January 2, 2008

The game is up for the housing hype-peddlers

Posted in Irish Independent · 7 comments ·

Ah the revisionists. You can’t help loving a revisionist. He always emerges after the event to suggest that the history you have just witnessed didn’t happen at all.

In recent days, our newspapers have been full of articles telling us what transpired in the Irish property boom in 2007 (as if we didn’t know). Commentators who this time last year were confidently predicting that house prices would continue rising (albeit at a slower rate — the fictitious “soft landing”) now have changed their tune and are suggesting that “we all knew it had to stop some time”.

Well wait a second; if you all knew it had to stop and reverse some time, why didn’t you say so beforehand or even at the time, or even when the market was turning down in mid-2006? What, cat got your tongue? Why didn’t you share this great insight with the rest of us, given that you are in the “insight” sharing business?

The reason is simple. Most of these so-called commentators and economists are paid agents of the hype-machine which has dominated analysis in Ireland for the past five years. Some work for banks, others for brokers or estate agents; many are representing various lobby groups and some work for the State, which gets 28pc of the price of every new house in tax. Some might work for media outlets which make so much of their revenue from property advertising that a simple calculation tells them where their bread is buttered.

Irrespective of where they work and who they represent, one thing binds them all together and it is this: they have been putting property before people for the last few years and in doing so, have condemned many thousands of Irish house buyers to 30-year mortgages for assets that are worth considerably less than what they paid for them.

As if that is not enough, the “property before people” merchants are at it again this week, telling us that there might be a slight recovery in the Irish housing market at the end of 2008! What gall. Having misdiagnosed the boom when it was in full strength, what qualifies them to make pronouncements when the patient is much more fragile?

Would you listen to a doctor who failed to diagnose the first signs of cancer? Worse still, what would you think of that same doctor who instead of diagnosing cancer and taking immediate remedial action, prescribed a course of muscle-enhancing steroids to disguise your weakness? As the cancer spread, the steroids made you look vigorous and strong, yet every day your health was actually deteriorating.

An interesting way to look at the commentary in Ireland over the past few years is to think of the economist as a doctor and the economy as the human body. The economy, like the human body, is susceptible to bouts of weakness and strength. It is also vulnerable to contagion. The banking system, for example, acts like the heart and credit operates like the bloodstream. If the heart is healthy, it pumps money into the economy which flows, like blood, into every nook and cranny. On the other hand, like a virulent cancer which spreads into various organs, the economy too — through the mechanism of confidence, overvaluation, outside shocks, accidents, bad behaviour/management and greed — is also prone to infection. Problems that begin in one part of the system can ultimately contaminate the whole organism. And yet, like the human body, the economy is a surprisingly robust entity, capable of recovery, rejuvenation and renewal.

A crucial player in this complex relationship is the economist — the doctor of the economic organism — who, using all the tools at his or her disposal, constantly assesses what might be going on under the skin. It is essential that the economist runs regular check-ups on the patient to ensure early diagnosis of problems.

In medicine we take it for granted that “early diagnosis” is one of the keys to successful medicine. Many of us will have friends and family for whom early diagnosis has been crucial in saving their lives. We also know people who have died of fairly treatable cancers because they were misdiagnosed or where not diagnosed early enough. Equally, we all know people who simply won’t take medical advice, will ignore the signs and pretend that everything is ok, afraid to confront the reality.

A good doctor is the one who tells his patients the bad news first, gets the sentimentality over with and focuses on the problem. She is the one who notices a problem and checks with ‘Gray’s Anatomy’ to see if this has been seen before. If she is unsure, she’ll consult with colleagues. Most importantly, due to a combination of instinct, experience and knowledge she will know what to look for. No one has ever criticised a doctor for diagnosing a problem too early.

Once diagnosed, it’s up to the patient to respond, maybe by taking medicine, changing lifestyle or diet.

Similarly with the economy, once a bubble is diagnosed it’s up to each individual to respond. No one ever suggested that you could not trade during a bubble nor use your own judgement to assess when it might burst. But the key thing to realise is that you are in a speculative mania rather than a healthy, permanent era of ever-rising prices.

