February 22, 2006

Property buzz may yet have nasty sting in tail

Posted in Celtic Tiger · 22 comments ·
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Property booms do not so much create wealth as redistribute it. In the past few years, the great Irish housing frenzy has done more to reallocate wealth in this country than any government initiative on tax and social welfare since the foundation of the State.

The transfer has been monumental. Arguably, we have to go back to Lenin’s persecution of the Kulaks to see one section of the population forced into giving so much of its wealth to another.

The major difference in Ireland is that the redistribution of wealth via property has made the old richer and, more depressingly, the young poorer.
It has created a drone class of the over-45s – Ireland’s accidental millionaires – who have seen their wealth increase enormously as their houses have soared in value. These drones are financed and indulged by a worker-bee class of the under-35s who are first-time buyers and renters.

For every four first-time buyers who are fretting in the traffic, working long hours, pinned to their collars by mortgage payments and creche fees and being bullied to part with money they don’t have by the threat of “mandatory” pensions, there is a healthy 50-something couple drinking vino verde on the Algarve, sun at their back and not a care in the world.

In financial terms, Ireland is now sitting on a demographic faultline. Bubbling away underneath the tectonic surface is the overheated property market, stoked up by cheap credit, irrational expectations and the corrosive psychology of the property-ladder tyranny.

As the property mania reaches fever pitch, this rumbling instability – like its geological equivalent – naturally leads to political, financial and social tremors.

Like the citizens of San Francisco, we know our economic San Andreas fault-line is vulnerable, but all of us ignore the possibility that the next one could be the “Big One”.

At the moment, there is an uneasy truce between the competing demographic of haves and have-nots but the problem for society is that, while an unforgiving meritocracy governs the lives of the worker-bee generation, the drones live in a pampered world based on equity releases and rental income.

This is not sustainable. Take, for example, a not-untypical middle-of-the-road office worker of the 1970s and 1980s. Although he now plays golf off seven, like the Monty Python sketch of old he reminds his office juniors how hard times were in the 1970s, how people had little money and few expectations.

He probably bought his house in 1975 for �10,000; it is now worth �1.3m . He has no debts, a well-financed pension, annual clean bills of health, a subsidised VHI Plan A scheme and an early retirement scheme that is just about to kick in.

With his enormous pile of equity, he took advice from an accountant mate and bought a couple of places off plans in the late 1990s. The (only recently declared) rental income nets him �3,000 a month, which more than covers his mortgage on the golf resort town house in Quinta da something. He is one of Ireland’s accidental millionaires and he is not alone.

According to the census in 1990, there were just over one million private households in the country. For these people, as prices have risen, the most telling indicator of wealth is not brains, hard work or entrepreneurial ability but the year they were born. Those 1990s households born in the late 1940s, 1950s and early 1960s are on the right side of the demographic faultline and are likely to be sitting on enormous property wealth.

Those worker bees, born in the late 1970s and 1980s – the productive core of the economy – are now the ones paying exorbitant house prices via 35-year 100pc mortgages or they are renting. A major determinant of whether you are a drone or a worker-bee is the date you were born.

So the main redistributive mechanism in our economy works like a demographic lottery which is heavily weighted against the young. It is, of course, natural that the 50s generation will be the ones in power, but because of our population structure, they are much less representative of the general population than they would be, for instance, in Britain, where they constitute 27pc of the population, or in France and Germany, where they’re over 30pc.

Here, those in their 50s only represent 11pc of the population and yet they are being enriched constantly every time house prices rise. Each notch upwards in house prices adds to the wealth of the drone class and the worker bees’ debts. We live in a society where the young work to excess to make the middle-aged rich via house prices.

The big banks tell me that house prices are going to rise by 10pc this year. Quite apart from being a grotesque scam which lines the Government’s pockets, enriches developers and drives up the share price of our money-lending banks, it is sowing the seeds of a demographic civil war.

Every 10pc rise in the price of houses is equivalent to a 10pc tax hike for the young who are trying to get into the housing market.

Another way to look at it is that every 10pc increase in the price of houses adds an extra 10 miles of commuting on to the day of the next batch of the dormitory-town-dwelling tribe. In contrast, the same 10pc price hike adds 10pc to the wealth of the drone generation and 10 more days in the Algarve.

