensus is they have to quickly buy in D4, Clontarf and couple of other currently trendy areas. It is a repeat of the Celtic Tiger mentality but confined to a few desirable areas and people who are very well off. There are also people who have bought a bigger house in a “better” area and are now renting out the old house as they wait for the recovery. I am basing this on what my Kerry relatives living in Dublin are doing which is a small snapshot. I try to refrain from telling them that NAMA and individuals are hoarding property which will hit the market like a landslide when interest rates go up. De ja vu all over again or a replay of 2000 to 2010 except this time the upper middle class will bear the brunt.
Re: Landslide
@ Mickey Hickey,
There are several things, several components, that you have to consider. I’ll try and describe this multitude of factors, all happening at the same time, as briefly and as well as I can.
A) Low interest rates in savings accounts, driving money into other forms of investment as you mentioned.
B) Broken system of mortgage lending, cash buyer only micro market created, consisting of a very tiny, non-representative number of transactions.
C) Dip in prices of houses in Dublin, which represented a ‘window’ of opportunity to buy at relatively good value, in terms of the trend witnessed in Dublin, over almost two decades.
And the big one, that everyone forgets about, which has less to do with Ireland, and more to do with global and European context.
D) Conversion of cash into an asset that will retain more spending power, of the cash, in the case of large loss of value of the currency.
The last one, is probably a much larger one than the low interest rate, factor, which can’t be excluded but is secondary. The low interest rate factor reinforces the behavior and belief that it makes sense to convert cash, into something physical such as property. But from a point of view of the individual or individuals holding on to cash, what one thinks about overwhelmingly, is that risk that you are holding, . . . that is best illustrated by what happened in the Russian economy this week, or in the South African economy almost two decades ago.
We haven’t experienced one of these de-valuation events along those lines in Ireland for a while. I don’t fully understand what did happen in the United Kingdom in the early 1990’s, but I do know that some very strange things happened in the UK economy, in the early 1990’s, and I would be interested in reading a good history of this some time.
I am really coming at it, from the point of view of construction tender price trends, for things like government capital investment programs in the United Kingdom, where the index reached a peak in 1989, and fell off a cliff, taking a whole decade to recover (bearing in mind, that this fall in the tender price index, had already begun and was quite deep, BEFORE, the British pound was de-valued).
But that has never really happened to the construction price index (it normally follows closely to the CPI in Britain).
In summary, the media covers a lot of stories in Ireland, about pension products that never really worked out for purchasers of those investment products (combinations of stock market crashes, and low interest rates hitting the pension industry with a wallop).
That is, a pension product for the kids, when they reach age eighteen years, which had a hundred pounds or euros invested in it, for almost two decades worth, ending up being worth less than the money invested.
There are a lot of reason therefore, over the course of the decade since 2001, and that crash, in the markets, why people began to accumulate cash, instead of doing other things with their money, . . . and that leads over time, to the accumulation of the kind of risk, which I describe above, whereby the Roubel, event takes place, and the cash saving takes a wallop.
People out there, are really, just trying to measure and balance all of these risks, as best as they can, in a world that is changing a lot in many dimensions, and age old strategies for what to do with money, and savings, evaporate into thin air. Given the decade, and turbulence that came before this decade, a large amount of cash was accumulated, and it has to go somewhere to mitigate present currency risks, and given the low interest rates too, . . . in ends up going into home purchases in Dublin (public auctions, as seen on Irish television, selling off of large portfolios of property on a given day). BOH.
It is now becoming more and more agreed that shortage of supply is the main cause of current rising house prices. Restrictions on mortgage lending are irrelevant and may make the situation worse by restricting supply.
ESRI now say it:
http://www.irishtimes.com/business/esri-questions-central-bank-moves-to-dampen-housing-market-1.2040195
And yesterday the Central Bank said (I believe only one link per post is allowed):
“shortage of supply is the major reason for rising prices”
Both identical to what I have posted here for months.
