November 12, 2006

Central Bank tries to stem tide

Posted in Banks · 43 comments ·

In the 10th century, the King of England, Ethelred the Unready, faced a crisis. Danish longships threatened rape and pillage all along the east coast of England.

Sensing that his armies would be routed, Ethelred conjured up a scheme: instead of facing the enemy head on, he would persuade the tide not to come in, thereby stopping the invaders before they even set foot on land.

He raised a tax, melted down the proceeds into gold coins called Danegeld (Danish money) and flung the coins into the sea in an effort to buy off the waves.

Needless to say, this unique and innovative solution didn’t do the trick. The Danes arrived and had a field day.

The Danegeld episode reminds me of the efforts of the Central Bank to warn against the excesses of the property market. In the absence of any proper economic tools, such as interest rates, the bank is reduced, like Ethelred, to the rather pathetic spectacle of persuasion with no sanction. Last Wednesday, it issued its financial stability warnings, which sounded like a politically-correct social worker trying to discipline an out-of-control juvenile delinquent.

The report was full of pieties, couched in gentle terms such as ‘‘should’’ and ‘‘could’’ and, like any good-thinking liberal sociologist, the bank was keen to pin the blame for the banks’ financial delinquency on anything but personal behaviour. So the credit mania is now a product of the environment, the social conditions, demography or outside influences. This is the economic equivalent of social theories that blame behaviour on mumbo-jumbo like where you come in the family.

For the arch-persuader – the Central Bank – Ireland’s credit bonanza is the result of a financial broken home where the prudential lessons of the middle-class kitchen table have been forgotten. If we could only get back to basics, it would be alright. And is there a threat of the juvenile going completely off the rails? No, not really, although every sign is screaming calamity.

Let’s cut to the chase. The economy is out of control. We dispensed with all our economic tools when we joined the European Monetary Union (EMU). The resulting deluge of cheap credit has propelled all prices upwards. So wages and inflation have taken off, as Junior Cert theory would attest to. When there’s lots of money around, prices go up; in contrast, when there’s not enough cash in circulation, prices fall.

The reason houses prices have gone up six times faster than wages in the past ten years, is that the supply of labour has responded with all this new cash.

Immigrants have kept wages lower than they would otherwise be, had 400,000 of them not arrived in the past five years.

Although it is not their fault, the result of mass immigration has been to stretch the gap between wages and house prices.

This chasm has been filled by borrowing.

Today, the average house price is close to 14 times the average wage, with the result that private sector debt is 205 per cent of GNP – the highest in the world.

The flip-side of all this debt is huge banking profits. Our banks are money-lenders. The more they lend, the more cash they make. This is why the Irish banks make more per customer in Ireland than any other banks in Europe. Equally, the banks are in a market share fight to the death, so it is not in their interest to lose or turn down business.

This means that the banks set extraordinary volume targets each year for their employees to foist money on us, because they need to keep loan growth going. To do otherwise would see their share price falling, and their shareholders wouldn’t like that.

But who are these secretive shareholders – some shadowy off-shore financial Dr Strangelove? Well, not really.

We, the Irish people who contribute monthly to pension funds are the main shareholders of Irish banks. Irish banks are largely owned by Irish pension funds, so we are caught in a financial brace where cash begets mortgages, which begets profit, which increases share prices, which calls for greater loan growth, which drives the entire cycle one more time.

There is little the Central Bank – the financial social worker – can do in these circumstances. If it had control over interest rates, it could send a shot across the bows of the banking system, raising the cost of money and jolting the system into some semblance of sobriety. It’s all a bit like the ‘‘last call’’ at the pub. At the moment, the Central Bank is like a friend trying to persuade a drunk driver not to drive when drunk, but the friend, though staggering, insists he’s grand. The only course of action is to take the keys off him.

But the Central Bank can’t take our keys, so the chances are we will do something silly.

Another dilemma for the Central Bank is that, like all regulators, it is trying to execute a high-wire act. On the one hand it is trying to rein in the banks with gentle advice; on the other hand, it doesn’t want to frighten the horses by shouting too loudly. The last thing the Central Bank wants is a stampede out of the housing market – as has happened in almost every boom/bust cycle in history.

This would cause one of our big homegrown banks to collapse at worse or be taken over by foreigners for a song, at best.

Foreigners owning one of our banks shouldn’t be a problem for us, but the corporate bloodbath at the executive level is something the cosy cartel that is the upper echelons of the Irish banking system banks – and I include the Central Bank – would be loath to witness.

Likewise, in the great offshore accounts scandal engineered by the banking system against the state, did the Central Bank act as an agent of the state -which is what it is?

Not at all, it acted in the interests of the banking system, not those of the citizenry.

So when we hear the bank’s warnings about the property market, you are hearing a sanitised version of the conversation it is having behind closed doors.

But it matters not a jot, because without control over interest rates, the Central Bank is about as useful against the tsunami of credit crashing down around us, as ancient Ethelred’s Danegeld was against the Danes.

