May 16, 2005

Property frenzy dominates Irish horizon

Posted in Sunday Business Post · 6 comments ·
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Years ago, I forged a reference from Jurys in Ballsbridge. I was heading to London for the summer after doing my Leaving Cert and intended to get any job, as long as it wasn’t on the sites. I realised early in life that I wasn’t cut out for building. Hotel work would suit me just fine, but I’d no experience.

A mate’s sister was working at the front desk in Jurys, so I got some headed paper from her and bashed out a reference citing my great bar skills, impeccable manners, diligence and aptitude for hard work.

Two weeks later, I was working behind the bar of the Royal Kensington Hotel, courtesy of the fictitious Michael McCarthy, allegedly front of house manager of Jurys Ballsbridge!

As a result, I have always had a soft spot for the place. And this week, I see that it has become the latest victim of the great Irish land rush.

Like all gold rushes, the great Irish land rush has turned into a frenzy and is corrupting, denigrating and elbowing out all other businesses in its wake.

Along with the Killiney Court Hotel and Bewley’s, this week we hear another Irish landmark, Jurys Doyle Hotel Group, is apparently about to go.

A property consortium has approached the owners, presumably with the idea of knocking down some of the hotels and building apartments on the premium sites, such as the one in Ballsbridge.

History is repeating itself. A feature of the original gold rushes – particularly those of the late 19th century in California, South Africa and Australia – was that, in the mania to be involved in gold at all costs, other businesses were sacrificed, not intentionally, but as a result of the gold industry sucking in all the best cash and the best people. The reason is very simple: the returns from gold were so much more than in other businesses that all ventures were benchmarked against the precious metal.

Why bother with carpentry, tanning or teaching if you could try your hand at gold prospecting? Why invest in agriculture, technology or shipping when you could punt on a gold mine?

It is interesting to look at the diaries of the man who first found gold in the Sacramento River in California, Johann Sutter.

Looking back, he said that, because of gold: �All my plans came to nought.

One after another my best people disappeared in the direction of the gold fields; only the sick and crippled stayed behind.� He was lamenting the fact that his real project was to expand his farm, bakery and sawmill business but, on discovery of gold, his men and investors left him so they could speculate, hoping to strike it rich overnight.

In the event, only very few did so.

Even the schools in San Fransciso had to close because teachers and then pupils headed off into the hills to prospect.

The crucial point is that the impact of gold for the rest of the economy was deleterious because, while it made some people very rich, it starved many other businesses of money and people.

Fast-forward to Ireland in 2005, and it is clear that we are in the grip of a frenzy much like a gold rush. Land has replaced gold. Quite apart from the social dislocation arising from astronomical land prices, a real problem for our society is that so much of our cash and debts are being funnelled into this most unproductive and speculation-prone 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 businesses. Instead of building a long-term business with customers, branding, employees and cash-flow, the lure of the easy money in land speculation is far too attractive.

In Ireland, we are experiencing the same dilemma faced by California in 1849. Back then, 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 Jurys – it is a premier brand. It is a name that immediately says something to all of us, yet it might soon be no more.

How many times have you said: �See you in Jurys’� after a soccer or rugby match? How many debs ended in the Coffee Dock? How many of our tourist industry staff have been trained there?

�But today it is more valuable as a site than a hotel, so it will go and be replaced by swanky apartments.

�The shareholders will cash in their chips, not because Jurys was losing money or couldn’t hack it as a hotel, but because our land mania dictates that knocking it down and flogging hi-spec apartments off plan makes more sense.

�Crucially also, the banks’ infatuation with land as collateral means that the developers will get all the leverage they need to buy and build. When it comes to selling the flats, the same bank will give the new buyers the loans to acquire their �once in a lifetime opportunity in Dublin 4′�.

So the bank simply transfers risk from the Jurys shareholders to the developers on to the buyers and the mania continues. Apartments of this type will be targeted at retirees, people trading down or those soon to retire.

It is highly likely that many will be bought using tax-efficient retirement vehicles, which means the state will subsidise the purchase via tax foregone.

Nice deal.

Obviously, no one can blame the owners for doing what they are doing, in the same way that no one could blame the 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 land frenzy lead to?

First, it has changed the balance of wealth in society. There has been a massive transfer of wealth from workers, employees and entrepreneurs to landlords. Secondly, we will have a banking system totally over-exposed 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 in Texas or the gold lobby in South Africa, the landlord lobby will become even more influential in politics.

The illusion of wealth, which in reality is a mirage created by debt, hides the fact that, over time, Irish business and creative flair will be sacrificed for dull bricks and mortar. The economy will simply become a duopoly – the multinational economy and the land economy. The multinational economy will be foreign-owned, high-tech, flexible and foot-loose. The domestic or land economy will be bank-owned (on our behalf), low-tech, rigid and very, very permanent. If anything went pear-shaped, at least there’d be money in forged references once again.


  1. adrian

    Living with the bubble.

