April 2, 2008

Picking up the pieces in property slowdown

Posted in Irish Economy · 78 comments ·
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The other day, a friend called by and poured his heart out. He had just had a net worth statement assessed by the bank and was faced with the realisation that not only was he no longer rich, but he was flirting with bankruptcy.

His assets — all property — had fallen in value while some of his initially low interest rate financing was about to ratchet up by close to 1pc, leaving him unable to cover the loans.

Some of his rent had disappeared, because his Polish tenants left just after Christmas. He had three properties empty and not enough cash to meet the mortgages.

He, like thousands of others, began to build his property portfolio in 2003. By 2006, he had half a dozen properties and was “earning” considerably more from the capital appreciation alone per year than he was at work.

About two years ago, when the Irish housing market peaked and property yields began to fall to low levels, he compensated for lower yields by taking larger bets.

As the banks were prepared to release more capital on the “increased” value of his portfolio, he could finance these purchases. Due to the huge leverage, he was still, on paper at least, making enormous profits. After all, if you are borrowing over 90pc and the property is notionally going up, even low initial yields can create impressive “paper” valuations.

Like thousands of other Irish people, he believed the twin fallacies that (1) property always goes up and (2) there will always be cheap money.

No one in a position of responsibility — from the State to the banks that were lending to the (often financially-compromised) commentariat who hogged business pages — questioned these fatal assumptions

The upshot of this collective thinking is that the housing market became, on the way up, more an exercise in mass psychology than individual economics.

The herd took over and very few people sold when the market was going up. Indeed, why sell if the bank was prepared to give you equity release if you needed the cash and, more importantly, why sell if the prices were rising?

Instead of earning our cash, we decided to use our houses as ATM machines, withdrawing cheap cash against the limitless value of our bricks and mortar.

Much of the nation was at the same carry on and that is the reason my friend is important: he is Everyman. This is not one isolated gambler, who recklessly bet his shirt on property. This man is all of us and his dilemma is our dilemma.

Around kitchen tables all over the country, people are asking themselves: why did we buy that third apartment? What were we thinking?

With 200,000 people registered as owning houses abroad and one in six houses in Ireland empty, the property reversal isn’t just an isolated concern, it is a national challenge.

Today, according to the TSB/ESRI index, Irish house prices adjusted for inflation (“real house prices” in an economist’s jargon) are lower than they were in 2004. This is a steep decline. As inflation is likely to move upwards and house prices downwards, the real price of houses is going to fall even further.

One of the great myths peddled in the boom was that the house price boom was all dependent on fundamentals, like demography. Well sorry to have to tell you, but the demographic situation has got better for the housing market in the past two years, yet prices have been falling.

According to the international estate agent Savills, Irish property was the worst performing property market in Europe in 2007.

Figures yesterday confirmed that Irish construction confidence dropped to a fresh five-and-a-half year low in March. Confidence in Ireland is now the weakest of the 27 EU countries surveyed, yet we have the fastest rising population! So this idea of some unique demographic advantage doesn’t wash.

If you want to see what is happening in the Irish housing market, just examine the latest central bank numbers. According to Dame Street, lending to the housing market is the weakest it has been in 14 years. This figure was substantiated by the release of numbers showing that, even at today’s discounted house prices, no one wants to buy — rightly. You would be mad to buy this year when even estate agents and banks are expecting prices to drop. Buying now is tantamount to giving money away.

Like all assets, house prices are determined by credit. People borrow to buy, so the borrowing figure is a plausible leading indicator. If you see this figure moving up, it might be time to reassess the extent of the downturn.

However, as lending to the housing sector has fallen every month for the past 26months, this indicator suggests that there is nothing at all underpinning the market — bar the flatulence of vested interests.

The lesson from the past year is that no one knows much about anything. Just as the surge on the way up caught everyone by surprise and estate agents and banks came up with all classes of flannel to explain why prices were so high and why they could only go higher, now that the market is falling no one has any idea where it will end.

Buyers risk “catching a falling knife” if they take advice from the same “experts” who, this time last year, spoke confidently about a soft landing. These lads are now confidently calling the bottom.

One of the best crutches to lean on in such circumstances is financial history. In the past 40 years, looking at 17 property cycles, we see that typically house price busts see 70pc of the previous price appreciation disappear.

This implies that if real house prices are at their 2004 levels today, they could fall back to 2000 or even 1999 levels.

Hopefully this won’t happen here. No one has any interest in such an outcome. But what do we have other than hope? Our interest rates are controlled in Germany and the rise in inflation there in recent months is likely to keep rate cuts off the agenda for a while.

In contrast, the US authorities are deploying all their resources to keep the economy moving. The Fed has been cutting rates aggressively since August. This week, the government intervened to rein in the banks and change the regulations governing bank lending. Hank Paulson — the Treasury Secretary — also suggested a national bailout of bad housing loans.

This, if followed through, would be a monumental and generational shift in American economic policy. Whatever the upshot, the message is clear: the US government will not allow US prosperity to evaporate with the housing market meltdown.