What does this mean for politics? Well, if the outcome of government policy has been to enrich one section of the population at the expense of another, it isn’t surprising that the hardest working sector of society opts out politically. By stoking up the property market at the behest of its paymaster – the construction sector – this government has engineered the progressive indebtedness of our under 30s and the relentless enrichment of our over 50s.

In the last election, the worker bees did not turn up. They see what is happening and are profoundly cynical about national politics. They couldn’t be bothered.

So a bachelor farmer from Achill or a 50-something from Sandycove, Foxrock, Terenure or Clontarf is twice as likely to vote as a suburban, double-income worker-bee family with kids.

In fact, the two areas of Ireland where the under-35 worker bees are present – the new suburbs and the inner cities – vote least. This opting-out trend contrasts with the rest of Europe where voting patterns follow education.

In Ireland, it’s when you were born, rather than letters after your name, that’s much more likely to determine whether you vote or not.

This is because the older you are the larger your stake in society and the more the present status quo suits you.

So the worker bees who toil hardest, commute longest, pay most taxes, have the biggest mortgages, have children, pay exorbitant creche fees and keep the profits of multinationals operating in Ireland sky-high, participate least in politics. But they won’t remain docile forever.

This vacuum is potentially explosive because, when you live on a faultline, the potential for eruption is never far below the surface.


  1. Richie

    “In the last election, the worker bees did not turn up.
    They see what is happening and are profoundly cynical
    about national politics. They couldn’t be bothered”
    This is the passive nature of Irish people, its the “It
    ill be grand attitude”. The under 35s are fast becoming a
    generation of slaves, and in true Irish style – doing
    nothing about it. It is not untill the masses of the
    slaves organises and revolts through the ballot box that
    we will see any government appproch the housing crisis in
    Ireland. (Richie – Annoyed Slave of the Celtic Tiger)

  2. Darren Kelly

    David,

    Property booms do create some wealth without transferring
    funds from young to old. During the current boom the value
    of my parent’s house has doubled (tripled? quadrupled,
    perhaps?). They haven’t sold it (or even had it valued) but
    it is worth more, so they are wealthier. And this happened
    without them receiving a penny from anyone. The wealth was
    thus created, not transferred.

    That is not to take from the substance of your thesis; that
    the young are suffering economically as the old (or at least
    ‘older’ – are you really ‘old’ in your 50’s these days)
    become rich. This is plainly true.

    I do think the differences between the two demographic
    groups are smaller than you suggest. For example, both
    groups want essentially the same thing for property prices;
    continuing rises. No one wants to buy at the top and however
    high prices get the first time buyers want (in fact ‘need’)
    them to get still higher after they put their cash in the
    developers greedy mitt. Sure, we’d like the bottom rung of
    the ladder lowered a bit, but only up to the point that
    we’ve got a toehold (however precarious) on that lowest
    step. A continuing stream of deposit-free,
    greater-than-100%, ever longer term mortgages will fuel the
    required rises. Negative amortisation mortgage, anyone?

    More worrying is the mass abandonment of politics by the
    young. I’m less certain that this has anything to do with
    our financial predicament than it has to do with what’s on
    offer in politics in this country. For example; I recently
    found myself tilted in the direction of one party because
    they said they’d remove compulsion for Irish in the leaving
    certificate. Seriously, as if that mattered to me at this
    stage! When I paused to think about this I realised it was
    the ONLY concrete policy difference I could discern between
    the main parties. If young Irish people are thinking “why
    bother to vote” you have your reason right there.

    Even if we do vote, nothing would change because our goals
    are always going to be aligned with older voters. After all
    the young know they will be old one day and plan to drink a
    little vino verde themselves. On the other hand the old know
    that they will never be young again. And thus democracies
    elect governments that favour the old.

    Darren
    (34, single, renting and priced out of property)

  3. John

    Another great article on the damage the property bubble is
    causing in this country. Your point about each %10 price
    rise adding an extra 10 miles to the commute is
    particularly apt. God help the poor schmucks stuck out in
    the sticks with no prospect of public transport and a 350k
    mortgage when this bubble bursts.

    It is clear that people are getting nervous. Of course
    there is nothing coming from our witless, spineless leaders
    in the Dail. Do you think there is anything that can be
    done at this stage? Is it too late?

    John (33 married, kids, renting, very well paid but priced
    out of the market, no intention of buying until prices
    fall!).