  1. mike obrien

    David mcWilliams may well be rights, having just returned from the US after a short visit – what I noticed was the good returns on property investment there compared to Ireland and given that the us have accepted that they are in decline

  2. I think every rational ,non-economist citizen is reading from the same hymn sheet David for some time now.Its not rocket science.
    However,the landing-soft or hard can not be far away-despite Fianna Fails (and the banks) determination to maintain the feeding frenzy for their principal backers the developer/speculator lobby..
    Considering approximately 40% of our housing stock is reputedly in the hands of speculators/investors, we will likely see a new landlord class arise in Ireland during the coming years.An unhappy legacy from the most corrupt and inept of our two principal, mirror image, political parties.

  3. The problem about pointing out that the Emperor is starck bo—ck naked, is that those who make the observation will be blamed when his majesty catches his death.

  4. Glen Quinn

    With the average price of property now 14 times of average industrial wages you would want to be an idiot to say that property is not over-valued.

    When it drops we will then here the idiots crying and moaning and I will be laughing at them because I will be buying there property at rock bottom prices. HAHAHAHA

    Come on property crash, bring it on.


  5. Isobel

    I have listened to David talking and warning the irish people about the property overinflation for a long time and the crash now seems very close and inevitable. I feel very sorry for all irish people who are trying to start in life, to make an honest living under a government whose house is built on sand. Shame on irish banks, property developers and government.

  6. Genki33

    When the Great Irish Property Scam of the early 21st century ( as economic historians will call it) unfolds, Bertie will be seen as a Nero type figure who fiddled..(ahem) while the young generation mortgaged their lives away. Fianna FAIL (rhymes with pale, Friendly Association of Irish Landlords) and their PooDle partners could have used a myriad of tools to cool the property market but did nothing. A government are supposed to behave with the best interests of its citizens at heart. But through lack of basic lending regulations and lack of property planning have allowed the older generation and their vested interest groups exploit the young of the country. Joyce wrote a hundred years ago or so of “the old sow that eats her farrow” How little has changed…

  7. Ian

    The loss of control of monetary policy certainly meant that the Cental Bank could do nothing about demand fuelled inflation, but what it could have done, with the resources and influence available to it, was to have researched supply side measures that might have taken some of the steam out of the upward pressures. There are planning and infrastructural options that might have been explored, ensuring an adequate and affordable housing stock within reasonable distance of work.

  8. r byrne

    There an olding saying “you get the government you deserve” and its as relevant here now as ever. Us blaming the government is a pathetic moan – we voted them in, after all. The RTE headline a few months back ‘immigrants cause rising house prices’ was as ignorant as it was inflammatory.

    The major ‘choice’ foible we made over the last decade was the joining of the euro. It was (and is) obvious that we were out of sink economically with mainland europe. Taking the UK/Sweden route would have been a far wiser choice. Losing control over our interest rates has left us awash with credit and the bubble-state of the union. Not that Brussels cares – 10% unemplpyment in Germany and structural reforms in Italy are top of that agenda.

    The ‘one diet’ for the whole family is fine for the 11 skinny older siblings but the obese red-headed step child in the corner is on a feeding frenzy and the social worker lost his job in 1998.

    Only good fortune not good government will save us now. Either that or escape the family house and make the 999 call for an ambulance.

    “Drop the Euro” – I can see the Sein Fein /Green Party election banners now !!!

  9. Very interesting article; Mr. McWilliams makes an admirable attempt to interpret the latest arcane declarations from the esoteric world of Central Banking.

    What I found most interesting about Governor Hurley’s comment was that it coincided with hawkish statements from the ECB. Commentators from the Commission had expressed the view that inflation was under control and many had felt that new rate rises were increasingly unlikely.

    As Ireland’s ear in the Governing Council of the ECB, Governor Hurley is the man with the clearest idea where interest rates will be in six months. He is obviously worried. Perhaps what Governor Hurley was doing was warning us of what is ahead rather than providing the services of a financial social worker — at least that would be my guess. Firing a warning shot across the bows is thus exactly what he was doing.

    I myself, despite an innate inclination towards pessimism, have become increasingly optimistic about the future prospects of the housing market. The slow appreciation of the interest rate, combined with favourable demographics, might save us in the end — a salvation policy makers hardly deserve.

    The Celtic Tiger is at a crossroads; we must lay the foundations for future economic success by investing in education, taking a strategic approach to R&D, and by reversing the erosion of our competitive position.

  10. eugene magowan

    Why the Irish property ‘market’ won’t fall? A possibly unique characteristic of the Irish property market is that it may actually be so small in comparison to the high number of super-rich who continue to buy into it. As a result, the market is not ruled by the borrowing behaviour of Joe Average, the market is unable to fall because property magnates have no need/desire to sell their holdings at this time.

  11. Ronan

    Eugene the super-rich people buying property are Ireland will be the first to leave as the market slows and will instead exacerbate any slump. Many of them have already moved into other, more profitable markets.

