July 2, 2008

Japan's housing slump was scary, and ours could be too

Posted in Debt · 63 comments ·
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This chart records the traumatic property experience of Japan. A monumental boom in the late 1980s and early 1990s reversed dramatically and house prices fell by 76.4pc from the peak.

This happened, not in a corrupt, tin-pot dictatorship, dependent on commodities for its sole exports, but in the world’s most sophisticated economy, with the most dynamic financial sector and a history as the world’s pre-eminent innovator.

Could it happen here? Will Irish house prices fall back to levels seen in 2000/2001 or even to levels seen last century? Will our house prices drop by 70pc before they stabilise? These numbers need to be considered because there are plenty of reasons to be fearful.

The similarities between both Ireland and Japan are striking; the main difference is that the Japanese controlled their own interest rates and thus were able to cut them to soften the blow. As EU inflation topped 4pc this week, it looks likely that we will be facing higher not lower rates for the foreseeable future. Not good.

One similarity is the capacity for self-delusion and failure to face up to the magnitude of our crisis. It was the same in Japan 20 years ago. I remember the Japanese mania even reached Irish shores in the grim late 1980s.

When I was in college, a particularly ambitious set of business students who used to wear suits to lectures (a true sign of recession) began taking private Japanese lessons. If you didn’t have a grasp of Japanese, or at least a smattering, their view was you might as well quit now and not even bother turning up for final year interviews.

We sat there, petrified, as professor after professor told us about the threat of Japan to our careers (not that the class of 1988 appeared to have a particularly stellar future ahead of them in the first place).

Every airport waiting lounge was stuffed with hardback tomes heralding the rise and rise of Japan and no economics exam was complete without the question: “Explain the fundamental economic reasons behind Japanese world economic domination”.

Japan of the late 1980s was experiencing a huge asset-price boom and stocks were going through the roof, allowing Japanese companies to buy trophy assets abroad such as the Rockefeller Centre and MGM.

Bulging Japanese banks dwarfed their European and US counterparts and threatened to dominate the City and Wall Street. Most spectacular of all was the Tokyo property market. In 1990, the land upon which the imperial palace in Tokyo was built was valued at more than the entire real estate of Canada, the second largest country in the world.

When I read the silly valuations in the ‘Irish Times’ property section, particularly the “Take 5 at €400,000″ section, I am reminded of the Japanese Imperial Palace delusion. Clearly a two up, two down in Rialto is not worth the same as a seven-bedroomed house in the Dordogne. Now that prices are falling rapidly, the idea that pokey Irish houses are worth more than French chateaux will look increasingly daft.

The other problem for Ireland is the sheer extremity of the housing boom. Irish house prices have risen 380pc since 1996, compared with 260pc in the UK — the next frothiest market. House prices fell in Germany and of course Japan in the same period. While in Switzerland — Europe’s technically most sophisticated economy — house prices only rose by 5pc in the 12 years since 1996.

As a result of this binge, Ireland is the most indebted nation in Europe. Outstanding residential mortgage debt now amounts to 192pc of our total GNP! This is truly shocking and depressing when you consider that in Germany, outstanding mortgage debt only amounts to 3pc of GNP.

Even in the US — where many disingenuous Irish commentators are suggesting this crisis originated — outstanding mortgage debt only accounts for 44pc of GNP. We are way out of whack with the rest of the world and our dilemma is very much of our own making. Think about the chart again. Have a long look and consider that in the past 10 years residential loans per capita in Ireland increased by 552pc. This is miring us in an ocean of debt. We got into debt five times faster than the average profligate American and, extraordinarily, 50 times faster than the parsimonious Germans.

With our British neighbours, we managed to lose the run of ourselves completely. In the UK, where billions of Irish euros were spent in the past five years, there is carnage on the high street. According to the estate agents Allsops, the real weakness is being seen in the thousands of new docklands-style developments which mushroomed all over British cities.

Many of these investors were Irish and most apartments are now trading at a 30pc to 40pc discount to prices originally paid in 2005. The British have the comfort of a falling exchange rate determined in London, we on the other hand are stuck to the Germans.

This is why the personal debt comparisons with Germany are so instructive. The German has no property-related debt to speak of. This means that the average Gunter doesn’t really mind if European interest rates rise, as it will make no difference at all to his budget at the end of the month.

