September 30, 2006

A warning from deserted ghost estates

Posted in Banks · 23 comments ·
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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.


  1. SPM

    Is this a case of people buying because of tax incentives
    fuelling a false demand in these particular areas, whereas
    real issues relating to shortage of supply are driving up
    prices in the rest of the country, particularly around
    Dublin? Would it be too simplistic to say that there may
    be two separate markets at work here?

  2. billy

    BANG!

    The sound of the wheels coming off…..

  3. Seán

    If you want to know what price property would be now without
    the boom then look in Moyross, Limerick city where a 3 bed
    house can be had for €75,000. Thats the floor and a lot of
    property is going to hit that mark over the course of the
    next few years most gains since 2000 will be wiped out. All
    the classic symptoms of a speculative asset bubble are
    clearly visible, it will be a spectacular crash.
    That €750,000 + stamp duty 3 bed single storey in Dublin 8
    has a long way to fall.
    This year we will complete a minimum 90,000 units. Our
    population in April 2006 was 4,234,925 people, thats a ratio
    of 1:47, Despite massive immigration (10% of the population
    is non-national), we have managed to build a surplus number
    of units.
    The last estimate for UK population in 2005 is 60,909,500
    and there were 225,000 units completed last year, thats a
    ratio of 1:270.
    In Spain 2005 that ratio is approximately 1:62, they also
    have a bubble market.
    The Irish Independent(date) reported that the census
    enumerators found 275,000 empty units + 30,000 further
    holiday homes, those empty estates can be found in the
    midlands in places like Alhlone, Carrick-on-shannon where
    the rental market has collapsed, i.e. there are so many
    properties available that it is impossible to find tenents,
    alot of people who own property in this region are in
    trouble, they will not be able to sell these properties when
    the section 23 initiative wears off. There are also empty
    apartments to be found in Ballsbridge, that no one has ever
    rented, I guess they are in it for capital appreciation.
    Then there are the idiots who have gone and bought property
    in Berlin, or Bulgaria who have no idea what rental yield
    is, I’m sure you have met these people who are only too
    willing to tell you how much they made since they bought the
    property. These people are completely blind to risk.

    If you want to keep up with the unwinding of the property
    market checkout

    Askaboutmoney’s “Current public sentiment towards the
    housing market?”
    http://askaboutmoney.com/forumdisplay.php?f=13

    Boards.ie “Housing bubble starting to pop?”
    http://www.boards.ie/vbulletin/forumdisplay.php?f=106

    GlobalHouseprice.com which has a section covering Ireland
    and links to other blogs.
    http://forum.globalhousepricecrash.com/index.php?showforum=16

    Anyone interested in the UK market can checkout
    http://www.housepricecrash.co.uk/

  4. Kevin

    SPM, there may be separate markets developing but I don’t
    think it can be said that there is really a shortage of
    supply anywhere. If there was then rents would have taken a
    significant hike as well.

  5. adrian

    Aesthetically speaking the best way out of the mess is to
    restore the unrequired housing back to green field sites,
    maybe a small proportion initial of stamp duty levy could
    be forwarded as a grant for such an environmental disposal
    scheme!
    Alternatively and best, (economically speaking anyway) we
    could lower the minimum wage, bring in a million more
    opportunity seekers and get manufacturing on a competitive
    footing – politically suicidal!
    A possible and probable scenario is that bankrupcy shall be
    rife as debt owners (homeowners) go in the sin bin for a
    few short years, it may make sense for most!
    The only upside is nice cheap homes for the next generation
    of buyers. In the distant distance, the future is bright,
    but heh chin up, Your healths your wealth, lifes short,
    stop whinging and Enjoy!

  6. Andrew

    David, I thought you might be interested in this article
    from a new group emerging on the left at the moment. They
    are doing some serious work on the economy from a marxist
    viewpoint.

    http://www.permanentrevolution.net/?view=entry&entry=813

  7. David Mc Williams

    Thanks for all your comments. Andrew, thats an interesting
    article in the permanent revolution site – thanks.

  8. A.N Other

    All those empty housing units lying idle in the West.

    The economy in the nu perfect Eire will consist of cottage
    industries & debt slavery.

    I hope that we’re building things that can be put to good
    use in a few years time.

  9. p.berry

    Hi all,

    It is obvious from reading the numerous comments posted on
    this site regarding the Irish property market that there is
    more than one view on the future direction of the property
    ladder. Are prices going North or South ??? There are the
    home owners who honestly dont care (a house is a home and
    all that jazz!!), there are the people who are on the
    property ladder & who actively talk up Irish property as a
    great + riskless investment and thirdly the people who are
    not on the ladder (due to choice or personal circumstances)
    and whom believe the end is just around the corner (this
    view may just be wishful thinking ?? i dont know) ….

    phil

  10. laura

    I lived in Midleton for two years. We paid 650 a month for
    a house the equivalent of which is now on sale for at least
    320k. If you borrowed this and paid no tax it would still
    take about 50-60 years to pay off.

    Accross the road they built fancy townhouses that sold for
    450k. For about a year after completion it appeared that
    only one of them, if any, was ever occupied.