    40 year (or more) mortgages are not sustainable. The only rational people who would buy one are either people so desperate to get on the ever rising bottom rung property ladder that they don’t think they have a choice or are betting high stakes on major rises in property prices AND relatively low interest rates for years to come.

    I’m only 28 and a 40 year mortgage means that if I took one out tomorrow I wouldn’t have paid it off by the time I retire. I’m lucky enough that I can wait a few years and I think I’ll sit on my SSIA until I’m ready.

  12. Declan Carolan

    Another interesting article David. I see that there is quiet a mixed view of the whole situation from your various comments posted.

    The best one I think relates to the possible call to drop the Euro! Citing it as the problem?????

    The Central Bank and the Government had a wide range of tools to cool or prevent housing from spiralling out of control but they chose to ignore! Possibily due to vested interests!

    Why would they do anything to stop it! The majority of people with the ability to do something in the system are middle-aged individuals with probably more than one property! So they stand to gain the higher property rises.

    It is like the proposed Benefit in Kind (BIK) for employees parking spaces, it never happened because the majority of civil servants have parking spaces in Dublin. The revenue commissioners are hardly going to implement BIK that is going to result in the majority of their friend and collegue paying more tax!

    This would be in the best interests of the state and of Dublin and would encourage greater use of public transport! But was anything done?

    The numerous government refused to implement windfall tax on profits generated from Rezoning! Why was this not implement? This would have greatly benefitted citizens of the state! Allow less vested interest profitering from doggy land deals, and possible reducing land prices!

  13. The term ‘favourable demographics’ is coming into widespread usage as bulls scramble for even the flimsiest of arguments to support the largest property bubble in European History. 15% of the housing stock is empty rents are lower now than they were in 2002, the supply of homes for sale is rocketing; so the demographics don’t seem to support the current market.

    But realtors in the US were using the demographics argument back in 1926 prior to the Great Florida Real Estate Bust. Come to think of it realtors were using the same demographics argument prior to the current collapse in Florida real estate.

  14. Robert Duggan

    The only way i could afford a house is if there is a crash.Every cloud has a silver lining! David,haven’t you being predicting a crash for years now? Even a blind squirrel finds a nut now and again.You have to be right sometime I suppose.

  15. r byrne

    Declan Carolan said,

    The best one I think relates to the possible call to drop the Euro! Citing it as the problem?????

    I actually dont know if you’re being sarcastic here Declan as you neither support nor rebuke the argument?

    Please tell me how the Irish economy has beneffited from adopting the euro (unlike the UK)?

  16. tony mc evoy

    note to eugene,

    you strayed a little from david’s article but you did make a valid point:
    “the market is unable to fall because property magnates have no need/desire to sell their holdings at this time” …..

    but what happens when they feel they must test the market or convert paper money into real money ??? this is when the bubble birsts !!!

  17. Glen Quinn

    First of all it’s Consumer consumption that leads the market. If consumers consumption falls then every other market will fall including the stockmarket and housing market. The likes of inflation,interest rates, stock market, jobs (unemployment figures) all lag behind consumer consumption.

    The average house price of a property 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 therefore 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.

  18. r byrne

    Note to Glen:

    “The likes of inflation,interest rates, stock market, jobs (unemployment figures) all lag behind consumer consumption”.

    Truth: Irish inflation & jobs are irrelevant for the setting of Irish interest rates. THATS WHY WE HAVE A BUBBLE IN HOUSE PRICES.

    The stock market will reflect european (or perhaps world) global growth expectations not singularly Irish growth expectations.

    “Also markets are called mean reverting” – this is an absurdism. Real assets – stocks included display very little, if any, mean reversion. There is a huge +ve mean to returns on these assets, linked to global growth expectations and inflation. A mean reversion assumption would lead a investor short of the stock market almost always.

    What can disply mean-reversion is yields and forex and also, to some extent, growth rates. There can be a mean reversion to retunrs (not price) but the mean is positive.

  19. Glen Quinn

    Note to R byrne

    You missed the point completly. Consumer spending controls the housing market, stock market, inflation which in turn sets interest rates. When an economy is doing well then people gets hired and when an economy is doing bad then people start to loose there jobs. The causes of employment and unemployment comes after the state of the economy.

    The problem with Ireland is that if our inflation gets out of hand then we cannot correct it by raising interest rates however it is still up to consumers to buy or not to buy. If consumers stopped buying property then the market will be able to correct itself but we all know that’s not going to happen because people are emotional and they have it in there heads that they must buy there own property.

    I’m afraid that you are mistaken and the stock market does work off of mean reversion. Every stock has a value and due to investor confidence the stock will trade above it’s mean and in time of crisis the stock will trade below it’s mean. This is why if there is a stock market crash (or correction) and the stock is below it’s mean then this stock is said to be undervalued, knowing that the stock will rise above it’s mean when market conditions come back into play. Also anyone with a financial mathematics degree would also tell you this. It is very complicated and maybe I should have kept it to myself.