Bad as it is, our banking system is not anywhere close (yet) to a US-style banking crisis, and therefore such interventions, even if possible, are not warranted.

Furthermore, there is something undemocratic about privatising profits on the upswing while nationalising losses in the downturn — which is in effect, what the White House and Federal Reserve are proposing.

Here in Ireland we have neither the competence nor the reason to follow the US example. We will just have to let financial gravity do its thing as prices fall back to earth.

As for my friend — Mr Everyman — the victim of group psychology, he is left ruing the day he declined to take JP Morgan’s advice that, “Nothing so undermines your financial judgement as the sight of your neighbour getting rich”.


  1. [...] Sean Hannon wrote an interesting post today onHere’s a quick excerptThe herd took over and very few people sold when the market was going up. Indeed, why sell if the bank was prepared to give you equity release if you needed the cash and, more importantly, why sell if the prices were rising? … [...]

  2. paddy cullen

    Any form of property, commercial or residential will be severely affected by the downturn in property prices for many years to come. Unfortunately many homeowners who bought over the past year or so will also be exposed to great difficulties. People who took out a recent mortgage of 90% to 100% may be looking at very large losses if they sell and fairly hefty paper losses if they do not. Often the deposit for a home will represent an entire family’s/individuals savings. Already, many these groups have lost their entire savings, though they will probably not realise this. Many experts believe that house prices will continue to fall, slowly but unavoidably, for the next ten to fifteen years. Many people view their homes as a nest egg, a source of money in the future, to be used for a second mortgage or security for bank borrowing. So when the day of reckoning comes, these people will be disappointed. They may find that their mortgage exceeds the value of their house, leaving their savings wiped out. Others who are hoping to trade up, assuming an increase in the value of their existing homes will let them make a larger deposit on a more expensive home, and they too will be disappointed.

  3. Jerry

    Delighted.

    Absolutely delighted.

    Now your greedy friend, and the hunderds of thousands like him who pushed families to their limits will eventually feel what it’s like to be under pressure. They’ll pay for their greed sooner or later.

    I can hardly wait for him and his kin to go bust.

    Then, and only then, will I and many like me be in a position to afford to buy my first home AND eat at the same time.

    Bring on the crash.

  4. John Q. Public

    Jerry, you are the person who will determine what level the market will fall to. When the prices fall to an acceptable level (determined by you) your type will pounce. “Bring on the crash” you say, well, will your type let it crash or will you just buy at a level you can afford, and at what point will that be? Maybe you will cushion the market to a soft landing and raise prices again. Let’s be honest that’s what you want: to buy cheap and watch values rise a little.

  5. idiottje

    I am one of Jerry’s type. I can now afford to buy in the commuter belt for the first time in years. However, like a lot of my friends, we have seen prices dropping, but are now finding out that the banks will only lend to “safe bets”. People who have steady (strongly unionised, public sector) jobs, as opposed to people who are in industry’s that they are afraid are going to suffer.
    What is going to happen is that when Jerry and our “type” finally do decide to buy, the banks may not want to give us a mortgage, which will cause the prices to drop further. We have all seen the demise of the 100% mortgage, and at the moment, the best offers going are 92% LTV’s, but only if you are a “safe bet” and have lots of actual savings. I know of two cases where mortgage approval has been rescinded.

  6. Mark Mc Govern

    Hi,
    I am highly impressed by the quote: “there is something undemocratic about privatising profits on the upswing while nationalising losses in the downturn – which is in effect”

  7. Malcolm McClure

    The broad consensus seems to be that economic realities will be worse for quite a while. The fortunate few who have made their pile are off to the Caribbean to sit it out. The Boys from the Blackstuff, meanwhile, will be heading back to Europe, where some economies are still on the upswing.
    In politics, as in the housing market, timing is everything. What does Bertie know that we don’t know? He’s leaving whilst our gratitude is still warmly felt.

  8. idiottje

    Well, Bertie did get copies of the documentation from the Tribunal as to the questions they will be asking. I wonder what was in it to make him think I had better go so??

  9. paddy cullen

    the early 1990’s saw sizeable decreases in property prices that in turn created much hardship for house owners in the United Kingdom who bought on borrowed money at the height of the bubble. When the property boom of the late 1980’s suddenly began to falter, most people either never noticed or refused to take heed. However, the signs soon became obvious when some began to notice that property was not selling as quickly as it had been. At the time prices continued to edge higher, but there was a distinct slow-down in the numbers of homes being sold and worry soon began to spread. In order to reduce the panic of the homebuyers/owners, the government described the slow down as a healthy breathing space that would permit the boom to continue for many years into the future. By the turn of the 1990’s, the imminent crash was obvious to anybody who cared to look realistically. People with mortgages where defaulting in increasing numbers. Practically everyone who had property in the UK where wiped out unless they acted fairly quickly after the previous price peaks of the late 1980’s. After the collapse of the UK property boom, investment in property lost some of its luster. The illusion of “good old bricks and mortar” was suddenly broken. It would be difficult to convince anyone who had purchased property in the UK around 1990 that property prices could only rise and never fall. It took until 1996 before steady growth reappeared in the housing market. For many, it had been a painful lesson in market economics. For the Conservative Government at the time, it also spelt the beginning of the end of their grasp on power ….
    Bertie is gone now, is it the end of the current govt also ??

