Vol 46, No 3, Autumn (2015)
Table of Contents
|Blowing the Bubble: The Global Funding of the Irish Credit Boom|
|Mary M. Everett||339-365|
|Outsourcing Foreign Services and the Internet: Evidence from Firm Level Data|
|Holger Görg, Aoife Hanley, Ingrid Ott||367-387|
|A Reduced-form Equation for the Unemployment Rate Estimated from a Panel of Nineteen OECD Countries|
|Dimitris Hatzinikolaou, Konstantina Girtzimani, Christos Mousafiris||389-397|
|Are Classroom Internet Use and Academic Performance Higher after Government Broadband Subsidies to Primary Schools?|
|Marie Hyland, Richard Layte, Seán Lyons, Selina McCoy, Mary Silles||399-428|
Policy Section Articles
|Wages and Ireland’s International Competitiveness|
|A Needs and Resources Assessment of Fiscal Equalisation in the Irish Local Government System|
|Gerard Turley, Darragh Flannery, Stephen McNena||459-484|
17 replies on “Economic and Social Review: Autumn 2015 Issue”
Is there any limit to the bad news?:
ESRI revise their forecast for economic growth in 2015 to 6% and 4.5% next year.
Given the growth, it now looks very likely that Ireland will have the 2nd highest GNI per capita in the EU by 2017 (only Luxembourg higher). During the current growth spurt, Ireland has already passed Finland, the U. Kingdom, Belgium and France and looks set to pass the others in 2016 or 2017. Ireland’s previous best ranking for GNI per capita was 4th in 2007.
However, there are risks.
The Daily Telegraph had an article on Monday saying that, if Australia beat England on Saturday, and the hosts go out in the group stage, this could trigger a stock market crash, a slump in consumer spending and a collapse in economic growth. This might have a knock-on effect on Ireland and the Eurozone, possibly even triggering the total economic collapse of the Eurozone, and eventual the EU, leading to political ferment across Europe and possibly the end of civilisation in Europe.
But, it would certainly be worth it.
Here is another Eurostat chart which more accurately reflects where Ireland fits into the European framework.
That the Irish economy can overheat – and subsequently blow up – because of bad governance and poor policy direction is not news.
And when it blows up, the cost of sticking the pieces back together is rather high.
I drew attention to the huge gap between the market income gini coefficient and the disposable income coefficient in the OECD’s Economic Survey of Ireland in this comment:
The OECD observed that: “Ireland’s high structural unemployment and low labour-market participation results in large groups of households being left without labour income and relying almost exclusively on social transfers to make ends meet.”
The tax and transfer system is, and has to be, very effective at redistributing income. But this comes at a huge cost and, despite the best intentions, the welfare system can create barriers to persons in jobless households wishing to enter employment.
This is addressed in a recent ESRI report:
Obviously more effective tragetting of welfare transfers and the removal of barriers and disincentives to workforce participation are important, but it is equally important to start tackling the market income inequalities. But one thing you can be sure of is that the focus will be on reducing the “burden” of welfare transfers and no attempt will be made to tackle the market income inequalities. Any assessment of these would reveal that most arise either directly or indirectly from policy and public administration decisions. And you wouldn’t want to be upsetting the beneficiaries of these decisions now would you?
So what happened the theory that house prices were unrelated to supply and demand and were actually determined by bank lending practices?
The increase is described as a ‘surprise’ on the RTE website. To anyone reading my posts on here earlier this year, it will come as no surprise.
To great acclaim from the usual sources, early in 2015 the Central Bank imposed severe restrictions on bank mortgage lending. This was widely predicted on this site and elsewhere to lead to a fall in house prices during 2015.
No sign of it yet whatsoever.
And little difference between house price increases in Dublin and outside Dublin.
So, what’s going on?
One of the features of modern liberal Ireland is the abandonment of intelligent analysis with regard to cause and effect for various phenomena. Instead, certain groups are single out by the cultural and media elites for demonisation, e.g.. Fianna Fail, the Catholic Church, the Construction Industry Federation etc.
Another such group is banks and building societies. By lending money to people who want to buy their homes, the banks and building societies are condemned and accused of stoking house price increases. We are told that house price increases have nothing to do with supply and demand. but are simply the result of greed among bankers and other lenders.
Its all bunk.
The reality is that house prices are determined by the laws of supply and demand, just like the price of everything else. We now have a growing mismatch between supply and demand for houses in Ireland and this is what’s driving increasing prices and rents. As the old song goes, at least in the short term ‘things can only get worse’.
Population growth in Ireland is accelerating sharply, from around 5,000 increase in 2012-2013 to a 27,000 increase in 2014-2015. On present trends, the increase in 2015-2016 will be close to 40,000. On the back of the booming economy, most economists now predict a return to net immigration from 2016-2017 on. I myself think we may already be in net immigration. This will lead to annual population increase of 50k, 6-k or even higher. Despite this, there has only been a very marginal increase in new house construction from rock bottom levels. Until this mismatch is addressed house prices will continue to increase.
