November 7, 2004

Gold in them there streets

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The demise of Bewley’s illustrates the influence that land is having on business culture in Ireland.

You may have read elsewhere that the first gold was discovered in California in 1848, but the big gold rush didn’t happen until 1849.

The rush was triggered by President James Polk mentioning the discovery in an off hand way during his State of the Union address.

The prospectors (and, years later, San Francisco’s NFL team) came to be known as the 49ers rather than the 48ers,whichwould have been technically more correct.

The long delay between the first discovery at Sutter’s farm in January 1848 and the State of the Union address in 1849 was the main impetus behind the world’s first telecommunications revolution. In 1849, the Western Union Company was founded and, within a decade, most of the US was wired for telegraphy, driven by greed for immediate news of the next big gold discovery.

It is estimated that 15,000 Irishmen who arrived by famine ship made their way across the US in the winter of 18481849 to prospect for gold. By 1853, the Irish had been joined by over 100,000 others, including 25,000 French and 10,000 Chinese.

The entire structure of San Francisco changed dramatically, and so was born theAmerican Dream,where anyone can strike gold. (A modern version of the same dream was repackaged and successfully sold to the American electorate by George W Bush last week.) However, the story of the original Mr Sutter, whose discovery of gold in the Klondike River sparked off the whole gold rush, is an interesting and cautionary one.

Johann Sutter was born in Switzerland in 1803. He was a decent enough fellow, but with a weakness for bad debts. Hounded by creditors he headed off to the US in 1834. After moving from place to place, he finally bought land in the SacramentoValley in 1838. He named his domain New Helvetia, and formalised his plot by becoming a Mexican citizen.

He managed New Helvetia as a small empire with impeccably dressed servants. By 1846, there were 60 buildings inNewHelvetia, including a bakery, barracks, tanning factory, 10,000 sheep and land producing 40, 000 bushels of wheat. In his memoirs, Sutter laments that “my best days were before the gold”. In 1847, Sutter decided to build a sawmill so that he could log the surrounding wooded valleys and sell on the timber to Yerba Buena, as San Francisco was still known at the time.

On January 24, 1848, his mechanic on the sawmill project – aman namedMarshall – came to his office and told himto close the door. Marshall emptied two ounces of gold from his pockets. Sutter, realising what would happen, told his workmen tokeep it a secret until the sawmill and another flourmill he was building were finished. They managed to keep the lid on things for a few months but then, on May 4, the secret was out in San Francisco.Within weeks, the surrounding area went bonkers. The recently-opened school in San Francisco had to shut because its teachers and pupils alike headed straight for the mines. Here iswhat Sutter himself had to say: “All my plans came to naught.One after another, all my people left for the gold mines. Only the sick and crippled were left.”

The mill was never finished as all other productive business got trampled in the face of the gold rush.

Fast-forward to Ireland in 2004, and it is clear that we are in the grip of a frenzy much like a gold rush.Land has replaced gold, but as Led Zeppelin would put it, the song remains the same. Quite apart from the social dislocation arising from astronomical land prices, a real problem for our society is that somuch ofour cash and debts are being funnelled into this most unproductive and speculationprone of assets. The dilemma for a society that allows itself to be swept up in speculation fever is the pernicious impact that “frenzy greed” has on all other business. Instead of building a long-term business with customers, branding, employees and cashflow, the lure of the easy money in land or gold speculation is far too attractive. In Ireland,we are experiencing the dilemma faced by Sutter in California. In 1849, all the best brains, brawn and capital got sucked into prospecting as thousands chased the jackpot dream, while real enterprises such as New Helvetia – with bakeries, tanneries and mills – got elbowed out.

This is because those real businesses were judged, not against benchmarks such as profitability, robustness and market share, but rather against the absurd capital gain promised in gold.The subtext really was that if you weren’t into gold in some way,you were a bit of an eejit. Similarly, in modern Ireland the same type of mentality applies: if you are in businesses other than land, many regard you as a bit of a simpleton. Land is, after all, where the action is. Take Bewley’s last week. Bewley’s is a premier brand. It is a name that immediately says something to all of us, yet it is now no more.Why? The experts tell me that there are a number of trends it was slow to pick up, such as coffee-to-go. Moreover, the cafe market is one of the most competitive areas around.