  10. Stephen Kenny

    The difficulty with what’s starting now is that it’s a negative spiral that hits everyone: Property activity falls, so financial services activity falls, so spending falls, so retail falls, so the tax take falls, to government expenditure falls, and so on.
    The difficulty is that when, in the normal cycle of events, it’s time to raise interest rates to attract money, the Irish government can’t. Is it possible that the Irish banking system will simply run out of money? This is a new one on me. The American’s have their federal reserve system that deals with regional ups and downs, but the EU hasn’t, as far I know.
    The queston has been asked by David several times: Where will the wealth come from, to replace that lost by shrinking property and associated sectors?

  11. Rob

    It will be interesting to see what the actual predictions are, i.e. where is the notional bottom of the market? Will prices decline 5 per cent per year for the next 4/5 years and then start to stabilise? One view might be if you have an affordable property in your sights, in an area you want to live in then perhaps go for it. The real crux might be that we are entering a phase where hard facts or even figures no longer rule and the market is ruled by sentiment. It is akin to the buffalo herd example used in an earlier discussion. Not wishing to take the credit for David’s ideas!! but in an earlier discussion i stated “Propping up the property market is a waste of time and if the Government accedes to this request it will only mean that exchequer funds from the public purse are used in effect to shore up the wealth of the property developers, who have in the last ten years made handsome profits. A very bad and unfair idea”. The other issue now seems to be can investors ride it out? And will some people actually make a profit from this time?

  12. Johnny Dunne

    I also agree with the quote: “there is something undemocratic about privatising profits on the upswing while nationalising losses in the downturn” ….but…..”Here in Ireland we have neither the competence nor the reason to follow the US example. We will just have to let financial gravity do its thing as prices fall back to earth.” David, is there anything else we could do more proactive ?

    Just letting the ‘economy’ slip away sshould not be an option – as reported today we have moved into an exchequer deficit of €350 million which is an ‘astonishing’ shift from a surplus by a €2.2 billion shortfall from the 1st quarter last year. We keep this up and we will be down nearly €10 billion for the year !!!! Although the spin is we are ‘only’ €600 million off budget for 3 months!

    Less than a year ago, our Finance ‘supremo’ Mr Cowen was reporting to the ‘nation’ when drawing up his economic programme before the General Election – the economy will grow over the period of the next government (7 per cent per annum in nominal terms on average), taxes will grow (7.7 per cent) and the tax revenue to play with per annum to reach €71 billion by 2012. The latter figure compares to €49 billion that the Department of Finance expected to receive last year. Now he will be ‘lucky’ to receive €40 billion in 2008.

    But the ‘chosen one’ to lead the country with this progamme expects to be receiving € 30 more billion more a year by 2012 – we really need to consider our options on all fronts – who should be ‘burning slowly on the barbie’ now ???

  13. N

    Viva the Irish journalists who have always spoken out ! Kennedy, Arnold and Browne.

    http://www.youtube.com/watch?v=F6tQN6H_tVY&feature=related

  14. neil

    “No one has any interest in such an outcome”

    Actually, any tenant who wants to buy a house to live in has precisely this outcome as their ideal. Looking good.

  15. Mark

    You are so right about how unfair it seems that the govt has to nationalise the losses of these big banks. This is so irksome but then governments have to shoulder some of the blame for allowing these cowboy banks ( i don’t care how big they are ) for continuing to lend in such a shameless and reckless manner. I hate to sound like a commnist but they might want to think about adding a few % to the taxes that these institutions should pay.

    And as regards people like your friend, who feels sorry for him? I don’t.

  16. ireland having a service economy was always a chance of a downturn , service economy is the side salad of the dinner , the steak being manafacturing, banks make money on people being in debt , property is a long term game not a wham bang , a slow down in economy is job loss , tighting on credit until the goverment borrow for major projects and higher taxes bit of a circle , a property is not an asset unless it puts money in your pocket every month

  17. Rob

    I couldn’t agree more with the comment from neil about a collapse in house prices. In fact this will be the saviour of the housing market. In my understanding the housing market acts like a pyramid. Starter homes or starter buyers come in at the bottom and progress their way up, This sector needs to be fluid, affordable and mobile and is the basis of the property market in total. However the crazy lending policies and the speculation on property completely skewed the pyramid. It became difficult to enter the base and the middle to top of the pyramid began to exert inordinate influence on the entire pyramid. A collapse in prices will allow people afford a decent home and will bring stability to the market again. This will mean that developers who have made fortunes in the past will in fact be forced to sell houses in the latest development at a loss. There’s no harm in that and they coined it for long enough.

    Secondly David might address the inherent failures/dangerous flaws that rampant capitalism possesses. It would seem to me that many advocates of this doctrine are keeping very stumm. While i am pretty sure that ardent socialism doesn’t work either. Are we now in a situation with the credit-crunch crisis etc. that a mixture of both philosophies is required?