There is also the fact that the 350k ’empty’ houses that Ireland was supposed to have were a myth, a political-motivated hoax. If anyone doubts this, pray let us know why, with a claimed overhang of empty houses of such magnitude ON TOP OF severe bank mortgage lending restriction, house prices are continuing to rise sharply right across the country (not just Dublin).
Add in soaring rents and the picture of a housing shortage (as distance from a fictitious 350k housing surplus) is confirmed. I can’t see either of these trends (rising prices and rising rents) coming to an end until there is a massive increase in new house construction. But, this brings us to a major problem. Namely, the building and development industry has been demonised by the cultural and media elites in recent years and anyone associated with it is now considered by these groups to be unclean and deserving only of penury and banishment from decent liberal society. In this culture, a much-needed increase in new house construction may be much harder to achieve than when, say, Charlie Haughey and Bertie Ahern were running the show.
It gives me no pleasure to point these facts out. I have no interest in seeing house prices rise and feel pity for those being priced out. But, that;s what happens when a shortage develops, regardless of what the Central Bank or King Canute think.
Either had much better employment/unemployment stats than the EU average from 1996 to 2008. they were then worse than the EU average and among the worst in the EU from 2009 to 2013. Since 2014, the trend has reversed. Ireland’s unemployment rate fell below the EU average again a few months ago. On present trends it should be well below the EU average in 2016. None of this refutes the GDP/GNI figures.
You are missing the point that I am trying to make. Unemployment will, no doubt, continue to fall because of the improving economy and emigration. But the country is literally off the chart when it comes to jobless households. This is a symptom of a much wider malaise of which most people are aware but few wish to discuss i.e. the existence of a near permanent deprived sector of the population which has no work but does have a vote. And a conviction, as a result of decades of cllentilist politics, that the state has a near total responsibility to “look after it” without any appreciation on the part of those involved that they also have a personal responsibility.
In short, the Irish labour market and economy in general is seriously skewed in terms of balanced access to the benefits of economic development as a result of inequality in terms of access to education and training, health care and retirement conditions. It is for this reason that it is at the opposite end of the scale from truly advanced economies such as those in Scandinavia.
Headline helter skelter economic data, largely as a result of fortuitous external factors (in which I would include FDI), do reflect a recovering economy for the majority of the population still at work. But it is a near racing certainty that history will simply repeat itself in terms of the failure to make the necessary structural changes. We will continue to be taken in by our own propaganda until the wheels come off again.
The “hesitation waltz” regarding the date of the election suggests that the political class in general is fully aware of the volatility of public opinion at this juncture. On the other thread, I posted a link to data on the parlous state of the finances of France. Their equivalent of the NTMA has done a simulation of the cost of a doubling in the historically rock bottom cost of government borrowing – including by Ireland – at this juncture. It would be interesting to see the same exercise carried out here. I would hazard a guess that it would swallow up the supposed budgetary leeway that more borrowing is supposed to provide.
Thanks for the ESRI link. I think that the Tánaiste has an appreciation of the problem and deserves credit for addressing it, even if coming at it at a tangent so to speak. I doubt if there will much in the way of appreciation of her efforts in electoral terms.
The Welfare System cannot “fix” the class bias in the education system; not is it designed to do so. It is designed to keep the ill-educated lower orders in such subsistence that they do not revolt … and upset the middlin and upper echelons who benefit most from the government funded education system.
Neat paper in ESR. I recommend it to readers who might, just might, have some interest in Labour as distinct from all the odious interest in Financial Capital which dominates this blog. Pardon the synecdoche ….
Any info on Eagle or Arrow or NAMA …. historical experiential FF insights, and a leg on all sides of the island, should give you an insider advantage here ….
Blowing the Bubble: The Global Funding of the Irish Credit Boom
Mary M. Everett
European global banks played a significant role in the international transmission of liquidity during the period prior to the global financial crisis. This paper examines how European global banks channelled finance, raised in US wholesale funding markets, via cross-border banking flows to Irish retail banks during the first decade of the euro. The results indicate that global factors, namely the US-sourced funding of European global banks and global risk, were influential in driving cross-border banking inflows to Ireland. Furthermore, the empirical analysis suggests these global factors contributed to changes in domestic private non-financial sector credit during the Irish credit boom. These results shed new light on the factors influencing the international funding of Irish retail banks and changes in domestic credit during the credit boom.
V. useful paper. Financial System contagion …
“The reality is that house prices are determined by the laws of supply and demand, just like the price of everything else.”
No John, this is not so. Its a tad much more complicated. Its explained several times – in the archives.