But it was land that really killed Bewley’s.The crucial transaction that sank Bewley’s had nothing to do with coffee, tea, sticky buns or lunches served.The core of the Bewley’s problem was a sale and leaseback agreement reached between the owners and a land developer. The developer bought the freehold Grafton Street building from the owner for a huge sum, and the owner, in return, entered into a leaseback arrangement with the developer at an astronomical rent.

It was rent, not bad coffee, that torpedoed Bewley’s.

So what is going on here? The owners of Bewley’s got caught up in land fever. They knew they were sitting on a goldmine, and the sale and leaseback arrangement seemed to be a way of cashing in on this goldmine,while at the same time retaining their business. In this deal, the dominant influences were land, the re-rating of the land, and the urge to cash in. It had nothing to do with running the business of selling coffee. In the process, the owner of Bewley’s changed frombeing a caterer intobeing a land prospector. Commonplace speculative land windfalls are dominating business thinking, to the detriment of real, lasting business. Last year, the Killiney Court Hotel was demolished for apartments, not because it couldn’t hack it as a hotel, but because itmademore financial sense for the owners to sell the land to a developer. Like Bewley’s, another Dublin landmark has gone.

Obviously, in both cases, no one can blame the owners for doing what they did, in the same way as no one could blame the 49er teachers in San Francisco’s schools for swapping basic maths for basic mining.However, the collective consequences of these individual actions are disturbing. In societal terms, what does this lead to? First, aweird balance of wealth in society where there has been a massive transfer of wealth fromworkers, employees and entrepreneurs to landlords. Secondly, we will have a banking system totally overexposed to one asset: land. Thirdly,only projects backed by land will get financed. So entrepreneurial ideas that have nothing to do with this new gold will be starved of seed capital. Also, like the oil lobby inTexas or the gold lobby in South Africa, the landlord lobby will become even more influential in politics. After the gold rush of 1849, at least the States was left with an impressive telegraph system, the name of a gridiron team and the enduring myth of the American dream.

After the Irish land rush,what will we be left with? 


  1. Bobby

    Well done David – the hammer found the nail again!

    A flip side to this is the collapse of our value system,
    our Chrisitan Faith and by extension, our lack of concern
    for the environment of global warming – its all related!

  2. Alan Gregg

    great article although it should be noted that the Klondike
    gold rush was much later (1897) and occurred many miles to
    the north in the Yukon.

  3. Paul Goggin

    Land, wealth, money. Cocktail to sucess. The problem with
    Ireland is that politics has deemed a snail like view of
    the world. We are building out instead of up and down. We
    have a one deminsonal view of the world. This is the only
    way that Ireland can go with its development. Thus putting
    a grid on the power of landlords.
    The problem of doing this is that the developers are the
    landlords so any effort to start the effort of taking power
    away will lead to slow stupid development, which we have
    now. But maybe they will realise that economies of scale
    will lead to bigger profits and the more qualtiy places you
    have the more money you make. What we will be left with
    David is the structual meltdown of the property markit.
    Which can only be good for the Irish people.

  4. adrian

    For several years now I have delayed on making a house
    purchase realising fully their gross overvaluation.

    Unfortunately for me the long awaited correction has
    failed to arrive and for socially acceptable home-making
    reasons a home has eventually been purchased. Lifes too
    short to hang around forever!

    I expect that houses are overvalued by about 45% and that
    they will fall. U.S. rates are on the rise which will be
    followed by e.u. rates. We’ve got an army of builders
    capable of throwing up 80,000 housing units per year and
    rising. Its been blatant for far too long that its a
    bubble on steroids, but the greedy gold rusher suckers
    just keep on coming into the bottom of this crazy pyramid
    money making scheme, meanwhile the banks and other vested
    interests (thats just about everybody) stay stume!

    I’ve reached the point of acceptance that a lot of money
    has vanished on purchasing my home. I plan to recoup the
    loss by providing psychotherapy to the gold rushers who
    are soon to lose everything. Hopefully they will have a
    little bit of money to pay for the sessions on the couch!