  18. Garry

    Good point on the losses of the mortgage lenders whether ‘sub prime’ or not…. There must be some way to stop public money being used in this way. We prop them up in good times and in bad.

    Its a bit late to be saying this but….The government rightly gives tax relief on mortgage interest to help people buy their own home. Surely theres some way to impose conditions on the quality of loans in return for this tax relief. Im thinking right now, banks sell mortgages, sell on the loans to the highest bidder getting rid of the risk to themselves, pocket the commission, and probably have contracts that they will sue the mortgage holder if they default. Who owns the deeds of your mortgaged house in all this horse trading (without your knowledge or consent) in unclear but you can bet that in the event of something going wrong the householder wont get a free gaff!!!
    Surely, its possible to impose conditions on the tax relief that it applies to ‘good’ mortgages where the bank underwrites the risk, ie. forces them to have some skin in the game which they lose if the loan isnt paid back or the bank goes belly up….. The banks would be perfectly free to indulge in all the reckless lending they wanted to by offering ‘sub’ mortgages that they could sell on but no public money in the form of tax relief would subsidise them….. These loans would not be as attractive to the public as the mortgage holder couldnt claim tax relief on them, but it wouldnt stop the banks offering them….

  19. Philip

    I hate to say it, but I think David is an optimist. This feels like we are on a river with a quickening current and a waterfall around the corner. Negative sentiment is going to dominate becasue both the government, banks etc are scared. 600m budget shortfall in 3 months and this from a spin? That is scary. They are out of control

    Property will collapse, but because so much of the economy is linked to it, so will everything else. Affordability will fall too.

    I take the position though, that globally this is also the case. China will downturn – simply from a sustainability perspective – their overheated economy (with high commodity prices, rocketing share and property prices) and damaged environment will come to a halt – hopefully in a graceful manner…else we could have a military war for food and water as the people’s party try to keep the show on the road. US is a gonner for now and I suspect those treasury notes sitting in a lot of those foreign reserves are looking a tad faded. China is sitting on a lot of them and it must be bothersome. Everyone else is clobbered as a result.

    As many of you pointed out, David has asked where is the wealth going to come from?..I say again that this is not just a question for Ireland. We have become too interdependent (thro’ outsourcing, chasing low cost wages etc) at the expense of giving due diligence to social issues. That’s like over farming a piece of land.

    Without becoming protectionist, we need a sense of self reliance now. Believe me, available help may be in short supply soon. Be glad we live on an island with a reasonable climate and a lot of resources. Let’s start tending it carefully – and for me that does not mean riddling it with motorways to accomodate more fly by night FDIs. We are ideally placed to be a green exporter but poorly trained for same. Our green brand for now is but a sham. The problem as I see it is that our government and decision making institutions create the future by mimicking the past of other countries. They do this becasue the decision makers have reached their high positions due to their past success. There is no big mystery. Success breeds success while the current rules apply. When the rules change, you need unique leaders and a lot of resignations…

    The whole thing has become global for reasons of comms and technology etc. This has caused the thinking to become similarly so. A lot of leaders are changing over right now. Seems syncronised? Leftist tendencies are emerging at a global level. I am hopeful…and wealth will come when we stop thinking in old non-sustainable ways.

  20. John

    David,
    I’m not literate enough myself but this article kind of expresses what I want to get across. like to know what you think.
    http://www.spiked-online.com/index.php?/site/article/4938/

  21. RB

    Good article David , as always..

    One question for anyone that cares to answer it , is it a seriously bad time to buy any type of property now? and when will be a good time?

    My younger sister (24) has just signed to buy a 2 bed apartment off the plans on the N11 commuter belt in Wicklow for euro 295,000 ..

    Is she absolutely crazy?
    And will this apartment decrease in value over the next few years?

    I would hate to see her get into negative equity at such a young age, and I haven’s spoken to her yet about it as she seems so excited that she was approved for the mortgage in the first place..

  22. E

    RB, if I was in your sisters position I would not buy. Particulary If I was on a relativle low salary (just out of college). Take the west Dublin/Meath area as an example. I have noticed several developers reduce prices on new apartments by 60-80k in the last two months. They just are not shifting. There are good 3 bedroom 2nd hand duplex’s in the Ongar area (D15) being advertised for 300k+ at the monent. Im absolutly certain these will be advertised @ 270k+ this time next year.

  23. RB

    Thanks for the information E …
    Not that she will listen to me..
    But its nice to know whats going on anyway..

  24. Rob

    RB, looks to me that it would be no harm in waiting for a few months. The Ongar area may not suit her particularly if she is going to buy in Wicklow. A few factors are important here, i.e. affordability – which a report published in the last couple days by some inter/l gang in France said that Irish prices will get even more affordable. The stability of interest rates are also extremely important. I would David to come on and give a prediction for the next couple of years about interest rates. The real trick will be calling the bottom of the market. Remember a lot of people sat on the fence for the last few years and must be quietly wondering should they get involved now. If prices take another 10 to 20 per cent drop that might be the right time to get into the market. The market may well recover in 2 years time and then property may start to recover from then on although I don’t think we will see those astronomic rises of the last few years, that is a rise of 3-4 per cent a year will be the norm….

