July 1, 2006

Our debt-financed lifestyle is just staving off the inevitable

Posted in Celtic Tiger · 7 comments ·
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They had never imagined this could happen to them, but it had. Both grandmothers were gossiping about another neighbour�s house that had been sold for a small fortune down the road, and both had been paid a visit by a smarmy estate agent who had, there and then, �valued� their homes at over �1 million.

For the two, who had moved in more than 40 years ago, this apparent windfall was a source of bemusement, rather than a financial opportunity. So now it�s official: the centre ground of the country is divided into two distinct middle classes – those who bought their houses before the boom and those who are increasingly chasing an exploding housing market.

The divide is demographic. The first group, mainly any homeowner over 45 or 50, is getting rich by doing nothing. The other, the under-30s, are pinned to their collars having to find ludicrous amounts of cash, simply to put a roof over their heads.

Figures released last week put our wealth at around �700 billion, as soaring house prices make millionaires of thousands of home owners. These people are Ireland�s accidental millionaires – people who never thought that they would become wildly rich when they bought their semi-d in the 1970s and 1980s.The rate of increase in their wealth is doubling every year, as house prices continue to soar.

Even after mortgages of �100 billion are deducted, the country�s housing stock is worth �400 billion, equivalent to �100,000 for every man, woman and child in the country.

For most middle-aged workers, their wealth is far outstretching their income, because their now one million euro houses are rising in value by over �150,000 a year. Meanwhile, their wages rise by single digits. Why work, when your wealth rises without you doing anything?

This is precisely what the owners of Roches Stores were rumoured to be doing last week. An unconfirmed newspaper report suggested the family were thinking of selling the business.

The suggestion was that they might sell the retail arm and keep the property. If true, the Roche family – no slouches – would be selling the hard part of their businesses to a retail competitor, while keeping the apparently easy part – the property part – which, as if by magic, rises in value without them doing anything.

None could question the Roche family for considering getting out, but they may be getting out of the business at a time when we are spending more in shops than ever before. In short, they would be leaving a booming business.

If they are deciding to get out now to make more money in the property market, what hope have other industrialists involved in businesses that are being squeezed by international competition?

Think about it. One of the best retailers we have may not be bothered retailing any more, even though the business is booming. But why is it booming? Because all this housing wealth is prompting us to borrow enormously to buy stuff we don�t need.

For example, this month we will splash out millions on decks and barbecues, so that we can poison each other with undercooked chicken drumsticks in the rain.

Take a trip to your local Woodies this morning to see what I am talking about. The home improvement boom is driven by thousands who can�t afford to trade up. Instead, they are ripping out bathrooms, kitchens and sitting rooms, installing Italian slate showers, Danish kitchens and Finnish minimalist furniture.

In April, according to the latest CSO figures available, we spent nearly 10 per cent more on electrical goods for the house than we did last year. That�s a lot of plasma screens, Neff double-door fridges and Viking barbeques. Tellingly, guess what was the only category of spending to experience a fall? It was the sales of books and newspapers. So much for the well educated workforce.

How is this consumer inferno being financed? By borrowing from other people. Again, April is the latest month for which we have figures. Borrowing rose by 29.6 per cent in the fool�s month. This is the highest rate since March 2000, surpassing the previous peak of 29.4 per cent in October 2005 and February 2006. It brings the total indebtedness of the nation to �276.2 billion.

So let�s take stock. We are all borrowing like drunken sailors because the rise in the housing market makes us feel rich. So, rather than working, adding value and generating profits, we are borrowing easy money. We are mortgaging our future on the illusion of housing wealth today.

Even some of the best retailers in the country are said to be getting out of real businesses – which they were extremely good at – to kick back on their sun loungers and allow someone else to do the work.

The financial assumption underpinning all this is that the yield on property will continue to rise indefinitely. If this is the case, why were only 22,524 planning permissions granted in the first quarter of this year, compared with 25,350 units for the same period in 2005, a drop of 11.1 per cent?

Why did permissions for first time houses fall to 16,454 new houses from 18,913 in the same period last year – a decrease of 13 per cent? Or permissions for apartments fall from 6,437 last year to 6,070 in the first quarter of 2006 – a 5.7 per cent fall?

In short, why are builders building considerably fewer places this year if the market is booming, the industry at full stretch and prices forecast to rise even more? Your guess is a good as mine! Unless of course, you take these as the first signs that the building boom is peaking. If it is, we are in for quite a ride. Now getting back to our under-30 Stakhanovites – the worker bees who drive the economy, commute, stick their kids in creches at 7am and collect them at 7pm.These are the very educated workers that Enterprise Ireland drones on about, but whose standard of living is compromised by the housing scam which enriches our soon-to-be-retirees and impoverishes our most productive workers.

How will they pay for ever-rising house prices? More importantly, what business will pay them to keep up with the housing market? What level of productivity will they have to achieve simply to allow their wages to match the 15 per cent increases in property prices? Yeah, you guessed right, it won�t happen.

So they will ultimately price themselves out of the labour market by wage demands that are ridiculous in any other context, but legitimate in the Ireland of runaway house prices.

So either we will experience widespread unemployment, a fall in real wages or falling property prices or – more probably – a combination of all of these. Economically, there is no other option. We can continue in our heavily-borrowed dream world for a bit longer, but with global interest rates on the way up, that avenue will soon be closed off.