  5. David

    David,

    I dont think I have heard of any other Irish
    analyst/economist question the insane property values as
    you have. I totally agree with you that Irish property is
    way overpriced but if you point that out to people you are
    regarded as a traitor/prophet of doom/unpatriotic etc.

    Why are people in such a mad rush to get into debt for most
    of their working lives to own modest houses?

    I´m surprised that no bank or auctioneering firm hasnt put
    a price on your head or offered you a nice job to keep
    quiet.

    Keep it up and maybe some people might see the light before
    its too late

    regards

    David

  6. Christian

    You cannot take your house with you too the grave and your
    children (if you have any)won’t want to Live on the flood
    planes of Lucan or even communte 2 hours in and 2 hours out
    evryday because 20 yrs from now there will still be poor
    infrastructure.

    WHOS GONNA BENEFIT ?

    Not you thats for sure.

    When my father bougth his first house I think it was approx
    20,000, he was married, he had a semi-state job and me by
    the age of 23.

    He was of his time.

    I am 26, I am not married, I have a partner. I have no
    children. I rent with 6 people in one house. I work for
    myself, and get paied very little.

    I am of my time.

    If myself and the other 5 people I live with, tried to go an
    buy a house maybe a three bedroom we couldn’t even afford
    that. we couldn’t even afford to buy a 1 bedroom apartment
    between. So look at this, 6 people, not a couple or married
    couple but six people in Ireland between the ages of 23-28
    cannot collectively afford the price of anything on the
    market and if we could we would be 5 bedrooms short!

    we don’t feel poor, we don’t look poor, we don’t act poor.
    We all have 3 stage/levels education.

    Yet we have been duped!

    4 NOW
    —–
    Tips for survival.

    Now is the time to:
    1)Keep Renting.
    2)Not buy a house now.
    3)Live with what you need not what you think you want.

    Christian.

  7. Christian

    - DUBLIN CITY CENTRA –

    Talk about Bewleys but lets look at Centra.

    The Centra & SPAR strangle hold on the convenience,
    newsagents & deli market is remarkable.

    We all balk at a nation of fat Americans, birthplace of
    McDonalds and flock to see movies lampooning these gluttons
    ignorant war mongers, such as “Supersize Me” while tucking
    into Jumbo portions of Popcorn. Yet are we as a nation not
    starting to get a little fatter…

    The Centra Roll.

    The US have their Burger meal, we have the Centra Roll &
    Coffee.

    I would like to draw a parallel between the increasing rate
    of obesity and the increasing consumption of the humble
    lunch time torpedo Roll form due to the increasing
    dominance of Centra on the national street.

    From College Green down Dame Street past Christ Church, down
    Thomas Street and well beyond James Hospital I would like to
    call this the “Deli Mile.”

    A new Centra just opened at the fountain junction on James
    Street. That now makes in my recollection, 5 large sized
    Centra/SPAR stores.

    This may not seem like very much but there are a few other
    similar smaller type stores dotted along the way which adds
    to the ubiquity. Yet very little else. Here is my point.

    THERE IS NO DIVERSITY – THERE IS ONLY FRANCHIASE.

    Down this “Deli Mile” all and many of its tributary streets
    either have a Centra Or SPAR so in relative terms there are
    approximately 10-15 Deli’s in the one are of the city alone.

    All offering the same fare.

    If you notice, the day of the independent Shop keepers
    drawing to a close, regards Dublin City and sprawling. Its
    all monopoly. Thus Dublin shop fronts are now boring in
    their homogeneous-ubiquity.

    Thanks to Musgrave who also owns, Supervalue. Centra has
    become Ireland’s Mc Donalds the Wall mart Of Lunch Time.
    Food supplied to centra comes straight from Musgrave, every
    Centra has exactly the same products. So while they are a
    franchise they are happily.

    So the food you buy in your supermarket or your convenience
    store is all from the one supplier and guess what they also
    own the stores too, in all or in some part.

    Ever wonder why food is so much in Ireland? Lets not start
    that one …. I shall continue.

    GUESS WHAT??

    The rest of Ireland is the same.

    DIVERSITY, that which makes life interesting, Nature GOD &
    GODESS. Is being throw out Baby & bathwater alike.