In contrast, the average Paddy, who has seen his personal property indebtedness rise by over 500pc since the late 1990s, will be roasted by a rise in rates.

So will Irish house prices follow the Japanese model and fall by 70pc from the peak? Maybe. Who knows? However, the similarities are too striking to be ignored.

It is clear the Japanese market didn’t freeze, as during the slump there were still distressed sellers and opportunistic buyers who thought they had bought at rock bottom, only to see prices fall again.

Overall, however, in the 13-year slump there was not one period of six months when any sustained rally was recorded.The lesson being, when things start falling, they drop like a stone.

Take a look at the chart again. Not a pretty sight.


  1. Dónall Garvin

    Good article,

    for those among us who have been vainly crying “crash” before most even knew about the bubble, we’ve seen a rapidly changing public view of property – from the newspapers, news makers, the man in the street.

    Reportedly, house prices have dropped by almost 20% in Northern Ireland in the past year (+ the drop is sterling) – however at no point do I recall people being warned a year ago that prices were either affordable or sensible.

    This property binge has made Ireland the UK an uncompetitive place to live, work and invest.
    It’s a pity that lone-voices like David’s have been ignored while so much money has been misplaced into property speculation.

  2. Cronan

    Why were estate agents not regulated for all this time.

    Why are they still not regulated?

    Why is there not an official government database of prices paid for property – to make the market transparent? [They obviously have the data to calculate their stamp duty cut].

    This lack of governance has contributed significantly to the problem IMHO.

    My generation has been let down, if not cheated, by a combination of government incompetence and sharp practice. We will be paying for it for a long time to come.

  3. That GDP:Mortage debt is staggering….

  4. RB

    Great Article David

    While I do feel sorry for those who will be inevitably left in negative equity as a result of the property crash, I feel maybe this is a lesson which needs to be learned.
    Greed will always have its ugly side, and it is purely greed and nothing else which has led to the current housing crisis situation. My generation (25 to 25yrs) has been completely ripped off. Surely the government were aware of this scam? Why did they turn a blind eye? Was there no way they could have tried to control the spiraling house prices?

    Or was it simply a matter of “I’m alright jack keep your hands off my stack”?

  5. Arresting article. The comparisons are illuminating and helpful. The responsibility ultimately goes back to successive governments since the late nineties who watched and cheered the silliness and irresponsible behaviour by all sorts of self-interested groups and people. And did nothing to curb excessive and exhorbitant lending.

    Now, what are they going to do? I hope the last thing they do is listen to Tom Parlon roaring away on the sidelines about the need to rescue the construction industry. Better to try to get back to basics of earning our living by making things and providing useful services.

    The issue now is what are we to do next?

  6. kieran daly

    All of Ireland’s problems have been caused by joining the euro.The Brits had the good sense to stay well clear but in Ireland the likes of Garret Fitzgerald, John Bruton et al all thought europe was the best thing since free love.The Irish housing market’s sensitivity to short term interest rates and the British experience of shadowing the Dmark in the late eighties should of served as a warning signal.Since the Irish pound (in nominal terms )broke parity with sterling last Autumn the numbers unemployed have shot through the roof!.The political party that promises to ditch the euro will get my vote.

  7. Colin

    why haven’t people realised that the fianna fail/pd government we have had for the last 12 years actually don’t care about us (young people under 35). the government must think “screw those young people anyway”. they practiced laissez-faire economics, the same which help cause the famine over 160 years ago. we blamed the british back then. now its our own who’ve landed many young people in debt. it was obvious they didn’t care, so thats why i didn’t risk buying a house, meaning i was free to emigrate – which i have since done. i’m the lucky one.

    for the past 10 years, i had to listen to nearly everyone say that ireland is a great country, and they wouldn’t bring up their children anywhere else. the truth is much different. why?

    1. the weather is the worst in the world bar iceland.
    2. the traffic congestion is the worst in the world bar los angeles
    3. the schools are the most dilapudated in the world bar albania
    4. the cost of rent/mortgage is the worst value in the world – london is higher but you have more attractions there
    5. the cost of running a car is the worst value in the world
    6. the cost of childcare is the worst value in the world
    7. the justice system is the worst in the world – juries aquit murderers regularly and judges are too lenient with hardened criminals
    8. the suicide rate is one of the worst in the world
    9. drug and alcohol abuse is one of the worst in the world
    10. the people in ireland have changed into one of the most selfish/self centered/coarse populations in the world.

    why would young people want to stay in ireland? look long and hard around the place?

