April 9, 2008
Yesterday, housing starts fell by 70pc compared to the same month last year. This is the biggest annual decline on record. Other data provided by the website Daft.ie showed that house prices fell in South Dublin by 6pc in the first quarter. This suggests a possible 24pc annualised fall for Ireland’s most expensive area.
Anyone who still doubts that we have got an imploding housing market on our hands had better snap out of it. We are seeing the Irish version of a phenomenon which is playing out all over the English-speaking world.
Worldwide, there is a palpable sense of the end of an era. In the US, the Federal Reserve is bailing out bankrupt banks and the White House is contemplating a huge housing bail-out; in the UK, Northern Rock has been nationalised and here, yesterday, the board of Waterford Wedgewood is going cap in hand to the Government to keep the gates open.
What is happening? One answer, particularly for the banks, is that the global tide of cheap money is receding, and as it does it is exposing, in the words of the investor Warren Buffet, those who are “swimming in the nude”.
The Waterford episode is related to these banking difficulties. However, in the case of the crystal maker, the fall in the dollar is the real problem. But it is important to realise that the plummeting greenback is merely the flipside of the end of cheap credit which made the US look stronger than it was.
As the US’s frailty becomes more and more evident, the dollar falls. This makes manufacturing in this country prohibitively expensive.
On top of currency movements is the fact that Ireland has priced itself out of the export market in the past few years as costs, driven by inflation, accelerated way above productivity.
We are facing a vicious combination of falling houses prices, which beget falling credit demand which in turn begets further house price reductions.
Equally, the international environment has turned sour precisely at the wrong moment for us.
Normally, when the domestic side of the economy shudders, the exporting side takes up the slack. This is not happening this time because (1) the dollar is pricing us out of the market, (2) the US is in recession and (3) we have become so expensive that Irish wages will have to drop or Irish productivity will have to rise dramatically for our companies to be profitable.
The productivity point is the most worrying of the above three because by investing so much in property we have exhausted our capital base. And now, when we should be investing in productive capital to increase the productivity of our workforce, we don’t have the wedge.
An increase in productivity could justify some of our wage demands. Without this, real wages (adjusted for inflation) are likely to fall along with property prices.
Such an outcome, if it were to come to pass, would present Brian Cowen with an entirely different political script from the one which underpinned Bertie Ahern’s era.
The reason we can be reasonably confident of such an assertion is because history tells that this is what happens. After huge booms, whether it was the 1990s Japanese property boom, the USA’s “Roaring Twenties” or indeed, the Thatcher boom of the late 1980s, the Government is left to carry the can.
In most cases, this financial process also leads to a dramatic political change. In the US, the 1920s gave way to the New Deal of the 1930s. Implicit in the New Deal was a government commitment to reign in the power of the oligarchs who had made enormous fortunes in the boom.
All booms lead to a concentration of wealth in the upper echelons of society. Such inequality rarely survives the subsequent recession because the State concludes that the quid pro quo for a government safety net is higher taxation of extreme wealth, more regulation and more control.
In a downturn, there is a political tailwind behind such moves — something FDR used to great effect in the US of the 1930s.
In the boom of the 1920s, the oligarchs — such as Scott Fitzgerald’s fictional Jay Gatsby — were seen as emblematic of the “can do, positive, go-getting” culture of the possible.
In a slump, these former heroes become villains and their attributes become liabilities. Their great wealth becomes a focus of envy and a signal of everything that was wrong with the excesses of the boom and the State moves against its former wealthy allies to cheers from the public gallery.
The figures on wealth distribution are truly startling. While the country on an income basis is quite equal, the wealth story is different. The EU suggests that Ireland is smack in the middle of the European average when it comes to income but when it comes to wealth, Ireland resembles America of the 1920s.
The Bank of Ireland estimated last year in a publication called The Wealth of the Nation that the “top 1pc in Ireland own 20pc of the wealth, the top 2pc own 30pc and the top 5pc hold 40pc of the wealth”.
This is not healthy. If you take houses out of that equation and calculate only financial wealth, then the top 1pc of the population owns 34pc of the financial wealth.
Other figures about the Irish oligarchs are equally arresting, both in terms of how rich they are and how recent this wealth is.
For example, the top 1pc of the population has assets of â‚¬92bn — that’s close to half of our national GDP. In the past 10 years, Irish wealth has increased by 350pc, but at the very top the increases have been much more fantastical. In a country that was almost bankrupt 20 years ago, it is estimated that there are at least half a dozen billionaires in Ireland.
Again, according to Bank of Ireland, there could be as many as 100,000 millionaires in the country or 2.5pc of the population.
This dwarfs the figure of 0.7pc of the population in the allegedly plutocratic US.
However, at the very top, it’s estimated that there are at least 300 people with net assets of over â‚¬30m, close to 3,000 with assets of between â‚¬5m and â‚¬30m and at least 27,000 worth between â‚¬1m and â‚¬5m. This is a Kremlin-style concentration of wealth.
As the feel good factor for the average Joe evaporates with ongoing house price falls, the temptation to see the mega rich as culprits rather than heroes will increase.
Rightly or wrongly, this might set a dramatically new tone for Irish politics where the little man reasserts his position.
Fianna Fail always suggested that it was a Republican Party, the party of the little man, the small farmer and, as my mother described it “the people who don’t know anyone who ever got an obituary in a newspaper”.
If Brian Cowen is truthful about going back to Fianna Fail’s core values or if he is forced there by events, the high rollers and Ice Bar aficionados of the Bertie era should be afraid, very afraid.