If the lenders had not behaved al la VW – and not used some very dodgy ‘software’ to assess the ability of borrowers to meet their mortgage repayments – and – have 68% of the after-tax income available for other stuff, then residential property prices would be about 60% – 70% below their current levels – apart from the top percentile sector.
The cost of a residential mortgage has to be in the 6% – 8% range otherwise residential property prices increase dramatically as interest rates decline. Its know as a boom – and it was the mother-and-father of all booms from 1996 – 2000 and again from 2002 – 2007.
Isn’t it strange that In Ireland few if any politicians are willing to advocate policies that make sense economically. Broadening the tax base, for example, by introducing a property tax, or getting households to pay for the consumption of a scarce resource, like water, and thereby encourage conservation. If introduced, the Troika or Europe are ‘blamed’, Similarly on housing, there are over 300,000 households in private sector rental accommodation so presumably it is a competitive market, with rising rents a symptom of excess demand. Yet it is proposed to effectively impose a ceiling on rents which would be unworkable anyway , absent a significant increase in the supply of housing. At the same time the Central bank chose to introduce credit controls, pushing more people into the rental sector, in a market where credit has contracted for over 6 years and where housebuilding is unlikely to exceed 13k this year.
“Isn’t it strange that In Ireland few if any politicians are willing to advocate policies that make sense economically.”
No, they are only interested in re-election. The so-called broadening of our tax base is simply electioneering sloganizing. The application of Psychic Balm, to calm folk – you understand.
Dan, this is rubbish – “getting households to pay for the consumption of a scarce resource, like water, and thereby encourage conservation …”
We already pay for electricity and gas – and we conserve those? Give me a break! Both property and water charges are simply additional income taxes – and not very artfully disguised ones.
“At the same time the Central bank chose to introduce credit controls …”
Nice try Dan, but you had better explain why we now have residential mortgage default rates at 20% – when they used to be less than 1%. That was when the lenders were few and very cautious about extending residential mortgage loans. Why they even required you to save for a few years before they would consider your mortgage loan application.
So what caused the twenty-fold increase in residential mortgage deafults? The Free Market? Financial deregulation? Too many lenders? Naw, not possible. The economic theory is clear on this – “Competition is good for ???? ” – and it sure wasn’t the borrowers!
Am at Heathrow, so unable to go into detailed figures. In 8 hours I shall be in New York. But, I leave with the following:
(a) Ireland’s unemployment rate is now below the EU average (9.4% v 9.5%) and well below the Eurozone average (9.4% v 11.0%). On present trends this gap will widen sharply in Ireland’s favour in next few years.
(b) CSO figures last week showed the jobless household rate in Ireland falling sharply to 13% and now similar to EU average but falling much faster.
Any thoughts on?
(c) Why is Ireland’s average GNP growth rate since 1986 over twice that of any other EU15 country and almost 4 times the EU average in that time.
(d) What happened the 350k empty houses FF were supposed to have left behind and, if they exist (unlikely) why are house prices rising so fast (both in Dublin and the rest of the country) and why is the housing minister in a basic and formulating emergency plans to purchase prefabricated houses. When Ff were in power, population growth was 10 times what it has been under FG/Lab (up 1 million in a decade), but there was no housing shortage as sufficient houses were built even for an unprecedented growth in population. Their reward, of course, was to get dog’s abuse for building too many houses from the same commentators who are now screeching about a housing shortage.
Au Renoir for now.
Oops – bad tying in terminal 2 – should be:
‘panic’ and not ‘basic’
LTV and LTI limits would have been a good idea in 2004, I agree, but we do not have a credit boom now so bring them in when it is appropriate. They are designed, after all, to have an impact on credit growth and that would-be buyers have to save for longer. If demand for property exceeds supply then credit controls will simply make that more evident in higher rents rather than higher prices.
Dan, the LTV and LTI limits are only two of the critical characteristics of residential mortgage lending. The others – (1) the proportion of your income that goes on [mortgage interest + property taxes + fire insurance + mortgage protection insurance + sinking fund for essential maintenance and repairs] – this total shall not be greater than 28% of your after-tax income; (2) the aforementioned + [all your other loans (cars, bank loans, credit card payments)] – this second total shall not be greater than 32% of your after-tax income.
Another characteristic – that has been artfully abandoned by the lenders is the aggregation of two incomes when assessing the borrowers. Only one income should only ever be considered – for pretty obvious reasons.
Basically, not more than 24% of your after-tax income should go on mortgage repayments.
If any of these above characteristics are breached, then the probability of defaults rises exponentially. This might beacceptable if we had non-recourse mortgages – but we do not.
The final nail in the borrower’s coffin is that the reckless lenders (because that is what they are) will have their debts backstopped by the taxpayer. Nice free lunch that. In summary: we do not need a Central Bank to “regulate” the unregulatable finance and insurance sectors – you just need executives in charge who possess a fair degree of testicular moxie and just say NO!