  8. Fergus

    To Kieran Daly,
    In a post on David’s previous article I largely blamed FF populism for all this,and how in the next election they would gain electoral traction by blaming immigrants and Europe for Ireland’s woes, never their own incompetence. Judging by your post, it seems I have hit the nail on the head. Not ONE of the major parties opposed the single currency, yet you seem to link our membership to ideas espoused by the brighter of FG’s recent leaders.

    FF are listening. They hear you. They will no doubt “get your vote” by acting accordingly next time round. And when they get back in, it’ll be jobbery and corrupt business as usual.

    Does anybody else feel that the real problem facing this country is a political system that offers the electorate a choice between a contradictory coalition of conservative and social democrat parties versus a populist catch-all right-wing monolith?

    FF+ FG coaltion at the next election, with Labour the official opposition. It’s the only answer, if only Labour realised that power is distinct from office…..

  9. sexitoni

    This article is linked to an equivalent article from 2000. David has even plagiarised his past work a bit for the above piece.

    So was he right then; very wrong then; or right eventually after years of crying wolf as his detractors would claim?

    In this article he mentions the Irish Times’ “Take 5 at €400,000″ but in the 2000 article he references the Irish Times’ “Take 5 at £200,000″.

    All I know is that if I had been in a position to take the plunge in 2000, I wouldn’t be batting an eyelid at increasing mortgage rates now. Or one bit bothered that I could have moved to Provence for the same price for that matter.

  10. MK

    Hi David,

    The Japan property bubble of the 1980′s is well documented, and I agree that it is useful to draw comparisons between bubbles. I understand that like some dot.com valuations, some Japanese properties have never returned to the 1980 levels in nominal terms, never mind in real terms. Japan ‘solved’ their bubble by reducing interest rates (they are still less than 2% for 10-years) and having 100-year mortgages, as well as the population tightening their belts, having Granny live in, and generally small apts, etc. Japan’s case with 100+ million people and the extent of its bubble was a particularly bad bubble.

    For us (Ireland), its hard to tell how things will pan out, how much hardship there will be and where and at what rate of descent things will go from here. Currently, the curve of the average house price index is just past the peak – so its still early days. Average has dropped from 300 or so to 280 or so, I think.

    In terms of your figures:
    > Irish house prices have risen 380pc since 1996, compared with 260pc in the UK
    > While in Switzerland house prices only rose by 5pc in the 12 years since 1996.

    But these percentages are meaningless and cant be compared as they started from different real bases, and there are different real prices involved in each. Apples to Oranges I’m afraid.

    and your other figures:
    > Ireland is the most indebted nation in Europe. Outstanding residential mortgage debt now amounts to 192pc of our total GNP! In Germany, outstanding mortgage debt only amounts to 3pc of GNP. US 44 pc.

    Are these values correct? I find it hard to believe that the German level is so low. Can you present the raw numbers (as Damien Kiberd does sometimes). There are differences as well in the housing usage. There may in Germany be more commercial mortgages tied up providing rental properties at contolled-rent prices. In the recent CSO regional report, it mentioned that 40% of houses in Ireland have no o/s mortgage on them, 40% have that are owner-occupied, and 20% are rented.

    Ireland also needs to worry about commercial mortgages and when some of these projects stagnate. Its happened to some hotels, etc, golf courses already. The commercial side could outweigh the residential side in effects perhaps, as we all need a place to live, but we can optionally choose where to shop, etc.

    MK

  11. bryan


    for the past 10 years, i had to listen to nearly everyone say that ireland is a great country, and they wouldn’t bring up their children anywhere else. the truth is much different. why?”

    Have you. whenever I visit Ireland I get the same old tired moan from people who generally would not live anywhere else. Rarely do people praise ireland. I do live somewhere else, but no place is perfect. Your list is nonsense.