Now back to medicine, consider the highly unlikely scenario of a doctor who is in the pay of a large pharmaceutical company. He is rewarded for pushing the company’s products onto patients. Imagine for a moment that this doctor is paid to advise patients to take steroids to build up their muscles so that they appear like ‘he-man’ in the centre-fold of ‘Bench-Press Monthly’ or some other body beautiful magazine.

This doctor is unlikely to tell the patient that taking these steroids is bad for him. He is unlikely to look for research which reveals that there might be unpleasant side-effects. In the extreme he might actually mislead his patients. The role of the Medical Council should be to police this type of carry on and strike off doctors who behave this way. This should protect society from compromised doctors.

Now think of the economist or commentator who is in the pay of a bank, broker, estate agent, developer or some other organisation which makes money when people buy overvalued houses. These people are in the same position as the doctor working for the pharmaceutical company; they are incapable of giving impartial, sound advice because it is not in their financial interest to do so.

This is the reason they all failed to forecast the dramatic reversal in the property market last year. This is the reason they did not speak out. This is also the reason that they ridiculed sceptics who years ago offered a crucial early diagnosis.

It is not because they are bad at their job — on the contrary they are actually extremely good at it. They are compromised cheerleaders masquerading as objective commentators and their job is to dress up a money making racket with the trimming of economic science.

The best way to protect yourself from them this year is a large dose of salt. Forget the hype. Prices are plummeting, so let the market do its thing.

You’d be mad to buy a house in 2008 — particularly with so many charlatans desperate to get paid at your expense.

  1. david

    bubble it may have been david but your smugness is unbecoming of a man who was consistently wrong in his view on the market for 7 years in a row. its very easy to be a bear as you can always say i told you so however i would not want you investing my money

  2. David Mc Williams

    David, there is a difference between realising something was a bubble and staying out of the market. We all trade. I have bought and sold over a dozen times since the early 1990s, selling up my final investment property in the UK in August 07 – (more luck than savvy it must be said) . The key is always to remember to sell on the way up and buy on the way down.

    And as for investing your money, there were and still are many more interesting places to make considerably more money than the Irish property market. And, if you check the record you will see that I never called the timing of the market (i’m not publicly in the advice game). All I contended was that once the thing turns there will be a monumental slump and Paddy Last will be left holding crud.

    I’m sorry if you are left with assets you should have sold. But why don’t you listen to the “vested bulls”, I’m sure they’ll think of some great exist strategy. I’m waiting to hear it as i’m sure it will be based on the same nonsense they have been spouting for the past four years!

    Best David

  3. Erica Keane

    I left Dublin for the US with a degree from DIT is 86 in Valuation surveying and have been in the (commercial) property business for years, followed by many years as a proprietary equity derivatives trader in New York.

    The combination of those two careers has given me a perspective on asset price bubbles. I know them when I see them and like yourself, noticed this one a long time ago.

    Recognizing a bubble and forecasting the timing of it’s implosion are two separate things. You are unfairly being attacked for recognising the bubble early on. Most punters never saw the bubble at all, including so called analysts and strategists who were on the payroll of the estate agents and conflicted up to the eyeballs.

    I laughed last year when RTE ran that controversial documentary (correctly) predicting the property fallout, and was met with vicious media feedback quoting various MIAVI memebers as saying it was “irresponsible” to talk the market down like that.

    Geniuses! Mood matters certainly, but mortgages at 6 time one’s salary and almost no down payment and variable rates and “oh I’ll find a renter” matter much more. My Irish friends and family are blaming the US subprime fiasco for this. Plus ca change…

    Kudos to you (and why is your newer book not available in the US?)

    Andrew, I commend you on your stand you take on the un

  4. AndrewGMooney

    This is all very disturbing.

    There are two levels to the unfolding catastrophe. Yes: I do mean Catastrophe. Not ‘downturn’. Is it $200 billion today? Is Bernanke still considered ‘fit for purpose’. Does it matter? Does Bernanke actually know how to use a calculator? Are calculators still legal on Wall Street?

    One response is the ‘smugger-than-thou’ – Ok: The corporate hospitality tent at Cheltenham Races has just been destroyed by a freak winter storm, so I may as well check out that English Eejit Andy Mooney’s ‘thesis’ about ‘space-age cars’ and S.A.S protected – gated -community Malvern- Mittle- England – Qinetiq hyper – surveillance – Israel – Is – Now – Eng – Eire – Land shite:

    What does that gob-shite know? Other than having grown up amidst the very most pernicious, poisonous and, potentially redemptive iteration of Fifth Province ‘Hybridity is the new Authenticity’ Anglo-Irish Culture ever to have emerged from The Mermaid pub and The Dark Streets Of Sparkhill and Small Heath?

