September 30, 2006
Driving around Westport in the rain the other day, I was struck by the number of empty houses. Large clusters of ‘holiday homes’ were dotted all around the coast, creeping out from the town and towards the sea.
Westport isn’t alone. All over Ireland, ‘ghost estates’ are enveloping many of our towns. Driving back from the West, these spooky ghost estates emerged out of the mist announcing places like Termonbarry, Frenchpark and Edgeworthstown. Anywhere there is a tax-driven scheme, there are ghost estates. You don’t have to be a child or believe in Halloween to find that scary.
There are an estimated 230,000 vacant properties in Ireland, according to Davy Stockbrokers. This figure is substantiated by this year’s reports from the census gatherers, who found a surplus of vacant houses for which nobody answered the census. Following discussions with local estate agents, neighbours and postmen, they concluded that many properties had never been lived in or were long-term vacant.
On the day of the 2002 census, it was estimated that there were just over 140,000 houses vacant across the country. In the past five years, this figure has increased by over 50 per cent, to about 230,000.
Today,13.5 per cent of the total housing stock is vacant. The ESRI did a study on this in May 2005 and found that traditionally Ireland has had a high vacancy rate, but that phenomenon was explained by emigration where houses were left when the people moved to Britain or the US.
However, today – when inward migration is running at 70,000 per year – the emergence of new ghost estates is worrying.
Even if we accept that Ireland might have a slightly different history, are you comfortable with the fact that in Britain – which has a similar home owning and holiday home buying culture, the corresponding figure is 3.2 per cent of all houses? Here one house in seven is empty; over there it is one house in every 31.
There I was thinking all along that we had a housing crisis, with prices rising at double digit rates because we didn’t have enough houses.
All the estate agents told me the reason prices were rising was that demand outstripped supply and we needed more houses. Well, it is crystal clear that the opposite is the case. It is not that we don’t have enough houses – we have too many.
Here is the problem. With 13.5 per cent of all houses vacant and an estimated 40,000 more ghost houses being built as I write, what is keeping their value up?
Normally, value is some derivative of what the asset earns. But if the asset is earning no income, how does its price continue to rise in the aggregate?
The last time we saw assets being priced with no reference to their underlying yield was in the dotcom boom. Remember that?
Companies with no earnings were being valued at hundreds of millions. Remember Baltimore Technologies?
Back then, everyone believed that the new economy had such massive growth potential that today’s borrowing would be turned into gold tomorrow. All the investor had to do was ask no questions, come along for the ride and live the dream.
At least the dotcoms had the vague, if naively plausible story that they were at the front of a technological revolution, that all the old rules had been thrown out of the window and a brave new world awaited the adventurous.
This Messianic message fell on fertile soil, financed by low interest rates. Nobody shouted stop. Nobody pointed out that the dotcom emperor had no clothes. If we check out our property boom where 13.5 per cent of our assets yield nothing – either financially or practically – it is not hard to see that we are dealing with a similar confidence trick.
The confidence trick has become so embedded that last week, a spoof plan for a Dubai-inspired development of Dublin Bay resulted in local politicians receiving angry calls to oppose the mega-development.
Anyone who believed that Dublin Bay could be turned into a space-age investor’s paradise, complete with offshore golf courses and giraffe-only zoos, could only have taken leave of their financial senses.
Yet this delusional carry-on continues, despite evidence that only 15 per cent of top-end houses sold at auction this week.
In the past few days, auction houses have been empty, leaving not only estate agents worried but also all the other industries which depend on the property pyramid scheme remaining intact, such as newspapers and their glossy property supplements.
Jeremiahs like myself have worried about this for years, and our concern is not that prices go up and down or that huge amounts of money get diverted/wasted into construction, which has no long lasting impact on the productivity or human capital of the society.
Our concern is more driven by what happens when prices stop going up and begin to come down again. What happens to our banking system, which could be fairly (from examining Central Bank figures on the destination of credit) described as a huge leveraged bet on Irish property?
What happens to the hundreds of thousands of people who have borrowed based on exaggerated property values?
We have examples of other countries that went through the same cycles. Finland in the early 1990s offers an interesting example.
The first thing that happens when the bubble bursts is bank shares slide rapidly.
This is made easier because, in Ireland, they are the most liquid stocks and most brokers will write options against them – hoping that at some price the banks will buy their own shares back, thus putting a floor on the fall.
In a stampede, this strategy typically backfires. In Norway, again in the early 1990s, following a run on the major banks, the state had to issue a national bank bond to recapitalise its banking system. This means that the citizens of the country bail out the banking system.
If our interest rates are rising at this time, the financial crisis is more damaging.
In a country where the construction industry is operating at full tilt, where 50 per cent of our new builds will be bought to be left vacant and when strains are appearing in the frothy auction market, the existence of ghost estates of vacant houses is a very bad sign.
In the years ahead, these ghost villages, like our famine villages, may stand testament to a great tragedy which, although predicted by concerned observers, was never fully appreciated until the morning the crops failed.