    1. the weather is the worst in the world bar iceland.
    Tha is subjective. I would suggest that a bit of rain is not exactly bad. Try the sahara. If you like heat go for it. I lived in Canada which is a real nightmare in the winter. Dubai is a nightmare in the summer.
    2. the traffic congestion is the worst in the world bar los angeles
    Dublin is pretty bad. There are plenty of developing countries a lot worse. Try China.
    3. the schools are the most dilapudated in the world bar albania
    Right. I dont know what to say to that. Try Africa, South America, even America, try Russia. Nonsense.
    4. the cost of rent/mortgage is the worst value in the world – london is higher but you have more attractions there
    This is partly true ( relative to wages Russia is the worst) but is changing – read the article.
    5. the cost of running a car is the worst value in the world
    Good. Climate change.
    6. the cost of childcare is the worst value in the world
    Nonsense.
    7. the justice system is the worst in the world – juries aquit murderers regularly and judges are too lenient with hardened criminals
    Whatever. I will say that the recent killing of the Mexican Federal Drug enforement agency was, seemingly, authorized by the head of the Federal police. I agree with the points, but not the “Justice system is worst in the world”. It is one of the best. Try the rest of the world. Travel a little. Pop over to anywhere else.
    8. the suicide rate is one of the worst in the world
    Nowhere near it. Finland. Sweden. And other boring spots.
    9. drug and alcohol abuse is one of the worst in the world
    Nope. Oh “one of” . Maybe
    10. the people in ireland have changed into one of the most selfish/self centered/coarse populations in the world

    Not really. Everywhere is about the same.

    Anyway get out. There is much to see elsewhere, and IReland is just about in the middle, and Irish self-negating exceptionalism be damned.

    One of the problems with Ireland is the whiners. This thing can be fixed with the right attitood, which is rarely seen on these comments ( David on other hand is an optimist – and thinks, as do I – that the correct in the housing market will be good long term).

  12. bryan


    In this article he mentions the Irish Times’ “Take 5 at €400,000″ but in the 2000 article he references the Irish Times’ “Take 5 at £200,000″.”

    Thats pounds, not Euro. Even then the 5 at £200,000 would show the problem. Is he right? Sure, all that needs to happen is for prices to drop to their euro value in 2000, index linked. We are well on our way.

    “Are these values correct? I find it hard to believe that the German level is so low.”

    They tend to rent, so it would make sense. In any cae German houses have not increased in value in 2 decades despite having the same loose credit as us – 2% ECB rate etc.

  13. bryan

    Ie£200K in 2000AD is worth about 360K€ 2008 – I am assuming inflations of 4% a year ( compound, of course). That is 36% over 8 years = £273K in 2008, or 360K€.

  14. Well done again David. Just because you have been tracking the course of the killer comet for a few years now, does that make the news any less scary when it finally begins to hit? No. But for many, who couldn’t afford to hear the truth / potential downside risks, aparently you were droning on and being unpatriotic. A bit like the perennial dowser who eventually finds water. Or the prospector who finally finds gold. ah well, it was there anyway, if you looked for long enough they say.

    ‘They’ also said that we had amassed billions of assets in bricks and mortar and, as such, were assured of our place on the world rich list, come what may. But I am sure that the poor feckers apres-Famine that left behind very impressive walled cottages in whole village format, in the West, were probably very assured of the idiocy of bricks and mortar when the real ‘buy & sell’ of daily living falls down all around you. How, pray tell, do we squeeze the collateral out of our property stock in order to compete internationally? A point made well by David over previous years, the unpatriotic so and so. Every pound available was thrown into property. Every executive racked his brain as to how to hitch onto this wagon. Savvy oil distributors bought up old petrol stations in poor locations (vis a vis the Tesco monster) and cleaned them up and built semi-d’s on them. Where would our cheap flights to Europe be if Mick O’Leary had turned down an honest day’s trading/ serving for the irresistable gleam of concrete and marbletop counters.

    Hats off to David McWilliams. Not God. And therefore not infallible! But always thinking. And usually very close to the money. Unlike the array of gormless ejits or extremely aware treasonists (take your pick, both viable based on the evidence this last 10 years) that are captaining the starship NO-Enterprise.

  15. Jack

    Those numbers are pretty enlightening and frightening Mr Mc Williams!

    As you say the Japanese ‘situation’ has been going on for nearly 20 years and shows no real signs of rectifying itself (yet) in general terms.