Here’s my suggestion. Appoint someone who has no interest in ideology, but who has a track record in getting things done, as housing tzar, with a mandate to get the annual number of new houses constructed up to 30k minimum. I recommend Bertie Ahern for the position. I also recommend bringing back the Galway tent. There was no housing shortage when it was up and running. Close personal links between the government and builders/developers are a highly effective way of ensuring that the building industry builds enough for the growing population’s needs. In the past few years builders/developers have been demonised, and the current housing shortage is the result. There is also an office shortage developing and just yesterday it was reported that Ireland urgently needs more hotels to be built to cope with growing tourist numbers.
It also begs the question: what happened the 350k empty houses Ireland was supposed to have when FF left office?
There should be a Dail enquiry to find out.
I suggest that they never existed in anything like the numbers claimed. If they had genuinely existed, there couldn’t possibly be a housing shortage now.
Meanwhile, down at the Ranching Landlords’ Ball …
‘A venture between Goldman Sachs and CarVal Investors is understood to be poised to purchase about €1 billion of real estate loans linked to the former Anglo Irish Bank.
The venture is the preferred bidder for the loans, which are being sold by the special liquidators of Irish Bank Resolution Corp. at a discount it’s understood.
Some of the world’s biggest investors are flocking to Ireland, buying unwanted real estate assets as the country recovers from western Europe’s biggest housing crash. This week, Royal Bank of Scotland Group Plc agreed to sell Irish real estate loans with a face value of £4.8 billion to Cerberus, while Blackstone Group purchased office buildings in south Dublin from a group of investors.
Spokesmen for Goldman Sachs, CarVal and IBRC declined to comment.
Bloomberg’
http://www.irishtimes.com/business/financial-services/goldman-sachs-linked-with-purchase-of-1bn-in-irish-property-loans-1.2041055
@ JTO
I think 2 links work ok but not 3
“It is now becoming more and more agreed that shortage of supply is the main cause of current rising house prices.”
Surely the hunt for yield is in the mix somewhere. Maybe this time really is different but I don’t believe fairy stories much
http://www.ft.com/cms/s/0/2bd925be-0bdb-11e3-8840-00144feabdc0.html
“The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad. Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view. Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it.”
Groupthink and pressure to get business done are lethal. No financial asset, including Dublin housing, has an intrinsic value regardless of the economic context. We are in a very uncertain economic situation and it’s really important to keep a lid on excessive risk taking.
I also think the state of financial modelling is a mess and if you are interested I would refer you to what John Kay has written on the topic.
@JohnThe Optimist
There are a lot of unoccupied houses scattered around the country. This has always been the case, I put it down to lack of property tax and other fixed monthly costs that are common outside of Ireland such as Water/Sewage Connection, Electricity Connection and Gas Connection (Connection + Usage). Well built semidetached dwellings in built up areas close to amenities are selling for Euro 80k to 100k outside of Dublin. I could not put a number on it but people are emigrating which makes the problem worse, people tell me it is as bad as the 1950s’.
@ JTO
I imagine a chunk of them are in the West. Where we don’t need them and where the path of least resistance to avail of Bertie’s property bonanza was. The housing shortage is in Dublin City, where the private jobs are being created and the family homes aren’t/weren’t created.
I’m from a small village in the West. It had about 700 residents and 600 houses. Most of which are 3-bed semis family sized homes. A lot of which were Section 23 aka empty for most of the year ‘holiday homes’.
Incidentally, of the 60 in my leaving cert year, 2000, 25 are in Greater Dublin, 15 are in Australia, 10 in UK, 1 in New Zealand, 1 in Japan, 3 in Europe. Those at home, which I define as within 20k of the village, 5 out of 60, are either nurses/teachers/guards or on the dole & doing nixers.
Untold Story
That’s Legal wrote,
David McWilliams, when he began to publish his theories about Ireland around a decade ago, started from the vantage point of Dublin city, and began to work his way, as best as he could out into the surrounding country side, into what he termed deck-land.
There has never, ever been a treatise written, which works from the other end of the island, and examines what happened to all of those ‘disappeared’ population, that you have described. More often than not, this demographic trend over a long period of time, has been skillfully swept underneath the rug. BOH.