In any event, the more we postpone this economic eventuality by hyper-borrowing, the worse the end game will be. All the while, our grey market expands and Ireland�s Jagger generation continues to live it up. Meanwhile, the ones who pay for it all – the under-30s Stakhanovites – toil away in the bowels of the boom.

Our political class (the vast majority of them over 50) doesn�t seem to care. Is it any wonder that the under-30s don�t vote?


  1. adrian

    The local council levies on house construction which are
    nudged up yearly act as a disincentive for builders to
    supply houses. This combined with the statistic which you
    recently highlighted that 50% of a new house price is tax
    tends to tell the story that the government is happy to put
    the building industry out of business in order to protect
    high house prices.
    Economic insanity at its finest!

  2. Seán

    The crash is now a mathematical certainty.

    There are more than 250,000 directly employed in the Irish
    construction sector. When an estimated 80,000 in financial
    and business service jobs that are dependent on the
    construction sector are added to direct employment, we get a
    total of 330,000 – just short of 20% of the private
    workforce according to Central Statistics Office (CSO)
    figures. Business service jobs have increased by 10,000 in
    recent years.
    Employment of 290,000 in Production Industries follows job
    losses of 30,000 in the past five years. Not alone are there
    more construction related jobs than industrial jobs in the
    economy, average annual earnings in construction are almost
    €40,000 compared with €30,200 in industry – a difference of
    33 percent.
    AIB’s report, meanwhile, indicates that only 22,600
    non-nationals are employed in construction. Conversely,
    27,800 non-nationals are employed in manufacturing, 23,100
    in the hospitality industry and 21,500 in financial and
    business services. Not only is the construction sector not
    ‘flooded’ with immigrants, it’s not even particularly
    representative of what non-Irish nationals are employed to do.

    The CSO recently found 275,000 vacant premises accross the
    country during the recent census enumeration.

    One in five first-time buyers are taking out 100 per cent
    mortgages

    A total of €6.6bn was borrowed during the month of May
    alone, pushing total debts up to €282.8bn. The amount owed
    in mortgages increased by around €2.5bn last month, the
    amount owed in bank loans was up €3.5bn and overdrafts were
    up €862m.

    Data Sources: AIB, Finfacts.com, Central Statistics Office,
    Bank of Ireland, Irish Independent, Irish Central Bank.

  3. John Doyle

    To Rayc,

    Fully agree with your comment, I see more & more young
    Irish making Sydney their home for the long haul.
    While an expensive city to live in too you still get good
    value for your dollar.

    For the life of me I can not understand how the day to day
    cost of living in Ireland is double that of Sydney.

    More and more Irish are looking for permanent status in
    this country

  4. Paddy Hackett

    David argues: So let’s take stock. We are all borrowing
    like drunken sailors because the rise in the housing
    market makes us feel rich. So, rather than working, adding
    value and generating profits, we are borrowing easy money.
    We are mortgaging our future on the illusion of housing
    wealth today.

    Paddy: A psychological condition such as feeling rich
    cannot form the basis for vast borrowing. Economics is not
    based on pyschology. The expansion in the Irish economy is
    a more complex phenomenon than apparently presented by
    you –bullish house markets. Each of your causes presents
    its own pedestrian circularity. What causes house price
    rises and it logically goes on and on.
    Ultimately the contradictory character of the Irish
    economy, if we really call it that, is a product of
    capital’s need to engage in accelerated capital
    accumulation. In this sense its contradictions are no
    different to those of Western Europe nor of North America.
    It has nothing to with the borrowing of the Irish working
    class, or indeed middle class, but with the profit
    requirements of the capitalist class. The contradictions
    of the Irish economy are fundamentally a class question –
    social revolution.

  5. JP

    To try to balance up the “anti 50 ish” arguments being put
    forward here lets look at a few facts.
    1 . Those of us 50 + lived through the eighties where our
    main bitch was not the high cost of housing or plasma
    screens or new cars (which seem to be the preoccupation of
    the so-called tiger cubs or arrogant new-Irish). No it was
    the complete absence of jobs.
    2. When I bought my house it was a wreck but we moved in
    anyway,leaking roof, no carpets , cast off furniture etc
    then we stayed in . People buying houses now will not
    settle for anything less than new furniture , home theatre
    etc plus retaining the nights out in restaurants, pubs
    and the now ubiquitous “city breaks” that they cannot live
    without.
    3. We would not pay 100 quid plus to get our hair done,
    nor 3 quid for a cup of coffee. Men were unfamiliar with
    clothes shopping in boutiques other than Dunnes Stores.
    Ostentatious stag and hen weekends in Barcelona were
    frowned on. When wedding receptions finished up with the
    band playing Congratulations we went home, we didnt spend
    the rest of the weekend in a boutique hotel offering
    tropical rain forest spa treatments.
    The only spas we knew were those who bitched about how
    tough it was instead of getting on with it.

  6. Open Window

    Its comming children of the sun, the bursting of the Irish
    Property Bubble, you can make your feelings & predictions
    known for the record or just read some interesting comments
    & posts, this is a non commcercial open forum for all, do
    join in.

    http://www.thepropertypin.com

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