  25. RB

    As far as I know she has already signed on the dotted line (so to speak), she has a new job in Tallaght , so she will be communing from Rathnew everyday..
    Sounds like a nightmare to me, but people have little choices nowadays ..

  26. E

    RB just to point out, Im wasnt suggesting that anybody buy homes in ongar or any particular area, I was just using an example of an area that Im more familiar with. The affect on prices will be broadly the same accross the commuter belt.

    Rob, I thiny predicting the bottom is a predicimant which many first timers will find themselves in. The general consensus amony the ‘non-estate_agent/mortgage_lender/property_supplement’ economists is that a sign of recovery of prices wont happen before 2010.

  27. Bertie Ahern

    I,m putting all my cash in a big suit case, jumping on a plane to an island in the sun and am leaving no forwarding address. A bit like at the end of The Silence of the Lambs.
    I,m not hanging about for 2008/9 when the proverbial hits the fan.Bye bye suckers. Cowen and co.can clean up the mess. Or maybe they will follow me out to my hide away and we can watch the revolution lead by Ernesto Che Kenny on satellite tv. Love Bertie.

    PS please explain to Judge Mahon that the money was just resting in my account….. blah blah blah…. to pay for my sick grannies boob implants….blah blah… loan us a tenner to fix the wheel of my bike………i have a postal order coming from Austrailia next week …blah …. in the biscuit tin under the bed…

  28. deckysweeney

    thats right bertie when the going gets tought the tought get going well at the end of the day you dropped the cpr tax and put money into education to get the ball rolling but when a high tide around the world , world world lifts all boats lifts all boats its only when the tide goes out so to speak we will see the damage and ireland is a small country we have to teach kids in school what a good deal is on money or stocks or property because an estate agent will and a banker will ever heard the term taking sweets from a baby im fed up with this herd shit , why not pass a law that banks cant charge insterst on borrowing if people look back far enought banks are only gold smiths , the people of ireland could start their own bank if the goverment would educate them cause i could

  29. deckysweeney

    oh by the the w ay this is not a plug or that just for common man and lady check out moneyasdebt.net long video but will open your mind this post will prob get pulled

  30. RB

    I think this quote by Charlie Haughey about Berti Ahern sums it all up

    “He’s the most skilful, the most devious, the most cunning of them all.”

    http://en.wikipedia.org/wiki/Bertie_Ahern

  31. SpinstaSista

    Why in the name of goodness would anyone under the age of 25 consider STAYING in this country? It’s going down the toilet and Bertie has just pulled the chain!

    If you buy property in the commuter belt you’re pretty much stuck for the rest of your working life paying off the mortgage as it’s harder to find reliable tenants for these areas.

    My advice for anyone under 30 who is considering buying property here would be to go on a working holiday to Australia or New Zealand for a year and consider your options when you come back. Mingle with the diaspora and get their views on Ireland! The experience will broaden your mind and give you a more balanced outlook. There is life outside Ireland and the world doesn’t revolve around property (at least not in Ireland).

  32. idiottje

    Well, it seems that Mr Cowen is in poll position for the top job, and there is much consideration for the position of Tánaiste and Minister of Finance, with them not being the one and the same. Is there any validity to the suggestion that in these uncertain times we need to recall Mr McCreevy from Europe?

  33. Rob

    History will judge this present Govt as one that inadvisedly spent the proceeds of the boom and it will not be kind to Bertie either. Bertie’s gift for deal-brokering (which he had) meant that he was unable to actually take hard decisions and a cabinet that had no ideas. To govern these days seems to consist of setting up a body to deal with problems e.g. Courts Service, HSE thereby shifting blame and responsibility. This has the effect of adding to costs, adding to bureaucracy, and ensuring that no-one in Govt is really accountable. The other angle is to ‘commission a report’ and then do nothing about it.

    The acid test for Ireland will be looking at her when the tide is out. A very smart Govt would have realised that there would be a downturn and do the outmost to negate the consequences. The difficulty here is that much of the economic growth, as David pointed out, was illusory as it was based on speculatative construction. In addition rising costs have meant established businesses are under threat.

    We have immense problems in our health service and seem to have created this monolithic HSE to deal with it. The State can’t keep creating public jobs and hope that the rest of the country will fund them. Something has to give.

    The grandchildren of the Easter Rising get their black mercs to go to the Dáil and in the meantime some primary school kids go to class in prefabs, not quite a Republic yet I think.

    The smartest thing Bertie did was going when he did. Today as far I understand it figures have shown that there was a record jump in unemployment last month. This is the biggest rise recorded ever.

    Travelling abroad for work and experience should be mandatory. It is a real benefit to sample other cultures and should be embraced. I am thinking now however that Irish people will have no other choice but to travel abroad for work! Tá an bhróg ar an gcos eile.