(a) Is Ireland the outstanding performer you claim it to be or a mediocre competitor with the rest of the EU?
(b) I could not find the CSO data to which you refer but did find this.
(c) The real question is why did Ireland lag behind when the rest of Europe was powering ahead in the post-war years. The policy changes that stopped this started with Whitaker and Lemass but FF, with the assistance of both FG and Labour, have since ensured a roller-coaster ride.
(d) I live in a rural location and I am surrounded by empty houses (their owners having emigrated) and several ghost estates. Anyone journeying to any location in Ireland outside Dublin, Galway, Cork and Limerick will have the same experience. Try Daft for the sales data, including the length of time properties are for sale and the prices those being sold are getting! There is a housing shortage because (i) FF allowed a coach and four, with assistance from FG, to be driven through planning rules and the rash availability of credit resulting in plenty of houses but in the wrong places (ii) stopped the construction of social housing on the basis of confusing deliberately for electoral reasons the right to a home with the right to own a house.
Slow down there Sean re house price predictions.
Just to note what has actually happened – quote from the article ..
“This was a much stronger performance than we had expected and it reversed the downward trend of the past four months.”
It’s important to note that the most recent move had reversed a downtrend over the past 4 months. If your analysis was so accurate then why would the property market have seen a downtrend of any description in 2015 given the roaring growth the economy is exhibiting ? Answer because house prices are not driven by the simplistic supply demand equation that you suggest they are.
The facts are: rents are rising in line with house prices and according to banks there has been a recent shift to buying rather than renting – the lending numbers are yet to suggest this but from experience the lending data has always tending to lag the actual events on the ground due to manner in which the CBI reports the numbers.
I’d suggest the next lending data numbers will indicate a pick-up in lending activity which has feed into the latest house price spike. The supply demand issues that supposedly drive this market were around in April, May, June and July this year and yet house prices, according to KBC, fell.
I understand how this can be the case yet it seems you don’t seem to grasp the idea that buying a house is credit dependant, is credit dependant , is credit dependant. It matters not a tot what supply or demand is out there; unless there are willing lenders with lots of cash to slosh around the average normal Joe’s won’t be able to transact as the average price is not within the saving means of the average punter. It’s not vegetables we’re buying here as the vast majority of property transactions require leverage leg ups.
In the years 2002 to 2007 residential rents according to the Daft.ie index were essentially flat to lower and yet we saw an enormous rise in house prices (close to 100% in that 5 year period alone).
If your demand supply theory was working as efficiently as you claim what was being experienced in the rental market should have been repeating itself in the transactional market i.e.as supply was coming on board at a serious clip and actually outstripping demand house prices should have been lower in the 2002 to 2007 period and yet house prices doubled !! Oh dear.
I suggested to you during the year that the likelihood of a similar house price bubble occurring today was highly unlikely primarily because house prices are not and I repeat are not driven by the simplistic supply demand issues which you believe they are otherwise the 2002 to 2007 house price index growth s noted above is either 1. Incorrect or 2. Imaginary.
We both know that the house price growth was real but essentially fictitious why ? because the rental market was telling you the real story. Additional housing supply was allowing renters to move freely and in so doing rents were stable to lower as supply and demand were broadly in unison albeit slightly more supply than demand.
Fast forward to today when rents are now rising; (per Daft.ie)
ytd at 5.2%
2014 at 9.3%
YoY at 8.5%
It seems logical and correct that house prices should be moving largely in step with the rental market if normal market conditions prevailed and lenders were properly assessing the valuation drivers:
Ytd at 4.79%
2014 at 11.21%
YoY at 4.73%
Whilst not an exact fit the numbers are broadly in line.
This simply proves as I suggested here many times that the rental market is the only true market to usefully determine the actual house price market.
What happened in the 2002 to 2007 was a pricing error driven by dire lending practices and a lack of basic understanding of the valuation drivers to the underlying property market by the banks during that period.
In 2015 we have a rising rental market at about 5% ytd and we have a resale market with prices rising at about 5% ytd (both according to Daft.ie). Pardon me but where’s your issue, as this is precisely as it should be.
My argument to you earlier in the year is that without another credit binge event it is unlikely that you will see house prices tick markedly higher as they will and should (all other things being stable) track the rental market which is precisely why house prices in counties such as Offaly, Longford , Roscommon and Cavan for instance are not seeing anything approaching the growth patterns in Dublin house prices because the rental market in these counties is only beginning to stabilise and harden and consequently actual house prices will likely exhibit similar patterns in time.
In the absence of an improving rental market house prices are not going to run off to the moon again unlike the pricing error allowed to develop in the 2002 to 2007 period which was fuelled by the errand banks.