    LAND Development.
    If its not a World Class Conference Centres, Yards of pokey
    over priced apartments its either Industrial or Commercial.

    Today land use is becoming so manifoldly – non diverse,
    boring and only angled to achieve MAX yield from perceived
    MARKET Trends… its all HORSE-DO-DO.

    Where can the artists hide and find studio space? Where can
    local Groups find meeting spaces and hold performances.
    Where can people go to live or find alternative spaces to
    model there own idea of living? Where can people live
    without the leering of Landlords and notions of RENT &
    LEASE.

    Nowhere! All of our built/unbuilt environment is being
    developed away into ubiquitous mass produced lines of
    INVESTMENT-READY-houses-of-CARDS.

    DONUT CITY?

    2004, Ireland is amazingly wealthy. Well compared to the
    70′s & 80′s. Yet Dublin, the Capital of Ireland, which once
    held the title City Of Culture in the 90′s has less Art
    centres in its city centre than it did 10 years ago. Less
    independent book stores, less low cost places to just hang
    out.

    It has more Arts centres now, but they have gone to were,
    well where the money is. The suburbs, the domain of the
    middle aged and the neon-landlords.

    Over the last 3 years, The City Arts Centre opp IFSC and the
    Art House Temple Bar have closed down after initial &
    continuing Public Funding.

    Larger Modern Art Centres have been developed on the out-
    skirts of the City. Much needed but entirely at the expense
    of the Inner City.

    INSURANCE, Killer of Diversity!

    Living above the shop.

    Housing crisis, NO.

    Under-use and inefficient use of many floors above most
    buildings in Dublin. YES

    The insurance industry put the Joana on the Governments
    “living Above The Shop” scheme which was to promote land/
    building owners who had properties with 2 or more floors
    were only one floor was being used for commercial properties
    with countless others being left, empty.

    The Insruance Industry, according to Ruari Quinn, dealt with
    the matter as to insurance of retail units with tenants/
    owners living above retail units was, PROHIBATIVE.

    So Insurance companies indirectly dictate Ireland Social
    Housing Policy?

    Surely that’s a headline?

    I thought our democratically voted representatives where
    empowered to control such essential an issue as Housing?
    Everyone has the right to housing, right???

    INSURANCE Companies are now telling the Irish people that
    Living above a Shop in an apartment be it the 2nd or 3rd
    floor is, well too much a Liability. A Liability?!?!

    HELLO!!! The rest of the world, this country with pockets of
    resistance in Dublin City seem to think that living above a
    shop is not so bad.

    Perhaps if you even dabbled with the idea of becoming, oh
    lets say an independent Shop keeper? Bucking the trends of
    IT, Pharmaceuticals, Engineering etc. living Above the Shop
    might be the only option to keep your costs down just to
    stay a float, because competing against the likes of the
    Centra?Musgrave trans-national Empire, would on the face of
    it seem like commercial stupidity.

    DIVERSITY IS DEAD LONG LIVE THE FRANCHIASE.

    RIGHT TO HOUSING IS DEAD LONG LIVE NEO-CLASS-PROPERTY-TZARS

    DUBLIN IS DEAD LONG LIVE DUBLIN SUBURBS (where the spire
    will be peoples only living memory of what is quaintly known
    as the City CentRA).

  8. Alan

    David, I would like to know what factors will have to be
    present to bring a correction to the housing market, surely
    ECB rates at present and the forecasted rates will continue
    the housing boom in this country for the next few years?

  9. Christian

    Here are the factors that I think will do it, some
    traditional other new and artificial.

    (I haven’t spell checked this, its just a flow..)

    1) ECB rates will go up.

    Even if a the rise is a few percentage points or less the
    effect will be amplified in the irish economy by the highly
    over powered dynamic state of the Irish economy. I.e.
    Ireland is a state of economic puberty. While the rest of
    europe will be slower and less affected as there economies
    are not so intoxicated with ready moneies the rest of Europe
    is a residing in a more mature econmics post boom state.

    2) Affordability for First Time Buyer is continus to be less
    feasible.

    Prices continuing to rise even if slowing, a 5% rise on 400K
    is a lot more than 5% on 60K.