  20. r byrne


    Ref: Mean Reversion

    You’re embarrassing yourself here. Please stop, admit you’re wrong and take the shame.

    “Also anyone with a financial mathematics degree would also tell you this. It is very complicated and maybe I should have kept it to myself.”

    Tell me you’re kidding? Mean reversion implies a negative autocorrelation in returns. There is no oscillation about a mean by the stock market. Anyone who has seen a chart of any stock index can see that. There is an upward trend and positive autocorrelation at medium and long term frequencies. It is painfully obvious that stock markets and indeed individual stocks exhibit trending behaviour – when they go up they tend to continue to go up. why? – human behaviour of chasing winners, investor window dressing, fallen angels and the frequency of a business cycle. In addition stocks represent real assets so returns tend to get a head start by including inflation and GDP growth (both almost always +ve).

  21. Glen Quinn

    To r byrne,

    The discussion of this article is not about the stock market but about the housing market and it seems that you agree with me, that the housing market is run by consumer spending.

    Just a note have a look at the Q ratio (or Tobins q). Tobin won the Nobel Memorial Prize in economics in 1981. The whole point of Tobin’s q is and he proves it that the stock market exhibs a mean reversion.

    As you can see the graph clearly exhibs mean reversion.

  22. John P

    Personally I have been looking aghast at what has been happening here in the last few years. In my opinion housing prices is not the only problem. If we have to import approx. 90000 extra people a year to achieve the levels of economic growth we have here, why do we need all this extra growth? Given the infrastructure bottlenecks, would it not be better if Ireland was let settle into its own skin (economically speaking) for a few years. Then again maybe this is the only way the vested interests can keep the necessary support under the housing pyramid.

  23. r byrne


    I dont agree with very much you say.

    Specifically, i reiterate that your ‘mean reversion’ argument is an absurdism.

    What Tobin shows and what you mis-interpret is that certain properties of a stock (or stock market) exhibit some mean reversion tendencies. The stock price itself does not. A stock, overvalued by Tobins Q measure, could mean revert on Tobins chart and yet still produce positive returns. There are two ways of returning to a fair value: through price or through asset value. Asset value will increase with inflation and GDP growth (and other variables). As i said above – returns can sometimes be mean reverting but prices are not.

    Tobins charts show a relative mean reversion and not an absolute mean reversion as you claimed. As a seperate point the reversion is very slow. the mean is crossed only a handful of times. the half-life of this value measure is very long. In the example given it appears to cross the average (or revert to mean) about 12 times in 110 years.

    What was it you said again? “It is very complicated and maybe I should have kept it to myself.”

    On the consumer spending rant: consumer spending, in the typical and economist sense does not include house purchases or mortgage payments. so no, house prices are not driven by consumer spending. house prices are driven by the availability of cheap money, the generousity of tax-incentive schemes, the myopic view of irish investors and a uniquely irish infatuation of owning one’s own property. in addition we (as a nation) are guilty of one of the greatest trading sins – ‘chasing winners’.

  24. Glen Quinn

    To r byrne,

    I did not say absolute mean reversion and it looks like that I am correct.

    Frankly I don’t care what you have to say either and you are really showing very limited intellegence.

    First of all Tobin won a nobel prize for his proof on proving the stock market is mean reverting. If he was wrong then he would not have got the Nobel prize. I’m not going to argue with an idiot any more on basic economics. If you can’t grasp the basics then you are in trouble.

    Also all investment banks in London and the US uses Tobins Q. It applies to the entire stock market and it tells you if the stock market is overvalued or undervalued. It’s like using BlackScholes to calculate the proper price of an option and they also won a Nobel prize for this and maybe you don’t agree with this either.

    “consumer spending, in the typical and economist sense does not include house purchases or mortgage payments” NO NO NO thats the Retail price index you just quoted. I’m talking about consumer consumption which includes everything including mortgages.

    It’s very easy and basic and I can’t believe you cannot grasp this:
    If you have a lot of buyers then you are going to have a lot of high prices which in turn feeds through too high inflation. If you have no buyers then you will have a drop in prices even if interest rates are low and favourable tax rates. It all comes down to consumer spending and consumption. It’s mainly consumers that buys property and not big business.

    “in addition we (as a nation) are guilty of one of the greatest trading sins – ‘chasing winners’” – I don’t agree with you here. In 1994 we only started becoming a successful economy. We had a recession for 15 years prior. Every nation chases winners and so I would not blame us on it.


  25. r byrne

    Glen, your attempts to defend yourself are only losing you more and more credibility. I admit i may have come across as patronising on this mean-revresion issue but let me assure you that i have very many years of experience on this topic.

    Stock markets do not display mean reversion and Tobin did not prove that they do. You are mis-interpreting the results of your wiki search.

    From your dictum so far i guess you are either still in college or a year or 2 out. Ask an expert at your bank/college what the correct interpretation of Tobin-Q is and he/she will hopefully set you straight.