  34. ailan

    “SpinstaSista said,

    on April 4th, 2008 at 10:39 am

    Why in the name of goodness would anyone under the age of 25 consider STAYING in this country? It’s going down the toilet and Bertie has just pulled the chain!

    If you buy property in the commuter belt you’re pretty much stuck for the rest of your working life paying off the mortgage as it’s harder to find reliable tenants for these areas.

    My advice for anyone under 30 who is considering buying property here would be to go on a working holiday to Australia or New Zealand for a year and consider your options when you come back. Mingle with the diaspora and get their views on Ireland! The experience will broaden your mind and give you a more balanced outlook. There is life outside Ireland and the world doesn’t revolve around property (at least not in Ireland).

    unfortunately its not that simple, its not that easy to emigrate to australia and is getting more difficult by the year, there are thousands of young irish in australia who are now illegal after over staying their holiday visas (although no one knows the full figure), most end up returning to ireland after a few years unable to continue life there illegally, even if you are university educated it is still difficult to qualify, this is because there is so much competition between emigrants looking to get into australia

  35. E

    Did anybody hear Moore Mc Dowell today on newstalk fm?

    He said that he believes that out GNP is actually LOWER than it was this time next year.

    That means the dreaded ‘R’ word.

  36. Tom Kirwan

    While the country is focused on the faltering economy and the demise of Bertie, two young brothers behind a tiny Limerick start-up are packing their bags and heading for Canada.

    The news behind the sale of Auctomatic to a Canadian company was treated as a great thing. Yes it is for the 18 and 16 year old Collison brothers and their UK partners but this is a great loss for Ireland.

    David, the “soft-power” you are speaking about is embodied in someone like Patrick Collision, former Irish Young Scientist of the Year and runner up European Young Scientist of the Year and now newly minted CTO of Canadian firm Live Current Media.

    The Collison’s could not get funding for their startup in Ireland. Is anyone in Enterprise Ireland questioning their polices or do they even realize that losing Auctomatic was a debacle.

    Auctomatic could not get funded in Ireland so they went to Silicon Valley to get its initial funding of 15 thousand euro. We are not talking about 15 million but 15 thousand. This is the price of a few bricks in a D4 development.

    Enterprise Ireland should be courting the likes of Patrick and his brother and not letting them slip through their hands.

    Not every start up or bit of software code is going to have the market potential of Auctomatic but the mind set has to be that of the VC’s in the US, back 20 and you end up with one big winner. There is also pay-off in those ideas that do not reach market because there is no greater lesson than failure. Many of those who fail have entrepreneurialism in their DNA and they cant stop until they have succeeded.

    David, how is your thinking going to be translated in to policies that will leverage the “soft power” and the power of networks that will be needed for Ireland to excel in the 21st century.

    In defense of Enterprise Ireland, can we expect any government bureaucracy to have the ability spot and develop companies? This is a talent like scouting the next great soccer player or band. The best the government can do is lay the right foundation for start ups and make it as easy as possible to invest and grow.

    Is Ireland developing a VC culture? There are plenty of people with the capital. Do we have the people with the experience in picking and growing start-ups? Maybe this is where your global network can come in. I am sure that in a few years the Collisons will have the experience and capital to be part of an Irish VC culture. Ireland should not lose the 2nd opportunity when it comes around.

    Skype came out of Sweden and was sold to eBay for a few billion. There is no reason why Ireland can’t create a Skype but the country needs to nurture these young companies and not let them go as hatchlings as it did with Auctomatic.

  37. AndrewGMooney

    There’s a real difference between the (apprentice) ‘rentier’ class and the individual struggling home-owner.

    The former has leveraged to the hilt to try and escape economic reality to a life of ‘unproductive’ rental income. Nice ‘work’ if you can get it, but hardly the basis for a whole society/economy.

    The latter, usually, has saved like crazy to ‘get on the ladder’. Only to find the ladder is part of a very scary game of Snakes and Ladders.

    And they may have been better off staying in that damp rented dump rather than mortgage their 40 year future for a ‘slice of the generation game’ 2 hours from Dublin/London etc.

    Unfortunately, ‘the great unwinding’ is unlikely to be calm or orderly. Just look at this horror article about Spanish property:

    ‘Foreign banks flee Spanish property debt’

    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/04/cnspain104.xml&CMP=ILC-mostviewedbox

    Here in England we have a surreal scenario of massive demand – but without any available credit to fund it, with banks in retreat from risk and cherry-picking loan seekers. The result being they are creating the crisis they, supposedly, seek to avoid!

    ‘Halifax raises mortgage rates and tightens deposit rules’

    http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/04/04/bcnhalifax10.xml

    I don’t really understand Economics but my logic is that the ‘irrational exuberance’ of the boom has given way to the hysteria of ‘downside’ fears. A house / share / commodity is only worth the price that a buyer is willing to pay when YOU need to sell it.

    If The Market makes purchasing impossible by withdrawing credit: Surely your house / share / commodity only has value to those who don’t need credit? Cash is King.

    It doesn’t matter what interest rates are cut to if banks won’t lend to consumers, house-buyers and businesses. I guess Government has some role to play in all this as well…..or have i missed something obvious?