    I lived and worked in Japan during 1992 and the sense of morose resentment was palpable even through the poker face of the Japanese populace not given to shows of emotion. Yes life went on, but there was a crestfallen-ness amongst the older (mortgage payers) and business men whom only a few years earlier had nearly ‘bought the world’ so strong was the Yen, so strong was their sense of power, their sense of being unstoppable. During the “baburu keizai” it was said that only a fool or gaijin (foreigner) failed to become rich. The younger Japanese who could never hope to buy a property (in the Tokyo metropolitan area) spent all their money on fashion (clothes, etc) and went on ‘exotic’ holidays once a year for a week to Europe or Hawaii. It just wasn’t a reality for them to own, so they blanked it out.

    The older young people were thoroughly miserable as they commuted for up to 2hrs in each direction everyday on the Shinkansen bullet train (up to 400km each direction) tied into their house that they inherited, along with the mortgage from their parents, Daddy seeing the wife and children for an hour a day if at all…….Could you imagine the typically ‘retiring’ Irishman or woman tolerating that depressing scenario?!

    The reason that i was ‘abroad’ then was that i had purchased a nice apartment in a nice area in London 3 years before, smug in the knowledge that i had got a ‘bargain’ after the market had been in freefall for a year “and was going up again” according to the estate agents. The problem was it didn’t go up and went 25% lower than i had paid AND didn’t go up again for nearly 6 years. I decided to rent it out which almost covered the outgoings and i sought my fortune on the road. A very hard lesson, both financially and emotionally.

    The thing is when prices are going up no-one, from your neighbour up to the government, via the bank and estate agent suggests being prudent and like a kid in a sweetshop…….Perhaps the desire to ‘own’ ones own home is deeply embbeded in the Irish psyche due to the last few hundred years of being generally not allowed to own their own property and just tenants of their landlord. Rent is just dead money, or is it ? Only if the property market keeps going up. If not (especially if it’s an interest only yoke) you just ‘rent’ from the bank AND have legal reponsibilities to boot.

    The parsimonious Germans have such an incredibly low mortgage debt simply because they don’t have ‘this’ mentality that pervades (and maybe poisons) the inhabitants of the UK and Ireland. Most of the population living in urban areas rent and that’s that. No-one gets put out if someone buys their property, they shrug their shoulders and that’s all, it’s a choice. There IS however, the usual competition to live in certain areas and for ‘good’ apartments (views,safety, how well the apartment is divided in terms of usable space,etc). The contract is effectively unlimited and as long as you are a good tenant that is also that. Simple! I currently live in a rental property and together with my German wife we have regular discussions as we try to reconcile our differing mentalities. She sees it as somewhere to live with little responsibility and i see it as a place where we can be turfed out every 12 months and are restricted in what we can do (paint/shelves/improvements). You can guess that makes for evenings of fun…

    One things for sure, ‘times they are a changin’ and the ‘golden years’ are over for the forseeable future.

    (Dylan and Bowie economic forcasters plc)

  16. Colin

    Bryan,

    i’m comparing Ireland to Developed countries, not Zimbabwe and the like. if we start comparing ourselves to Zimbabwe, then the country is royally f**ked.

    the point of my list is that for all the boom years the country had, we have ended up with many more problems to fix, and with the good times officially over, these problems will never get looked after.

    1.you think we only get a bit of rain? stop deluding yourself. i’m not comparing ireland with china, dubai etc…
    2. invalid comment, not comparing ireland with china
    3. invalid comment, not comparing ireland with Africa, South America, Russia.
    4. do you want to live in russia? go for it!
    5. the cost of running a car is the worst value in the world. Good? Climate change? i didn’t know we had a reliable public transport service as an alternative. Where is it Bryan?
    6. the cost of childcare is the worst value in the world. Nonsense? so why do we hear parents with young families moaning about it 24/7.
    7. the justice system is the worst in the world – juries aquit murderers regularly and judges are too lenient with hardened criminals
    Whatever. I will say that the recent killing of the Mexican Federal Drug enforement agency was, seemingly, authorized by the head of the Federal police. I agree with the points, but not the “Justice system is worst in the world”. It is one of the best. Try the rest of the world. Travel a little. Pop over to anywhere else.
    do you feel safer walking home at night than you did 20 years ago? do you think scumbags think we have a great justice system?
    8. the suicide rate is one of the worst in the world.Nowhere near it. Finland. Sweden. And other boring spots? i bet if you add in suicide by dangerous driving and misadventure, we’d be thereabouts
    9. drug and alcohol abuse is one of the worst in the world.Nope. Oh “one of” . Maybe? so how did the gangs in dublin and limerick get so rich? selling ice creams?
    10. the people in ireland have changed into one of the most selfish/self centered/coarse populations in the world. Not really. Everywhere is about the same? come off it, that german ambassador hit the nail on the head last summer when he made those comments.

    and don’t get me started on the health service.