    For the record, Tobin postulates a formula for determining over/under valued stocks based on the mean-reversion property of the price/assetvalue ratio. It is not based on the mean-reversion of prices.

    Incidentally, though theoretically sound, the success of this ‘model’ deteriorated substantially out-of-sample.

    Also, the anology to black-scholes is very weak. Tobin postulates a theory or a model for valuing stocks, that at best will work more often than it fails. BS solves for a unique solution to the price of an option under no-arbitrage constraints (based on some market assumptions).

    Somebody please convince this kid he’s wrong!!!

  26. Glen Quinn

    Actally kid you are wrong. I work for JP Morgan in the city of London and since you questioned my experience I have been doing investment banking for 20 years.

    If you look at my recent comments you will notice that I never mentioned mean reversion of stock prices. I did say the stock market as a whole illustrates mean reversion.

    Here is one of the many investment banks in London who uses Tobin’s Q:

    It’s good to see that you are slowly coming around to my way of thinking now and it’s good to see that you are starting to see the benefits of Tobins Q ratio. Tobins Q ratio can be applyed to other markets as well. If you apply it to the housing market you will find that the q ratio is very high which suggests that the housing market is over valuated.

    For your own information. All investment banks (Except Ireland it seems) uses the BlackScholes method for calculating the price of options.

    Getting back to the article. The only way the housing market in Ireland can slow down is that if the majority of people stopped buying property, this would put a dampner on house inflation.

    You could have interest rates at 20% and if everybody is still buying property then you will still have high property prices because house inflation would be high. This is why the market as a whole is driven by Consumer Spending and consumption (see the Consumer Price Index for Ireland).

    If consumer spending slows down dramatically (by 2%) this will trickle down through the industry which then leads to unemployments which will then lead to people not being able to pay there mortgages which then leads to reposessions and hey the market is collapsing.

    In the UK house price inflation is way out of control and most people are declaring bankrupcy and interest rates are currently at 5%. All utility companies do not accept credit cards or cheques because they fear the cheques will bounce and the credit cards payments won’t be authorized. So you see interest rates are not the cause of high house prince inflation. It’s people spending and buying the property that is doing it.

  27. r byrne


    Honestly, drop it.

    You are wrong on so many counts it’s unbelievable. its natural that you would try to defend yourslf on an anonymous website but there are now also bare faced lies in your comments.

    Here’s a lie: Most recently you wrote …

    “you will notice that I never mentioned mean reversion of stock prices”

    while earlier you wrote…

    ” (if) the stock is below it’s mean then this stock is said to be undervalued, knowing that the stock will rise above it’s mean when market conditions come back into play”.

    Here’s an error. you wrote…

    “(Smithers) is one of the many investment banks in London who uses Tobin’s Q”

    Truth …. Smithers is not an investment bank.

    Now, at this stage i’m sure we’re annoying other readers. i know i’m right and i know you’re wrong. anyone with experience of markets valuation also knows i’m right so i’m going to give up trying to help you. if i came across as patronising i apologise. So, for the last time

    1/ Tobin’s q = market value / asset value. Asset value is the replacement value of the real assets of the company (bricks & mortar, patents, stock, …etc)

    2/ Tobin posulates that q should revert about some mean for a single stock (or stock market). This makes theoretical sense. After all what is a company but the sum of its parts and what is a markett but the sum of the stocks.

    3/ The mean of Q is in practice rarely 1. This is becasue of intangible assets, risk premia etc

    4/ Assume Q is too high. Q is expected to revert to its mean, M say.

    5/ Q can move to M in in two basic ways. The numerator of the quotient, ie the price of the market, can fall while the denominator stays the same. Alternatively, the denominator (the value of the assets) can rise while the price stays the same. In truth both the numerator and the denominator change.

    6/ It is possible for the price to rise but for the asset values to rise faster. This will result in Q moving towards M but the market getting more expensive. [You dont get this bit]

    7/ Importantly (and this is the bit you really don’t get) the mean reversion IF ANY concerns Q NOT the level of the market.

    [A good analogy: A glass of orange juice contains 5 oranges, no extras. Orange juice at £2 is expensive when compared to oranges at 5p. [Here Q = 200/50 = 4.] Should we sell orange juice futures? Perhaps. Suppose we do. Here’s a scenario – the price of oranges goes to 30p each and the price of the juice goes to £3. Q is now 300/150 = 2. We have a reversion of Q towards the mean but we have lost money (£1) on the trade.]

    If you charted a graph of the market price (not Q) and its mean (a straight line by definition) you would find that the mean line is rarely crossed. In fact, I have just charted the Dow from 1990 to date and it crossed the average just once. Even expecting a reversion to the 1-year moving average is a very unprofitable strategy.

    I’m promising myself i won’t reply to any more of your attempts to dig yourself out of your hole.