    This bubble has been around now for about eigth years.
    Anyone studying bubbyology should take a good look at her
    now before she pops…. but stand well back… its a bubba
    mutha f..cka and its full of messy globby puss oooooh!

    The fed engineered a bubble to stimulate the US economy
    after the dotcom bust. Interest rates were taken close to
    zero. Homeowners cheered with growing house values buoyed
    up retail sales,a debt driven bubble economy is born. The
    hangover to such a party is now apparent… inflationary
    pressure is forcing up the rates while the volume of debt
    pulls dowm on the dollar and the economy. Maybe that
    bubble wasnt such a good idea.

    Its a globalised world out there, economic hardship and
    inflationary pressure know no borders. Our bubble is
    doomed.
    So why did our bubble get so big for so long?
    …Ireland being a eurozone baby doesnt call the shots in
    euroland. Onkle Hans in Deutschland is the Euro Daddy.
    He’s old now, hes getting it tight and needs nice low
    rates (which are a bit like steroids), to keep him moving
    which he barely manages. Little baby Ireland is on Onkle
    Hans’ medecine, the youngster is all bloated up like a
    Sumo Baby! Life expectancy is low.

  2. PAUL

    It should be quite easy to calculate a latest possible date
    for when the Irish property boom will end. The current boom
    is based on colossal and unsustainable levels of borrowing,
    much of which is going into the property sector. This
    borrowing creates the illusion of vast sums of money
    flowing into Ireland. In reality this money is balanced by
    the same amount of debt flowing outwards. In net terms the
    boom is effectively based on fresh air.
    Current property prices require Irish people borrowing
    considerably above their income (they are currently around
    130% of income on average and rising). With debt levels
    already high it will not be long before the vast majority
    of people have borrowed up to the limit of what the banks
    will lend them, let’s say 6-8 times their annual income.
    Then increases in the amount of debt (further borrowing)
    will have to fall to levels sustainable by increases in
    wages and population (less than 10% of current levels of
    borrowing). Nothing can then stop the Irish property market
    and the economy that depends on it from crashing. this is
    regardless of what happens to interest rates and the supply
    of new housing.
    Of course this is a very simplified model and it is likely
    that people may start to moderate their borrowing before
    they reach the absolute limit of what the banks will lend
    them. In this case the crash will be less sudden but will
    be sooner. Other factors such as job losses and rising oil
    prices and interest rates can also bring forward the time
    of the crash, as can the increased supply of new one-off
    housing. A reduction in rates of construction would bring
    forward the crash by reducing economic growth. I recently
    found out that the per capita level of construction in
    Ireland today are similar to the level in West Germany
    after World War II, a country being rebuilt.
    The only things that can delay the crash are a willing ness
    by the banks to increase the limit of what they will lend
    in relation to income or some unexpected and unlikely boost
    to the economy such as external investment or mass
    immigration.
    Once the crash occurs the govern ment will not be able to
    borrow our way out of recesssion because our membership of
    the Euro does not allow large deficits. The loss of tax
    revenues from the constructon sector and from other sectors
    affected by the crash will force the government to cut our
    already poor public services or increase tax revenues.
    Luckily the government appears to be preparing for this
    already by looking at removing some of the pointless tax
    breaks that exist.
    I will not be so bold as to suggest a date for the coming
    crash. However the relevant figures for working it out
    (levels of personal debt, bank borrowing limits, inflation
    and economic growth) should be available from the Central
    Bank.
    Now don’t get me started on the surplus of commercial
    property!

  3. Tom Farrell

    David,
    As per a previous article, once again, one is reminded of
    the quote from the legendary investment banker JP
    Morgan: “Nothing so impairs your financial judgement as the
    sight of your neighbour getting rich.”
    Rgds,
    Tom

  4. Owen

    2 years after this article, and the subsequent comments, was written and property is only now starting to stagnate/fall mildly. Anyone (usually called fools or whatever by the property doomsayers) who bought a property in May 05 would have 30% or so of positive equity. Fact. To end up in a negative equity situation u need one of the following to happen: 1. u bought in 2006 or later, or 2. u need a massive property crash, in the order of 30% or so, which is highly highly highly unlikely. Population is rising, wages are rising, CPI is rising – is there any reason why we shouldnt expect house prices to rise also????

  5. Patrick

    Actually, this article is very prescient because, with the house price bubble now burst and house prices dropping, we’ve come to the end of the credit party. Hard times ahead. The question is now – now when the boom ends (it has already0 but how much and how rapidly will house prices fall in the coming years?

  6. Tony Dunne

    I left Ireland in late 1995. Both my parents were dead and I and my sister were left the house. My sister married and moved into a new house close to where they both worked. We decided not to sell the old place as we thought it would be a good investment for the future. The old family home was built in 1969 for the sum of £7500 and that included the site. In 2005 we had 5 offers in the area of 475,000 Euro’s, we decided not to sell. On the 8th oct 2007 it was finally sold for 415,000 Euro’s with only one interested party.
    That tells me everything I need to know about where the Irish property market is going.

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