    The the ghostly “for sale” signs came out. 5 of them.
    There were 6 houses. That indeed is scary as these were 1
    mile outside the town. There seems to be no rational sense
    in the rented sector either. I was looking on DAFT the
    other day and there are nearly 500 rooms to let in Dublin
    priced at €500 or more. There are even 37 cabbages trying
    to let rooms for 800 a month or more! (Who in their right
    mind would rent one of these when there are also 38 1-bed
    apartment or flats to let for 800 a month or less!)

    The thing is, there are 562 rooms for rent at 400 or less.
    And of these, 140 are 300 a month for less. Why, if
    somebody can rent at these kind of prices, are people
    trying to push rooms out at such exhorbirant prices?

  11. Lance

    Well, at last more and more people are looking at the
    numbers and can tell they don’t make sense. Property is
    the Irish passion, but many of the outpriced young smart
    professionals are doing one of two things, 1) Waiting for
    a re-alignement of prices to some semblence of reality, or
    2) More than likely emigrating as I have.

  12. Glen Quinn

    I chose option 2 as well. I have emigrated to London. I
    find London much easier to live in than Dublin because
    wages are much higher and prices are cheaper.

    The reason why I emigrated was that I was getting very
    very worried about the Irish economy and I don’t want to
    be in the country when it all goes wrong and it will. The
    higher prices go the more there going to fall. I’m looking
    at a 60% drop on average.

    The average house price should be no greater that 5 times
    average earnings (According to the bank of England and the
    old central bank of Ireland). Average Industrial wage =
    32,000 euros and therefor house price = 32,000 * 5
    house price = 160,000 euros.

    Average house price in Dublin say 400,000 euros this means
    that the house price must drop at least 50% to come back
    into proper valuation. Also markets are called mean
    reverting which means that all markets eventually revert
    to the mean (average) this includes stock markets, bond
    markets, property markets etc.

  13. Glen Quinn

    I chose option 2 as well. I have emigrated to London. I
    find London much easier to live in than Dublin because
    wages are much higher and prices are cheaper.

    The reason why I emigrated was that I was getting very
    very worried about the Irish economy and I don’t want to
    be in the country when it all goes wrong and it will. The
    higher prices go the more there going to fall. I’m looking
    at a 60% drop on average.

    The average house price should be no greater that 5 times
    average earnings (According to the bank of England and the
    old central bank of Ireland). Average Industrial wage =
    32,000 euros and therefor house price = 32,000 * 5
    house price = 160,000 euros.

    Average house price in Dublin say 400,000 euros this means
    that the house price must drop at least 50% to come back
    into proper valuation. Also markets are called mean
    reverting which means that all markets eventually revert
    to the mean (average) this includes stock markets, bond
    markets, property markets etc.

  14. r byrne

    Section 23 relief has been a major factor in propelling irish house prices to current levels. These are 10y schemes, the first of which came available in 97 (i believe) and investors might be willing & wanting to sell these properties as the schemes expire. This would be a major negative for housing stock. Even a 20% reduction from current levels in these properites will leave the investors happy. is it worth the risk in keeping these properties with rental yields

  15. DannyS

    How true this is. Many will say that this only applies to Rural areas. In Kanturk in North Cork, 40 minutes commute to Cork, Limerick, there is a new estate of approximatley 150 houses, that seems to have very few occupants, and this is only one estate that I haventake note of. Within Dublin, there has been immense developments in Lucan and Blanch. that will have the same problem, compounded by declining values in the commuter counties. Its a great irony of life, that those who castigate the doomsayers, will end up proving them right. It seems to be happening now, as there has been some sharp falls across all of Dublin in the last month. Check out Daft.ie and pick a page in Dublin, keep it and check it again in a few weeks, and you will find them. FTB’s will not benefit from a big crash, as they will become first time umemployed..

  16. [...] We have been told for years now that those who were buying houses as an investment were being entrepreneurial. We now know – from the 2006 census – that just under 14 per cent of all dwellings in Ireland are vacant. House construction stands at around 80,000 new units a year, while the price for a second hand house in Dublin is at an average of €520,000 – about 16 times the average industrial wage. [...]

  17. Holger

    @Se I don`t think you need to be an idiot for buying s.th. in Berlin if the day comes where the prices start to rise over there they will rise very fast. A few days ago I got offered “affordable housing” for a 2 bed in Navan at a price of 227000 Euro currently you can buy a proper 2 bed in Berlin for 70000 Euro or and Berlin is one of the main capitals in Europe. At some point things will turn back to normal.

  18. [...] prices are tanking (moving the prospect of home ownership back into the achievable goal category), ghost estates litter the rain-soaked countryside and the hundreds of thousands of Eastern European immigrants who [...]

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  20. joe sod

    reading this now in january 2013, its amazing how accurate it was, and only 19 comments so it did not generate much interest back in 2006. The issue of the ghost estates is a big thing but it is something official ireland is unable to deal with. It hopes that the market and the private sector will sort it out. Ghost estates are referred to in the abstract merely as figures rather than as physical entities. There are solutions to sorting these estates, maybe a law requiring unfinished estates to be finished or demolished within 5 years.

  21. [...] it became clear that the demand just wasn’t there. In 2006, Irish economist David McWilliams named these developments “ghost estates,” and the name has [...]

  22. [...] hold, it became clear that the demand just wasn’t there. In 2006, economist David McWilliams named these developments “ghost estates,” and the name has [...]

  23. [...] took hold, it became clear that the demand just wasn’t there. In 2006, economist David McWilliams named these developments “ghost estates,” and the name has [...]

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