  28. No Inflation

    David wrote an atricle a while ago concerning “the great con of irish inflation statistics”.David suspected and argued that true irish consumer inflation was far higher than official statistics showed. I argued at the time that i didnt believe there was any great (disguised) inflation in Ireland. I still believe this is the case.

    why resurrect the issue? because, in my opinion, we have enjoyed the spoils of cheap credit without the backlash of more expensive goods. Supermarket prices have not increased much in the past 5 years becasue of tougher competition from european names (Aldi, Lidl). The days of “Guaranteed Irish” (read “guaranteed expensive”) are over. There are fewer “booze cruises” and trips to Newry for the half price Twixes. It is true that non-competitive goods have got very expensive – luxury clothing, insomnia coffee, ps2 games but these are not important for general consumption metrics. [As a young lad i paid £1.20 for a can of budweiser in the local off license. Now i can get 6 bottles of rolling rock for 5 euro. Oh, to be young again!]

    So, we borrow, we spend and ‘things’ do not get more expensive because our ccy is fixed against our trading partners. This extra money ends up in housing eventually. The problem with housing is that you cant export it. German contruction companies cant readily export houses to ireland. If they could, they would and prices would be lower. The main vehicle for irish inflation is housing because most other goods are open to european competition. In a sense, we have as a nation, started to import cheaper housing by buying in Spain, Portugal and Bulgaria but no matter how much leverage we in Ireland use we’re not going to shift house prices across europe commensurately to achieve a pan-european equilibrium.

    As another factor leading to the house price bubble i would add the LACK of consumer goods inflation relative to wage growth.

  29. Glen Quinn

    Please R byrne,

    My original comment that started this off is:

    First of all it’s Consumer consumption that leads the market. If consumers consumption falls then every other market will fall including the stockmarket and housing market. The likes of inflation,interest rates, stock market, jobs (unemployment figures) all lag behind consumer consumption.

    The average house price of a property 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 therefore 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.

    I do not mention returns or prices you did! I was talking about the market as a whole in which by using Tobins Q we can determine whether a given market is under/over valued.

    In order to calculate consumer consumption then you would look at the CPI (Consumer Price Index) index and not the RPI (Retail Price Index).

    Your comment on Interest Rates: “Taking the UK/Sweden route would have been a far wiser choice”. You are wrong here because if you went and lived in the UK you would find out that the UK is in the same boat as Ireland, that is inflation here is very high and house price inflation is rampant. Interest rates here are currently at 5% and house inflation is still accelerating. So your argument is totaly false, wrong and misleading.

    The whole problem is that people are not asking themselves the question is the price that I am paying for this property worth it. As long as you have lots of people buying then you will always have inflation (or house price inflation).

    The conclusion is and I do not like repeating myself is that CONSUMER SPENDING DRIVES THE ECONOMY.

  30. No Inflation

    Actually, if you look at the UK data you will see that house price increases did ease consideribly in 2005H2 and 2006H1 as a direct consequence of interest rate increases during 2004.

    In that 12month period house prices rose no more than 3-4% on average. This is less than official interest rates and less than all mortgage fixings. Owning property was a negative carry trade during that period.

    In recent quarters prices have picked up again as expectations of a dramatic increase in interest rates has recinded. The UK market is a very mature market in the sense that it does respond to rates as economists would expect. But, in the main, increases have been less dramatric than in Ireland. Also keep in mind that there was a lot of negative equity built up from 1990 to 1995 (yoy growth

  31. Glen Quinn

    Hi No Inflation

    That is correct in what you have said about the UK and we are expecting another interest rates rise in January 2007 but this did not stop house price inflation rising too 8%.

    People were saving during the period of 2005H2 – 2006 H1 (Nobody was buying property and so the prices were going down). People now are buying property even though they know that they are not going to be able to pay there mortgage if interest rates keep rising that is why we are now seeing a dramatic rise in house inflation.

    People today are not taking responsibility for there debth that they are taking on and this then feeds through to the economy. As long as you have a lot of people buying and spending then that will lead to high inflation (Raising interest rates is meant to damped inflation by making money cost more but if people don’t care then the interest rates becomes ineffective).

    In Sweden they don’t have high house prices (or house price inflation) even though interest rates are at 2.5%.

    The reason why house prices are so low is because people are not buying property. The reason for this could be put down to either cultural (In Germanic countries they rent rather than buy because of rent laws that they have) or that people need to put down a 20% deposit but they do not have a property market bubble.

    That is why the driver of the economy is consumer spending and consumption.

  32. eugene magowan

    Thanks for replies to my post above. I still maintain that the Irish property market is distorted by the large holdings of the small number of super-rich who are non-sellers. As an anecdote, I asked one of these why they don’t sell or move into something more liquid and the answer was ‘….because I’m so wealthy already that Irish property is just a part of my portfolio, a good thing to hold onto, it may dip or fall, but its a good longterm asset’.

    It may be incorrect to assume that the Masters of the Universe are motivated to increase value at all times, they may well be just as lazy as you and I.