  38. James

    Good article.A while ago I saw that the AIB sold their headquarters in Ballsbridge.They knew that the market was close to its peak,pity a few more people did’nt see this happening.

  39. Brian

    There seems to a number of people in this discussion who claim not to feel sorry for people who built up a property portfolio in the last number of years. Some even suggested that they are going to enjoy the crash and watch those ‘greedy investers’ feel the ‘pain’ of what the ‘genuine owner occupiers’ have gone through to afford a mortgage. I find such attitudes very sad and typically Irish. Please see the light and understand it was our leaders who led us down this path. We live in a capitalist system and a product (property in this case) follows the invisible hand of the market. Therefore fear of loss predominates and some people do not want to ‘lose out’. There were perfect conditions for a boom in Ireland with banks lending 100% mortgages out and the government doing NOTHING to stop the boom due to tax returns etc. Ultimately as is the case of the capitalist system we have to look up to our leaders of our government and large corporations. They are responsible and were the ones who were tapping into the fear of loss of human nature fuelling the boom solely for their own ends (ie banks to earn money and government getting good tax returns). So if you are ‘looking forward to the crash’ please vent your anger towards our leaders who led us down this path and not towards the ‘greedy investors’. ‘Greedy investors’ are generally people who merely did not want to ‘miss out’ (fear of loss) and wanted to secure their futures. They are not evil people! They contribute to society paying tax and more in stamp duty. Surely we should all be talking about whether or not we need to alter our capitalist system to ensure that nobody can profit to such extremes on the 3 basics of survival ‘food water and shelter’ hopefully easing the pain of boom and bust?

  40. Shlock

    Q: Some even suggested that they are going to enjoy the crash and watch those ‘greedy investers’ feel the ‘pain’ of what the ‘genuine owner occupiers’ have gone through to afford a mortgage. I find such attitudes very sad and typically Irish.
    A: So ‘schadenfreude’ is an Irish word is it?

    Q: Ultimately as is the case of the capitalist system we have to look up to our leaders of our government
    A: Looking to government to plan the purchasing decisions of its citizenry is exactly what the capitalist system is NOT about.

    Q: Surely we should all be talking about whether or not we need to alter our capitalist system
    A: Those that blindly followed an irrational market as it overshot will lose their shirts, whereas those that made considered value judgements and sat on the sidelines until asset prices came into line with fundamentals will benefit. Now that is capitalism.

  41. Shlock

    In reply to SpinstaSista: “Why in the name of goodness would anyone under the age of 25 consider STAYING in this country?…My advice for anyone under 30 who is considering buying property here would be to go on a working holiday to Australia or New Zealand for a year and consider your options when you come back.”

    I am a citizen of Ireland and Australia. Let me tell you, Australia has its own problems and housing cost in Australian cities are almost as ridiculous as in many parts of Ireland. Don’t be too hard on Ireland; she is a fantastic country with much about her to love and be proud of.

  42. Rob

    I think people are getting a little confused here. An owner-occupier will have seen his mortgage go up all right but relatively speaking interest rates are still low. Therefore his/her primary concern from day one was whether or not they could pay their mortgage. Negative equity has nothing to do with this. Your house as an asset may be declining but if you bought with the intention of staying 5 plus years you be all right and your house price will come back. The key is as I say if you can afford your mortgage, if you can’t you shouldn’t have borrowed that amount in the first place. Its no good blaming the banks there is such a thing as free will.

    Secondly investors, well no one can feel sorry for them at all. They already have a house. If they took a risk on buying more property, and they are all grown-ups well they will have to bear their loss. Their speculation feeded the price inflation of property, also bear in mind putting these houses out of the reach of joe public/seán poiblí who wanted to get a foot on the property ladder. The scenario reminds me of the Atlantic shares fiasco in the 80′s? where loads of people piled into buying the shares on rumours, ridiculous. Ultimately I am not one of those gloating on the sidelines as investors get burnt, and for the record I am an investor with a small ‘i’, but these were risks taken by adults. If people over-extended themselves, failed to rationally work out their figures, or got greedy, well its off their own doing. A downward drop in property as we now see has now started the market moving again and has made property more affordable for the first-time buyer. That just what we need right. Another 20 per cent kick down and we will be bck to 2002 prices, which i reckon is where we should be.

  43. Paul

    Well for a start Rob, some people only invested further after the banks hounded them, offering cheap credit. I it was a good attempt though, to shift the blame away from the biggest crooks in the country (after Fianna Fail and the Builders). I was not only called by phone, but texted by a financial institution about buying property or releasing equity !! madness !.

    And in 5 years time alot of these “vibrant” ( estate agents love using that word) housing estates may have become anti-social hell holes full of unemployed chav’s. Because to be honest, large parts of Ireland now resemble places like Croydon, and of course the lack of infrastructure is not going to help things, in fact it will magnify any sort of downturn. (at least in Croydon they have decent public transport)

  44. SpinstaSista

    Schlock, I wasn’t recommending that people under 30 should necessarily go to Australia for good. However, they do have the opportunity to go over there for a year on a working visa. You’re only young once and why not travel for a year when you have the chance instead of putting down roots and struggling to pay a mortgage in an uncertain property market? People can always buy property, rent it out and then go travelling but I know young people who bought properties in the last two years, rented them out, went travelling and when they came back the properties had fallen in value.