    3) Job consolidation. Less bouyant or less yield in
    job/earning market/potential.

    4) Rise in the price of Oil.

    Do not believe anythign but the fact the world is using up
    Oil in an irresponsible way and the vested interested will
    bluff till the end untill its no joke. Take the empty
    promises of OPEC to keep the prices down by increasing
    barrel produdction. They can’t ehy are in decline!

    Think of addiction and the kind of denial an addict will go
    through in the face of a untennable lifestyle in when
    composed against longterm survival. Or a mafia boss, who
    will one day fall.. btu always in denial of his mortality.

    5) Introduction of New Home Energy Ratings.

    Since we don’t measure price of living space by Sq Ms,
    simply by location location location(crazy). A government
    imposed energy rating system just the kind you find on bulbs
    and fridges is to be applied to homes. So wheather you like
    it or not the house you are selling is going to have a
    rating.

    An objective value which all houses can be judged by when
    considering all the pros and cons. So when you spending 800K
    on a house and its energy rating is “D” opposed to a more
    modern home which nmight only be 500K and has a “B” rating
    its obvious tghe more costly lower rated house hs hidden
    short term and long term energy costven though it might be
    LLL perfect, but if you haven’t the money to throw around!

    I predict that this will have a huge impact and no one
    should under estimate the pyshcological effect this grading
    system will have. I beleive will indirectly effect the
    market as has the smoking ban in so much the smoking ban has
    forced publicans to start price cuttingand offering
    alternative spaces i their pubs. I kid you not, I have come
    across 2 pubs offering pints at ?3!

    6) Oversupply thru Social Change, family units breakdown.

    The 2 hour trek in and 2 hr trek to work in the communter
    belt that might choke the city will become unberable. So
    marraiges/partnerships will break down and it likely the
    house will be the first thing to go on the market.

    7) Oversupply Thru Over Development

    The irresponsible orgy of landowner/developer schisims all
    over the land will outsupply demand.

    8) Oversupply thru Rental market shrinkage.

    The yields from the rental market will reduce due to
    oversupply outmeeting demand and the cost of new investment
    developments being prohobative. Rental landlord Tzars will
    begin to cash in and introduce latent-energy or units held
    in rental stasis causing oversupply due to a delay in units
    that never quite hit the marlet for FTB now appearing all
    over.

    9) Dublin communter belt will be first to Drop.

    As most of the investment property is probably located in
    the suburbs of dublin and apartment hot spots this area will
    rapidly drop in value the most and first. Never to regain
    there hightly prices of the beginning of this centuary and
    probaly will not reach this value for 15 years.

    10) Nostalgia/Capitalisim is destroying the Earth.

    I need not overstate the distress we are going to cause
    ourselves to continue along outdated 200 year old modes of
    thinking and acting. We are not victorians, we are highly
    aware beings with choices to make.

    11) Rental Market is the largest X Factor

    Look no one is saying public that if the pants fall out of
    the rental market it will crash the fantasy.

    there are only 1.1 million housing units in Ireland
    according to the last Census. Yet no one is exactly sure how
    many of these are owned v rented.

    The rental market cannot be lower than 80,000 units but many
    believe the it could be over 200,000 units.

    So even if 30-50,000 units came into the economy over
    aperiod of 1-2 years while the building output could hit
    40-80,000 for each of those years we could be looking at an
    oversupply fire whos flames are fanned by an injection of
    new properties being reliased from the rental market.

    Worst case 2 year crash scenario;

    160,000 nes units built
    +
    50,000 units released from the rental market, normal sales,
    other reason outlined above.
    ————
    210,000 new units in two years??!?!?

    SO what is demand? I don’t know do you?

    These figures are not exact science but if we a country
    don’t even include the price of a home in our inflation
    figures or are only asking “are you renting” every 2nd
    census (thats a 10 year gap between questions) how can we
    expect to know the truth.

    Truth is no one knows and this is the biggest game ernal
    speculation we have ever witnessed and involves a dangerous
    canablisation of inter generational relationships and has
    the ability to disenfranchise the young from the old and
    leave this country more devidede than the North issues.

    I can back these figures, predictions and assumptions up.

    Just conatact me at, fifteendegrees@hotmail.com

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