  33. No Inflation

    eugene – i dont know. i’m not sure about your ‘few super rich’ theory. i know about as many people (average age 30) who can’t afford anything as i know with 3 houses. i know idiots with 3 houses who think they’r gordon gecko becasue they got lucky. some of the smartest people i know cant afford anything because they ‘were right at the wrong time’.

    most young people who bought in the mid 90s have leveraged up either by buying more or buying bigger. they are all loathe to sell – property just doesnt lose value they cry. they’ve been right for a long time now.

    i dont know any 30-35y old who downsized or any who sold his/her portfolio.

    many older people either bought another property as an investment for their young when they saw the market take off or as an investment from a huge positive equity spin on their own homes.

    Another feature i notice about modern ireland is the illogical dispersion of money amongst workers. Nowadays cleverness does not beget money. There was a time it did. Many of the property magnates, phoneshop owners, coffee shop owners, telecoms engineers, IT maintainence and builders that make the money today would have been ‘flipping burgers’ had they been born in the 60s. Perversely by not going starting college in 93-98 and spending 4-5years educating yourself you became far more successful by selling phones, buying a property or doing a 3 month FAS course in telecoms or basic IT.

    I dont begrudge anyone a nice life, i just feel sorry for the one’s that got left behind. Could a college grad contemplate a career as a teacher, civil servant, lab worker, nurse or garda? Even going into college to study medicine now would be a loser nowadays. 7 years study, 2 years earning FA and building slowly from there.

    Makes me wonder who will be doing these jobs in ten years time?

  34. Des

    I’m not a grammer snob, heaven knows I have a limited grasp for punctuation and spelling. The pronoun to use is “their” and not “there”. Please don’t post comments without editing the; too/two/to, and there/their mistakes out or I will be forced to stop reading the rantings on this site.



  35. shtove

    I do property repossessions in England, and the system is barmy.

    House prices keep rising along with interest rates, and people who can’t afford their existing mortgages are remortgaging or securing extra money on the property. They’re just running faster to stand still. Then they end up in court, babbling like demented chickens, and nine times out of ten the judges give them another chance, and another, and another … Legions of people are entering bankruptcy or IVAs, and then the selling process starts all over again, to buyers who will be even less able to afford the monthly instalments. I’m sympathetic to these people, but there will be a reckoning.

    My favourite was when an Irish guy got stung on buy-to-lets: the first property fell into arrears, then the next, and within three months 14 B2Ls had collapses on him like dominoes. Fair dues to him – he just said, Feck this, I’m off back to Ireland! No doubt to set up another line of dominoes. Who needs to work?

    At base, it’s nothing to do with interest rates – it’s the availability of credit, full stop. And most of the extra stuff is coming from the dodgiest finance providers you can imagine – the top tier lender sighs with relief when Super-Duper-Quick-Screw Loans takes over the mortgage.

    As for Ireland, bring it on. I can’t wait to hear the fart-like sound as all that air rushes out of the balloon. Should have happened a long time ago. But then the top-tier lenders over there are posher versions of Super-Duper-Quick-Screw Loans. AIB should have had its banking licence taken away over the off-shore accounts scandal. So there!

  36. Helen Carty


    Surely a bubble has to have at its base a shortage. There has been a shortage of houses in Ireland because of restrictive planning practices.

    Next, the Central Bank does have some powers. It sets the reserves. When lending was exploding why didn’t it up the reserve requirement?

  37. Paddy Hackett

    I distinctly disagree with the fundamentals of David’s argument:

    The resulting deluge of cheap credit has not propelled prices upwards. It is internal economic conditions that have propelled prices upwards in the phenomenal form of inflation. In other words the source of price rises is caused by the economic conditions obtaining. To claim that credit increases lead to price increases is merely to assert that price increases cause price increases. This is a circular argument that goes nowhere. Clearly the economic conditions in Ireland have not developed in such a way as to prevent the occurance of inflation. The problem then is Ireland’s backwardness as an economy rather than the opposite. It is Ireland’s backward nature, as a capitalist economy, that is the cause of inflation. It is the Irish economy’s inability to productively absorb increases in credit that is the source of inflation. It is the law of value that regulates the Irish economy as opposed to the ultimate source of wealth –the working class. The accumulation of value in the Irish Republic is too restricted to prevent inflation. It is the very absence of Ireland as a Celtic Tiger that is the cause of inflation. There is and never was a Celtic Tiger. The needs of the working class can never be satisfied under capitalism: an obsolescent system for the reproduction of human wealth. Communism is the ony solution to the problems of the working class.

    Paddy Hackett

  38. Colin Ahearn

    You mean the party is not going to last forever.

    Anyone remember the famine.

  39. Glen Quinn

    Hi Paddy,

    Communism does not work for single countries. It would work if the entire World was at the same level of progression both socially and economically.

    Also the Communism that Russia, China and North Korea have is not the Communism that Karl Marx’s envisioned.

    I agree with the rest of what you said. The way we look at the economy was that having a job alone meant that you were rich regardless of the salary that you were on because during the 80′s it was impossible to work in Ireland.