    Do you live in Ireland or Australia?

  45. SpinstaSista

    Schlock, I wasn’t recommending that people under 30 should necessarily go to Australia for good. However, they do have the opportunity to go over there for a year on a working visa. You’re only young once and why not travel for a year when you have the chance instead of putting down roots and struggling to pay a mortgage in an uncertain property market? People can always buy property, rent it out and then go travelling but I know young people who bought properties in the last two years, rented them out, went travelling and when they came back the properties had fallen in value.

    If you live in Australia, do you intend returning to Ireland for good any time soon?

  46. Aspro

    Rob said: “Another 20 per cent kick down and we will be bck to 2002 prices, which i reckon is where we should be”.

    Rob – €300,000 for a 3-bed terraced house in Neilstown? A 20% drop would mean €240,000? I would say 50% drop would be more realistic. I think there is a combination of a collective delusion over the definition of affordability in this country and a prolonged denial by vested interests that the housing boom is over. This is only prolonging the agony for those of us waiting to afford a roof over our heads. We need to see a reflection in prices that are appropriate to the historic lending multiples, i.e. average house price should be maybe 5 or 6 times average industrial wage (c. €33,000). Wake up Ireland!

  47. Jonathan

    RB, Tell your sister to bail out and lose her deposit if necessary. Here’s why. Affordable is internationally defined as 5 times gross salary. A 2 bedroom apartment would appeal to, and be suitable for, entry level to the property market, i.e. young single professionals (or professional couples to a lesser degree). The salary of this group would be at best 40k per annum for a single person. Therefore I would estimate that she should not pay more that 200k maximum.
    Also she may lose her deposit but assuming that prices will eroded by 5-10% (15-30k) in nominal value in the nest year plus another 3-4% (9-12k) against inflation, it isn’t so bad. This may continue for several years. Even if prices stabilise at the end of this year inflation will continue to erode their value.
    Even if she decides to persevere she should play hard ball and renegotiate for a lower price.

    #
    RB said,

    on April 3rd, 2008 at 5:47 pm

    Good article David , as always..

    One question for anyone that cares to answer it , is it a seriously bad time to buy any type of property now? and when will be a good time?

    My younger sister (24) has just signed to buy a 2 bed apartment off the plans on the N11 commuter belt in Wicklow for euro 295,000 ..

    Is she absolutely crazy?
    And will this apartment decrease in value over the next few years?

    I would hate to see her get into negative equity at such a young age, and I haven’s spoken to her yet about it as she seems so excited that she was approved for the mortgage in the first place..

  48. John Q. Public

    Nobody here has mentioned the price of renting in this country which is also a joke. Dare we mention the few hundred thousand foreigners living here that have been fueling the demand for years now? And don’t feel too sorry for investors, they get the 21% VAT back on the price paid for their house so they can afford to see a 21% drop in value before they break even.

  49. MK

    Hi again David,

    > The upshot of this collective thinking is that the housing market became, on the way up, more an exercise in mass psychology than individual economics.

    I would put forward the thesis that ALL economics are driven by mass psychology, which is a basic factor as to why it is difficult to control. Both on the way up and the way down. In fact, all the time. It has been ever thus: the tulip frenzy, the south sea shares, the stock share bubble of the 1920′s, the japanese property market in the late 80′s, and now Ireland’s property 1996-2006. It is a human failing of greed and perhaps not wanting to be ‘left behind’ that underpinned the property price boom and indeed all the other booms. People were classified as ‘fools’ for not having an investment property.

    Busts have their own dynamics. For some, it pays to wait, but waiting costs others, so things inevitably continue downwards. “Time waits for no man” applies.

    Indeed, if super-intelligent beings from planet Zonk existed and looked on earth as a case study they would likely conclude “the earthlings are so stupid that they actually dont have the intelligence to recognise over-extensioned booms when they are happening and see that many of their fellow humans will go through pain. They dont even have contols in place to prevent it. They are an inferior lifeform.” Indeed, they would be right.

    Some governments do put in controls to try to prevent the boom-bust cycle of property or at least reduce the peaks and the troughs and the collective ‘madness’ that occurs. Some counties have property taxes that are paid annually, such as in the US. Ironically, this didnt work and is a factor in driving prices down further as it is cheaper to rent than to own (as you dont pay the property tax when renting). As far as I understand, Germany has a lot of government interventions in the rental sector, rental ceilings, rental controls, etc, which affects the market overall and has a stabilising affect. Have Germany had less or lessor boom/busts? I dont know, and I’m not aware of a ‘perfect’ property market off-hand, ie: one that didnt have any boom-bust cycles to date (in the last 50 years) and moved more or less upwards in step with incomes and the ability to pay loans back. Maybe your data sources can reveal the ‘best’ country so far? Ireland is not likely to be the best …

    MK

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