  4. Pete

    While I agree with most of the article, the implication
    that there will be some kind of worker-bee political
    revolution is nonsense. The only people who would
    seriously campaign for house prices to fall are those who
    are currently renting (it would be financial suicide for
    all those worker-bees with huge mortgages), and anyway,
    what would they do? Form a political party and try to get
    elected by promising falling house prices?? They’d have no
    chance of getting into power. March in the streets
    demanding money from the government? Even if they got it,
    house prices would just adjust upwards to absorb it. The
    same goes for any government move that tries to make it
    easier for people to buy houses at current prices. Demand
    the building of more houses? David recently wrote that the
    supply of houses already exceeded requirements, so that
    doesn’t seem to be working. No, they won’t revolt, they’ll
    just quietly leave Ireland and look for a better life
    abroad. Poland anyone? More likely Australia or USA.

  5. tyoung

    I think the property boom/bubble is a reflection of a
    monetary inflation. The fact that inflation hasn’t shown up
    in the CPI doesn’t mean it hasn’t happened. Just look at the
    money supply figures coming out of the Irish central bank.
    If what was happening in ireland was happening on a global
    scale the price of gold would be exploding. From this
    perspective buying property is a rational defence against
    the devualation of your cash. Land/property is a finite
    resource that is locally traded. Property is an Irishman’s
    gold. His dence against inflation.

  6. SM

    Prices are just out of reach for most people, but if they
    did fall, there are a lot of people who could afford a
    place closer to Dublin/main town.

    This is pent-up demand, as eptiomized by John’s ‘waiting
    for prices to fall’ comment. If prices did begin to fall,
    there are thousands of very well paid John’s out there,
    renting or living in dorimtory-land who would rush to snap
    up the ‘cheap’ properties, thus stopping any price fall in
    its tracks.

    I think what is more likely is for single people to start
    leaving for the UK where the jobs are good, well-paid, and
    when they return, their sterling savings jump 40 per cent
    thanks to the euro xrate.

  7. Paul

    David,

    I wonder if you would turn agony aunt and tell me just what
    a late-twenties, single, 45k earning, Dublin based renter
    should do in the current circumstances – keep renting in
    the city centre and wait for house prices to become more
    affordable or just accept the way things are and buy
    somewhere in the sticks? I am loathe to join the buying
    frenzy but the nagging thought that I am missing the boat
    is still at the back of my mind!

  8. Don

    David,

    While I agree the over 50s are accidental millionaires,
    they are by no means all living extravent lifestyles on the
    backs of the worker bees. My parents bought a house in the
    late 60s for 4000 punts that is now worth 1.7 million euros
    (Warren Buffet would be proud of a return like that). They
    have no mortage, have not extracted any of their equity,
    and have no plans to do so. They are just happy living in
    their present community on modest pensions.

    You recently had a piece talking about how the steady
    stream of immigrants will get cut off when prices get over
    a certain level. Let me tell you about another migrant
    stream you should consider. A stream of 20s/30s Irish
    professionals emigrating from their homeland. I am a 29
    year old professional and recently moved to the US where I
    am paid more for the same job, taxed less, house prices are
    half, and the everyday cost of living is lower (way
    lower).

    And everytime I am at a party over here and someone talks
    about the US property bubble, I go “Let me tell you about
    the 2 million dollar 1400 square foot 1 bathroom suburban
    home my parents own in Ireland…..”, but no one believes
    me, they smirk at eachother, and then ask me if I am ok to
    drive home….

  9. Darren

    @John/Pete
    I could have uploaded those very posts a few years back. I
    thought residential property had had a far-too-rapid run up.
    I listened to the Cassandras (amongst them, it must be said,
    our host on this site) who suggested it was all worryingly
    similar to London at the end of the 1980’s. And I wasn’t
    settling down at the time, so I sat on my deposit waiting
    for the “inevitable market correction”. That was 1997. By
    2002 I decided I had to buy or I’d never be able to, but
    when I got the mortgage approval and went looking at houses,
    it soon became apparent that it was already too late for a
    one-salary singleton like me to own a liveable home. That’s
    when I decided to emigrate and my final move to Australia
    will be later this year.