    If having cheap credit is meant to be a cause of a bubble then how come Sweden does not have a bubble and they have cheap credit (Swedish Interest rates are currently at 2.5%)

  40. krona

    “If having cheap credit is meant to be a cause of a bubble then how come Sweden does not have a bubble and they have cheap credit (Swedish Interest rates are currently at 2.5%)”

    Swedish house price went up 12% in 2005. Is that a bubble?

    Heres some reasosn why it might not be as expensive as ireland…

    …the 2.75% (and rising) official rates suit their lower inflation and steady work force participation
    …they have had lower growth over the past few years
    …the banks are stricter on credit lending
    …they dont have the same wage inflation as ireland and income taxes are extortionary
    .. they dont have section 23 grants
    …they have a different culture of home ownership
    …they have their own currency and it is expensive, detering ovreseas investment.
    …they run their own intereset rate policy so markets EXPECT higher rates if inflation picks up. The same is not true in ireland where we KNOW the ECB will not respond to Irelands inflation and we (investors and lenders) know that the euro-area is not justifying very much higher rates (yet) on the basis that it doesnt suit Germany, Italy or France.
    …Sweden is a highly socialist state and the safety net of the generous welfare system does not encourage home ownership.
    …there is no population explosion
    …has less competitive domestic banks

    Perhaps the most OBVIOUS reason is that swedish house prices collapsed in the early 90s so investor/consumer faith in the markets upward trend is weaker than in Ireland. History doesnt repeat itself but it does rhyme.

    Sweden DOES have the same response function to interest rates that theoretians (sp?) expect and all countries have. There is a lag effect to rate changes and an unclear transmission mechanism from central bank to consumers. Rest assured if the riksbank hiked rates to 10% say, the market would not rally another 12%.

    is that enough?

  41. Glen Quinn

    Hi Krona,

    I believe Sweden does not have a bubble economy because of a number of reasons.
    1. There inflation rate is very low. It is at 1.3%
    2. The average house price in Sweden is about 75,000 euros (Small increases in price would appear big in percentages. If the average house price rose to 80,000 euros that would mean that house prices rose 6.67%)

    I agree with the rest of what you said and you missed out that Sweds have to put down a 20% deposit in order to get a mortgage out.

    I do not see the Euro as a cause for our housing bubble. I would blame the following factors:

    1. I blame our culture in having to own a house at any cost (Common sense goes out the window).
    2. The government for having stamp duty too high (In the UK stamp duty only goes to a max of 4% as compared to our own at 9%. Buying a typical house in London for £300,000 would incur you 3% in stamp duty)
    3. The central bank could have got banks to increase the percentage of reserves to debt, this would restrict theamount banks to the amount of money they could lend out.
    4. Having tax relief for property as you correctly pointed out.
    5. It is unproftible for the government to stop house prices increasing.
    6. The new 125% mortgages, 100% mortgages, 40 and 35 year mortgages.

    From the above you can see how easy credit is filtering through our economy and distorting the prices.

    Here is a good article that I found, It’s a year old:

  42. Jonathan Benson

    Hi all,
    WRT the availability of credit I get a laugh each month when offers of credit cards and pre-approved loans come tumbling through my door. Why? Because I’m a student (researching for my PhD) and live off a stipend which in the context of “Celtic Tiger”, big spender Ireland makes me relatively poor. Before anybody starts on about students and being supported by rich parents, I’m not and haven’t been for a long, long time. In anycase it’s doubtless in my mind that the banks are giddy about handing the money out to people who can hardly afford to repay it (i.e. me).

    Another factor leading to the bubble in house prices is the amount of people buying additional housing units for rental markets rather than demographics. According to the CSO first time buyers make up only 36,000 units of the market, the rest buy to let (28,000 units) and tradeups/downs making up the rest. Clearly all these 28k investors and spectlators are heading for a fall unless there is something underpinning their investment and needless to say this level of investment needs to continue for the market not to fall due to a drop in demand. Sure building completions can decrease but this will lead to a drop in employment among many of the people renting these houses. Unless I’m missing something fundamental the bubble bursting is inevitable. I’m afraid the housing boom has more to do with cheap and readily available credit than demographics.

    Off topic a bit: Whatever about stamp duty, I think that when land is rezoned the beneficiary (aka horder of potential development land) should be taxed very very heavily upon sale of rezoned land. There’s no logical reason why the holders of land should be gifted millions by the stroke of a county counsillors pen. Might decrease corruption in planning and land speculation (and therefore land price) somewhat too.

  43. shtove

    Well, it’s started in America. Subprime feeds into Alt-A into prime. Repossessions rise and rise. Bubble pops, housing industry goes wallop. Consumer spending plummets. Dollar collapses. Bush declares war on Iran. Oil price rockets. Greenspan is de-canonised and Bloomberg TV taken off air!

    I knew this was going to happen when I saw a starving, bikini clad contestant on the US version of Survivor seven years ago greet the fortnightly supply boat with the question, “How’s the stock market doing?”

    Seriously, what effect is this going to have on Ireland, Britain, Europe?

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