November 6, 2005

Credit drives people out of the cities

Posted in Celtic Tiger ·
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Last week’s three big news events underscored again the rise and rise of suburban Ireland. The mooted sale of Eircom, the Transport 21 initiative and the government’s burgeoning budget surplus are all directly related to the way we live, commute and organise our days.

It is time to accept that the future of the country is a suburban, – and probably, ultimately an exurban – one. The economic handmaiden of the geographic phenomenon of suburbs is credit, and the interaction of these two will determine how our society looks in the future.

One statistic that links all three was released last Monday. According to the CSO, �in the period January-September 2005, the total number of all vehicles licensed was 244,829 compared with 204,561 in the same period last year, an increase of 19.7 per cent’�.

So we have close to a fifth more new cars on the road this year than last year.

To see how these events are intertwined, let’s work backwards, following the money at every stage.

Geography determines why we need cars, credit determines how much we will pay for them and psychology determines what cars we buy.

Almost all new cars are bought with credit by people living in suburbs, who commute to work.

So far so predictable, but did you know that over half the new cars in Ireland are bought in January? This rush is driven by consumer psychology and the bizarre and uniquely Irish concept of number plate envy.

Strange as it may sound, the rush to have the first plate of the new year is the single biggest determinant of Irish car-buying – not price, safety, model or income.

This demand for new cars is enabled by credit. But what is securing this credit? The first factor is full employment, the second is housing wealth.

So what is driving the increases in employment?

In the past few years, most jobs have been created in the services sector – this is the domestic part of the economy where most of us work. And what drives the services sector? Domestic spending is the engine which, in turn, would not spark without abundant credit.

So the jobs that are themselves a function of ample credit are guaranteeing yet more credit.

The second factor driving new car sales is simple: the more people live in the suburbs, the more cars they will buy to commute. Because equity releases determine in many cases the amount of credit available, the higher house prices go, the more credit will be released.

This mutually reinforcing dynamic has pushed borrowing to stratospheric levels, and now the country is awash with cash.

A good way of assessing this is through the denomination of notes in circulation.

On a recent trip to Italy, when I asked for �50, the ATM gave it tome in fivers and tenners. This does not happen in Ireland.

When was the last time you saw such small denominations coming out of an Irish ATM?

So the suburban housing market that compels us to drive in the first place also facilitates the credit to allow us to indulge in number plate envy. This is good news for the state.

With all this cash sloshing around in the system, is it any surprise that the government is running a budget surplus?

The much-heralded surplus, which is sometimes misinterpreted as a barometer of successful financial management on the part of the state, is only a reflection of the originally-borrowed credit finding its way into the government’s coffers.

Think about it. If you borrow money to buy a house, a significant chunk goes to the state in Vat and stamp duty.

On top of this, the price of your house goes up, so you feel wealthier and you buy a bigger car sooner than you need to because number plate envy, like a consumerist version of MRSA, has infected your bloodstream.

So you pay more tax – VRT, road tax, etc – with more borrowed money.

So the more we borrow, the more the government surplus goes up and the more tax cuts can be bequeathed in the political charade that is the annual budget.

More cars on the road, more suburbs to access and more �borrowed’ money make the state feel it can’t afford a big strategic initiative to try to reel in the commuters who up to now have not shown any real interest in voting. So we get the Transport 21 initiative.

This plan, which is absolutely necessary, reveals that a great blurring has occurred between rural and urban Ireland.

We are now a land of Dulchies � twenty and thirty-something Dubs who have moved to the former �culchie’ strongholds. And the Dulchies are the political target of Transport 21.

The Dulchies are also the reason why Eircom is up for sale – for the fifth time in seven years (even by the standards of financial engineering, this must be a record – think of the advisory fees alone).

A nation of commuting Dulchies tends to talk and text more than most.

The farther away they are from each other, the more telephony they will use.

This makes Eircom attractive to the likes of Swisscom, and explains much of the rationale for the Swiss company’s moves. It also makes Eircom attractive to other suitors, which is why a beauty parade is likely, and it is far from certain the Swiss will emerge as the eventual owners.

So what about the Dulchies? What suburban future can they look forward to? First, as this column has argued before, with all non-property-related businesses now benchmarked against the roaring property market, we are losing these businesses because credit is attracted by the fast buck of property.

We can see this in the expansion of the construction industry vis-a-vis the relative decline of manufacturing. We are no longer a nation of producers – we are becoming a nation of consumers.

The most obvious manifestation of this is the fact that, in provincial towns all around the country, former industrial estates are being turned into apartment blocks, large DIY stores or shopping centres – consumer havens for the consumer nation.

As has occurred in the US, it is highly likely that the suburbs will become autonomous places of their own in the years ahead, and the umbilical link with Dublin will weaken, rather than strengthen.

At the moment, Dublin – and, to a lesser extent, Cork, Limerick and Galway – fuel and nourish the suburbs. This will change.

Companies will begin to move to provincial towns, driven by lower rents.

Workers will reject the daily commute in greater numbers, and, more crucially, as provincial towns reach critical mass, the dynamic of their own demand for services will keep people there.

In the US, this has given rise to the exurbs – large developments beyond the suburbs.

The CSO is forecasting this development in its 2020 population outlook. It maintains that the fastest-growing parts of the country will be the mid-east counties such as Offaly, Laois and Westmeath. Rather than turning into dormitory towns, these will be much more self-contained communities.

However, a significant caveat in these geographical projections is the availability of credit.

From the perspective of a country, a good way to look at credit is to regard it as a commodity.

In the same way as rubber made Brazil rich in the 19th century, coal favoured the British and gold enriched the South Africans, today in Ireland credit – rather than technology – is the premier industry. It is growing faster than any other sector, and it depends on our spending more and more.

Is it possible to keep consuming if our ability to produce is falling? Credit allows us to do that for a short period, but over the longer term, is it feasible?

Now that really would be an economic miracle.


  1. Sean

    Thanks for pointing out that the increase in borrowing is
    fueling the economy. When the the data concerning the amount
    of credit borrowed was revealed a month ago, one of the
    banks said that credit growth was not responsible for the
    economic boom.

    Its frightening to think what would happen if large number
    of people decided to downsize their lifestyle and borrow
    less money or even try to get by without borrowing. In the
    meantime I’m looking for a gaf in northern europe to work at
    home from ;-) , internet-connectedness is betterthan nothing.

  2. Paul Rux, Ph.D.

    David, long live the exurbs and the decentralization that
    comes with it! One of my purposes in life is to promote
    the exurbs here in the USA, as an alternative to the ever-
    more crime-infested urban centers here. I work as a
    strategic planner of rural electronic commerce and related
    infrastructures; I am at work on projects that
    promote “wired” villages, telework, and technology-based
    rural business incubators. God willing, I hope to have a
    chance to share my skills and passion in Ireland to help
    it to escape the suburban strip malls and urban meltdown
    that besmirch this country. As always, you are one of the
    few commentators that I read. I do not like to waste
    time. You never waste mine. Keep up your good work!

  3. Luke

    Re Sprawl, cars and edge cities.

    Is the problem in Ireland not made infinitely worse by that
    the fact that our tax system, with its high rates of VRT and
    annual car tax, and our low excise duty on petrol is a
    massive incentive for people to use their cars more
    contributing to the congestion and sprawl problem. Our
    government wants people to drive!

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