  17. D. Roche

    The difference between Japan & Ireland is that our feet are frozen in heritage and nobody is seriously competing on an innovative level. Our brands and ideas are passed from generation to generation and they are now either owned by MNC’s or no longer viable. Ingenuity was and remains a key success factor in the Japanese and Eastern economoies which are built on true commerce & trade unlike the Irish boom which has been a frenzy of housing & loan speculation.

    Japan built economy through innovation & market strategy, for example their dominance and competitive advantage of the US car market in the 1980′s. Today another opportunity presents itself in the manafacturing & engineering of alternative energy transportation. Who do you think will have the foresight rip open this niche market? Ireland is typically reactive and we will probably continue to sit on the fence and wonder why we are in this mess while the likes of America & japan begin to strategize.

    The current recession has not landed without warning. There has been plenty of notice in the form of ludicrous property value, non-qualified credit, and the geo-political landscape. It’s important to have home equity but it is more important to be realistic.

  18. bryan

    Colin. You said “in the world” for all of your complaints. Now you admit you are not comparing with Russia, China, South America, India etc where most people actually live. I dont live in Ireland. I have lived in far worse places than Ireland. The place I live now is better, but only moderately so. So stop whining. Or leave. As I said this incessant whine about Ireland comes from stay-at-homers.

  19. John

    Bryan/Colin,
    In my opinion I think what’s most disappointing about Ireland is how we’ve got so little to show after 10+ years of a boom. Yes you can argue that people are wealthier now and have a higher standard of living. However when it comes to infrastructure in particular (public transport, hospitals, public services etc.) we are way behind.

    John

  20. VincentH

    Whatever about Japan, it is apples and oranges. Here the drop it house prices was certain to happen. For the last number of years we have listened to people who should know better witter on about the fundamentals when they should have been on about the BASICS.
    Ed Hobbs is correct when he says if you need a house, then you need a house. But do you need it here.

  21. Conor

    Well said, Jack. I too have similar discussions about buying property with my German wife.

    D McW said: “This is why the personal debt comparisons with Germany are so instructive. The German has no property-related debt to speak of. This means that the average Gunter doesn’t really mind if European interest rates rise, as it will make no difference at all to his budget at the end of the month.” Exactly. Here in Germany most people will ask: “what credit crunch?”

    There isn’t high personal debt here in Germany like the UK or Ireland. People are content to rent because there’s less responsibility, better tenancy laws and no obsession with buying property as property prices haven’t risen here much in the last few years. Also houses are not hugely overvalued as they are in Ireland. Here, people tend not pay for goods much by credit card – more so with cash or debit cards. Generally the case is, if you can’t afford it, you probably don’t need it in the first place. However it’s gradually becoming acceptable to finance the purchase of a car for example.

  22. paddy cullen

    As residential property continues its long slide, there will be many minor ripples; prices will certainly not fall in a straight line until we approach the end of the property crash. After a speculative bubble bursts, there are many upward moves that may trap the unwary. Initially people will see declining property values as a fleeting opportunity to buy at a slightly lower price. Estate agents will seize on this opportunity, selling the “get in now, last chance” concept i.e. get in now before the property prices start soaring again. Hope springs eternal at the early stages of a falling market, and each minor flip-up is considered to promise a reversal and the next massive rise. Each dip in property prices will be classified as a “healthy breathing spell” by most. Each rise will be hailed as the beginning of the next boom. Because of the enormous participation in the house-buying boom over the last two decades, thousands of Irish will be affected as they gradually become aware that property prices have been steadily falling. Eventually, I believe that many will begin to think that house prices may not start rising again for quite some time. Many will begin to doubt that property prices will “always go up” and will become deeply concerned. Lending institutions will then in turn place restrictions on lending. House builders may try to hold on to their stocks of unsold houses, but most will probably be forced to sell the properties at distressed prices to meet overdue construction loans. With professional property speculators adding to the supply of houses and lending institutions restricting demand, the fall in prices will increase with severity. This trend in my opinion my not be easily reversed. Minor recoveries will become brief and gains will be more modest. The declines will be sharper and longer. The sense of urgency to buy a home that exists to some extent at the moment among the youth of Ireland will I expect also virtually vanish from the residential property market. As the falls in prices become more pronounced, other necessities of life may take priority to owning a home. Rented accommodation may become more plentiful because of what might be happening in the buying market. Investors in property will have no choice to rent out their properties, since buyers may be less interested in buying given the current climate in the market. There will be a steady increase in the supply of houses, but sales will become scarce. Losses on property will be making the headlines and building and construction companies may stop trading. As we enter a stage of increased uncertainty within the Irish property market, we may also be confronted with the forced sale of houses. House buying has been the main player in the bubble of our recent prosperity, what happens when that buying stops?