    He’s just another ‘I told yous so’ back-stabber. Like the traitor DMcW. Even if he’s so much more photogenic and handsome……Rooney + Clooney = Mooney indeed. The arrogance! I can’t stand the bastard!

    The other perspective is slightly more rational and long-term. Namely: The comment from another ‘Irish David’ as follows:

    “bubble it may have been david but your smugness is unbecoming of a man who was consistently wrong in his view on the market for 7 years in a row.”

    Can someone translate this into Japanese? Because it reminds me of when I was on holiday in Thailand in 1989 (On my honeymoon! Before everyone else ruined it with their post-Catholic sex tourism). We were sitting in a restaurant in Bangkok, on the Chao Praya River, the type of place where you ‘see-food’ and they kill and cook it. LOL!

    Anyway, this Tokyo Joe is ranting and raving about the ‘property market’ in Japan and ‘trans-generational mortgages’ and shite. My future wife-to-be turned to me and said: “Imagine if we ever had that nightmare unfold in Western Europe! We’d die out within 2 generations”.

    She is and was a very wise woman. Other than her choice in men, but….I did my best.

    The point is: Dublin Bay is the new Tokyo Bay. You may be facing a catastrophe which you don’t even have a language to describe. You are being ‘spit-roasted’ between Sterling and the Dollar. Is the Euro/Europe really going to come to your rescue? The Bundesbank is alive and well: It just changed it’s name.

    Don’t blame us Brits! Please! After today’s ‘budget’ we have enough nightmares of our own without having to deal with more bogus post-colonial guilt trips foisted upon us from The Celtic Fringe. Don’t, whatever you do, go the Scottish/Welsh whinge-trip route.

    We have wished you well, and watched in astonishment at your ‘miraculous’ economy.

    But your ‘miracle economy’ appears to have as much credence and validity as the imprecations of my Aunt Breda when she threw Lourdes Water at me in 1977. Not unreasonably, I flinched from the cold shower. “You have the divil in you, Andy Mooney!” she said in fine Frank McCourt style. Maybe she was right…..

    But your economic miracle doesn’t make much sense to this Thick Brit. Maybe it’s because I’m a….Brummie: But I don’t actually see where your miraculous innovation is. Bebo ‘gang-bang social networking let’s trash Mom and Dad’s house party’ excess excepted. Of course.

    Am I being unkind?

    Enough of this nonsense. Let’s celebrate! Leonard Cohen plays the Royal Hospital, Kilmainham on 14 June 2008. Tickets released Friday 09:00 hours.

    Not all Brummie Boy’s come to Dublin on the stag-night-piss-take.

    You have it all.

    Don’t throw it away in a ‘temporary tantrum ‘because your store cards aren’t accepted at Dundrum for a few years.


  5. Ed

    Easy money has an amazing effect on people, they want to believe it will last forever – it becomes a disease. History is littered with examples, the most spectacular being the Spanish and their love for gold during their days of Empire. Property will always undermined productive enterprise and that’s why it should be controlled by government – it’s primitive, even Adam Smith had a negative view of it back in 1776.
    Sorry, we were told that it’s different this time – Smith is only yesterday’s man.

  6. Ronan

    Hi David

    Not sure if these coments are are read by you but sure i’ll comment anyway,
    I remember reading this article last year and it scared the S H one T out of me
    as was just about to buy, I held back a month or two to evaluate the market a bit
    more and I’m just writing to say thankyou from the bottom of my heart for your
    accurate and timely advice.

    The Apartment I was going to buy knocked €75000 (18%) of the asking price due
    to inactivity 3 months later, now these apartments are in a prime location in a
    town south of Dublin & i still kept a close eye on them. The complex still appears
    to remain empty as not a light to be seen after dark must be evidenceof this.

    So I would like to ask you David what would you see for 2009 in the property
    market?? they say its dropped 7/8% this year, some believe its more??
    Is the same likely for 2009?? I’d be keen enough to buy but not in an overvalued market.


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