    John, you’re now waiting on the “inevitable market
    correction” like I was in 1997. Even if it does come and
    even if it is huge (say a cataclysmic 20% drop) it will be
    too little, too late for me. Property values prices would be
    where they were in 2003 – that was hardly cheap! If owning a
    home were your goal, I’d say; do it while you can afford it.

    Oh! And Pete, by all means take advice for friends, family,
    random internet forum strangers and opinion formers like
    David. It would be great to have some über-authority who can
    make the tough choices for us, but at the end of the day you
    have to stand by your own decisions.

    Best of luck!

  10. John

    SM & Darren have a point, but the fact is that I am in no
    rush to buy anything at this stage – the boat has been well
    and truly missed. I am quite happy to rent a property in a
    decent area for a fraction of the amount it would cost to
    buy (assuming I could even raise a large enough mortgage
    which is unlikely at this stage!).

    I earn close to 100k and have no interest in spending
    everything on a 3 bed semi-d in Athlone just to get on the
    property ladder. I believe that there are lots of people
    like me who are quite content without a 3 hour commute and
    are not buying into the hype.

    As is often pointed out, just because a crash has been
    predicted for a long time does not make it less likely to
    happen. I just hope that when it does happen it doesn’t
    bring the whole economy down with it.

    Good luck in Australia Darren, I notice that their bubble
    seems to be bursting at the moment – a good time to buy!

    John.

  11. G Keon

    The price of a semidetached house in Ireland appears to be following the
    ecomonic law of a “Giffen good”

    The economic theory is as follows.
    From Wikipedia, the free encyclopedia
    (Redirected from Giffen goods)
    A Giffen good is a product for which a rise in price of this product makes
    people buy even more of the product. Giffen goods may or may not exist in
    the real world, but there is an economic model that explains how such a thing
    could exist. Giffen goods are named after Sir Robert Giffen, who was
    attributed as the author of this idea by Alfred Marshall in his book Principles
    of Economics.
    For most products, price elasticity of demand is negative. In other words,
    price and demand pull in opposite directions; if price goes up, then quantity
    demanded goes down, or vice versa. Giffen goods are an exception to this.
    Their price elasticity of demand is positive. When price goes up the quantity
    demanded also goes up, and vice versa. In order to be a true Giffen good,
    price must be the only thing that changes to get a change in quantity
    demand, and conspicuous consumption does not enter the picture.
    The classic example given by Marshall is of inferior quality staple foods,
    whose demand is driven by poverty that makes their purchasers unable to
    afford superior foodstuffs. As the price of the cheap staple rises, they can no
    longer afford to supplement their diet with better foods, and must consume
    more of the staple food.
    Marshall wrote in the 1895 edition of Principles of Economics:
    As Mr. Giffen has pointed out, a rise in the price of bread makes so large a
    drain on the resources of the poorer labouring families and raises so much
    the marginal utility of money to them, that they are forced to curtail their
    consumption of meat and the more expensive farinaceous foods: and, bread
    being still the cheapest food which they can get and will take, they consume
    more, and not less of it.
    http://en.wikipedia.org/wiki/Giffen_goods

    Unquestionabley

    Housing in Dublin for the masses is
    of inferior quality
    has no close substitute
    and consume a lot of income.

    The rest of the world has a Real Estate Bubble caused by low interest rates.

    Ireland has both a Real Estate Bubble and a “Giffen good” effect.

    The literature does not disclose how the “Giffen good” effect ends.

  12. Bill Barry

    I fully agree with your “transfer of wealth” idea but I
    don’t think you have ever discussed what will happen when
    these lucky suckers kick the bucket / bite the dust / meet
    there maker !!! The children/relations of these
    accidental millionaires will inherit large amounts of $$$
    through the sale of the family home…This in turn will
    create another batch of accidental millionaires…

  13. Darren

    @Bill,

    Consider; the accidental millionaires are in their 50′s
    their children are in their mid twenties. Life expectancy is
    c.85. Their kids will have retired by the time they inherit.
    And that’s presuming the older generation haven’t spent
    their money on round-the-world cruises or on ruinously
    expensive geriatric medical treatments.

    Darren

  14. Bill Barry

    @ Darren ….

    whatever ….