  23. Look what the cat dragged in

    Does someone want to explain to me what “sub” means? I hear it alot and am completely lost

  24. sexitoni

    Thanks Bryan, I’m pretty sure when I typed £200,000 and €400,000 I got the difference between pounds and euros…

    Personally I calculate 200,000 pounds then to equate to somewhere in the region of 330,000 euro now (inflation was below 3% for extended periods throughout the noughties).

    A mortgage taken out in 2000 of 180K over 25 years to buy a 200,000 pounds house would be costing 1,367 euro a month to service today, not factoring mortgage income tax relief. And you would have nearly 1/3 paid off, and that assumes you never took advantage of rock bottom interest rates to pay more off in the meantime.

    Borrowing 360,000 euro now over 25 years to buy a 400,000 euro house costs 2,153 euro a month, not factoring mortgage income tax relief, and interest rates are probably only going up.

    So if you bought your house to live in as opposed to considering it an investment, inflation, which hasn’t even been too wild, has done you a huge favour.

    David alluded to the effect of 80s’ inflation wiping out 70s’ mortgages before. Well that’s happening to late ’90s mortgages now, when we were deemed to be in a bubble. We have a long, long way to go before someone who ignored the sages and bought a place to live in in 2000 would even consider regretting it.

    P.S. I haven’t even started to consider the difference in quality and location of house that 200,000 pounds would have gotten you eight years ago.

    I haven’t bought yet because it was always just beyond me, but a fall to 2004 prices is the most I’m hoping for.

  25. Paul

    Hey cat, sub = subscribed

    What is going to happen to all these people stuck in housing developments, strapped to that property for life, or worse still all of them out of work. We are going to see thousands of mini Tallaght’s around the country. Things have been fairly quiet, but only because Anto and Rasher had money coming in, and they were able to have a holiday and throw parties. What happens when they have nothing else to do but hang around causing trouble. I live in what I suppose you call a middle class neighbourhood, large houses with two cars in the driveway. But we have a lot of trouble, from teenagers who just want to act like scumbags because they think it is cool, these kids have everything they could possibly want, they wouldn’t know a hard day if it fell on them, yet they smash up cars, and damage public and private property on a weekly basis. I just wonder what will happen when these idiots find out what tough times are, will problems escalate across Ireland’s housing estates as the economy goes south.

  26. Nostramartus

    paul yes you’re right, by next week we’ll have an indication from the government as to how bad things are, by october we’ll be able to see it in 7-8% unemployment, some good arguments were made in yesterday’s irish independent as to why it might reach these heights. Will the government borrow and let property prices collapse or will they make cuts in the health services and try to pointlessly tinker with the property market. If they bottle it and try to save the worst offenders expect to be in a Rorke’s Drift defense of your home from marauding teenagers wearing tommy hilfiger hoodies by june of next year. With no money for ritalin and valium we’ll see the real face of middle ireland’s celtic cubs. Thousands of Irish people are going to learn what recession and repossession mean the hard way, our generation have no real comprehension of poverty, so those of us who didn’t buy into the property porn are still going to be at the broken end of bottle of some rightfully disgruntled consumers who’ve lost everything and still have to pay debts for years to come. Discretion being the better part of valor those with the means who remain uncommitted should consider building their homes in the country despite oil prices the knock on effect of recession could deliver some bargains in land prices.Martina Devlin makes some good points about scraping the army and some other cost saving ideas in her article today.
    http://www.independent.ie/opinion/columnists/martina-devlin/hard-times-so-lets-scrap-the-army-1425904.html