  15. adrian

    @John.
    Keep the faith John the market will certainly crash.
    A crash of 50 to 60% isnt unrealistic.I recently read that
    at one time the Finnish property market tumbled by 50% and
    given Irelands speculative run that downside seems probable.
    The nasdaq hit 7000 points before tumbling down to 1200 or
    so. A spectacular! The classic car market lost approx 70%
    of its value in the eary 90s, another example of
    speculators losing the plot.

    On the subject of the Giffen goods economics assumes a
    rational man. Its rather irrational to go into debt til
    your dead for a brick shelter on a small plot of land.
    Bricks are cheap and land isnt scarce. The next time your
    on a plane look down and see for yourself – theres lots of
    the stuff…

  16. SM

    Adrian> …and of course whatever causes a 50 to 60% crash
    would in no way have any effect on you. You would be
    completely immune, and be the only one with the means left
    to swoop in on these ‘cheap’ properites (even after a 60%
    drop).

    Laughable. Dream on. People like you have been saying that
    since 1996 (that’s 10 years ago btw). You have truly missed
    the boat and that’s just tough. Deal with it realistically.

    John> u r on e100k and can’t afford a property!? Just what
    kind of place r u looking for? Me and my other half earn
    just over e80k combined and we were able to buy in Dublin
    last year. Thanks to our SSIAs, we r going to wipe a tonne
    off the mortgage. I think u must be setting yr sights too
    high.

  17. Martin

    David,

    I was part of the last great wave of university graduates
    that was forced to leave the country to find a job. I
    returned to Ireland in late 2004 and have been saving every
    cent to buy a house in my home town. I contacted the
    auctioneer today and to my absolute disgust the 25,000
    euros I have managed to save as a down payment will be
    wiped out by the price hike on the next phase. As usual, I
    just missed the boat, the last house in the present phase
    just sold for 300K. What the f*** is the point I ask myself?

    I left the US to escape from the greed, ignorance and fear
    that is the capitalist beast. Now I feel Ireland has been
    seduced too. I am beginning to think a mutated bird flu is
    the only answer! It seems we have replaced material poverty
    with spiritual poverty. What are we to do?

    Martin

  18. John

    “SM> u r on e100k and can’t afford a property!? Just what
    kind of place r u looking for? Me and my other half earn
    just over e80k combined and we were able to buy in Dublin
    last year. Thanks to our SSIAs, we r going to wipe a tonne
    off the mortgage. I think u must be setting yr sights too
    high. ”

    Hi SM,

    Of course I could afford to buy at the moment, however, I
    wouldn’t get a place as good as the home I currently rent
    within my price range. I believe that the market will
    crash soon and then I may reconsider (assuming the economy
    holds up and I still have a job!) In any case, I do not
    want to be stuck with a home I don’t like in a cr*p area
    for the next 15 years.

    John.

  19. adrian

    @ S.M.
    Its ok Im on the boat having purchased 2 properties pre
    97.I havent bought for investment since in that
    fundamentals have been wrong. Ive been reducing capital and
    am all ready to gear up and cherry pick out some nice
    properties when reality dawns. Whats your gaff like? When
    the repo people come and youre on the park bench I’ll have
    it for next to nothin’… only messin s.m. But go on do
    some maths, roughly speaking irish property has quadrupled
    since 95, a 50% fall will mean it has doubled since 95,
    still nice growth at that, a 50% tumble its realistic with
    a temporary overshoot to 60%. In addition Germany has been
    in doldrums since unification and last month German
    business confidence indicators hit a 20 year high, expect
    interest rates to climb. Fix your mortgage quickly or the
    park bench may become realistic.

  20. bill barry

    @ all …

    A valuable lesson I was thought early on in my career in
    the trading room was not never to confuse “Brains and a
    Bull market” … this is in my opinion a valuable piece of
    advice for all you wannabe Sarah Beaneys and Donald Trumps
    out there.. Rents are flattening, Interests are rising
    steadily, supply of property is increasing and yet prices
    are still rising ??? And the demand is still there???
    baffling…

  21. L Blackman

    It’s a strange one…this fascination with property?
    How quickly the negative-equity phenomenon is forgotten
    that happened in the 80s UK.
    I guess this whole bubble will only set in, when the
    construction industry hits the skids, the Multinationals
    fly the nest…and the drop down is oh so far!
    Then the repo-men arrive and the suicide count soars!!

  22. [...] economists saw what was happening in the property markets and warned that it couldn’t last. It was never going to, really [...]

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