  27. Ed

    “David alluded to the effect of 80s’ inflation wiping out 70s’ mortgages before. Well that’s happening to late ’90s mortgages now,”
    The real winners in the 70’s were those who bought early on in the decade – that was difficult to do as rampant inflation eroded savings and lenders were only giving 60% mortgages plus income tax was running at 50% approx. and a £20,000 house was increasing at about £50 per day. With all these obstacles, it was almost impossible to get on the ladder. Interest rates were 14 to 15%, so the first 10years of a mortgage saw very little capital repaid – it was all interest. I managed to get 40% together and borrow 60% by ‘78, unfortunately the economy collapsed in ‘79 and I was out on the dole in ‘81 – managed by one means or other to hold out until ’88 and sold at 1.6 times what I paid in ’88 , but the capital element 60% of the original cost remained, effectively a ten years struggle with no net gain. So nothing has changed – the young have always had to carry society – in not too distant past, it war – so don’t feel sorry for yourselves – it could be another 10 years before the cycle comes out of the negative.

  28. Aidan

    I think this crisis won’t begin to be solved until the class of 97 in the irish establishment is cleared out, they have mismanaged the boom and won’t have a hope of dealing with the recession, i will reserve my judgement on cowen for now, i think some of the criticism is valid in that he increased spending so much, however he was still under aherns thumb and maybe he wasn’t allowed to be genuinely reforming as finance minister, but the rest of the cabinet i don’t have much faith in, in the eighties we had ray mcsharry, albert reynolds, alan dukes, des o malley these were reformers with stong backrounds in economics, the cabinet now is very light weight, also the business establishment is very light weight a product of a booming economy when money was easy especially the financials, another clearout here is necessary, unfortunately it could be some years before this is achieved. In some ways older people with experience of the 80s recession might have to be brought in

  29. GOM

    So Ed, to your points about, e.g., 60% mortgages – this was a control we could have had in the past ten years to prevent the runaway lending, i.e., restrict lenders to hard rules instead of let them set it themselves.

    Someone also posted earlier about the Euro being the root of our problems – clearly rubbish, illustrating a crass misunderstanding of the differences between us and the UK (they have an infrastructure that can be leveraged) and why it is important for our overall balance of trade to be pegged, or locked into a larger market bloc. The real problem was the will of “leaders” not taking on responsibility for what was happening, not doing the right thing in terms of controlling the overheating by lending rules, planning enforcement and Stamp duty policy.

    One other word on Japan – the longlasting eonomic woes there were also largely associated with a deep cultural way of the banks covering up their exposure as it quite literally would have meant the death of many bankers had this exposure been made public. This cultural change of direction takes years to correct. We on the other hand are not so burdened by these cultural elements so we can react more quickly – but with what do we react in a country with little infrastructure?

  30. Garry

    Martina Devlin makes some good points about scraping the army …..

    Jeasus.. theres plenty of other agencies that should go before the firing squad before we scrap the army? At least lets get them to shoot a few PR consultants first :)

    What is it about us these days? people want to scrap or outsource everything where people actually do real, dangerous or measurable work, and instead spend more money on spin? You cant eat spin

  31. Colin

    Bryan,

    i have left. i came to london 9 months ago. i’m not a whinger per se. i just feel the young people were screwed by the government. i will not return home until property prices have dropped 50%. that’s when i’d buy a house. i’ve started saving for a deposit. in 3-5 years time, it should be a nice chunk. i’d suggest everybody who hasn’t bought a house should do the same as me.

    i was just making the point that ireland isn’t all its cracked up to be. to be honest, i don’t miss it that much. its needs to change – start with slash and burn tactics in public service jobs. HSE should be slayed. jobs for life should be scrapped. farmers should be taxed at much higher rates when selling land. pubs should be de-regulated – it would bring down inflation.

  32. As prices rocketed in Ireland, the quality of apartments appeared to fall.

    For example, the Sion Hill development, adjacent to the Blackrock Clinic, which was built in the 1990′s, in terms of structure and workmanship, compares poorly with the older apartment buildings.

    Not only were developers allowed build structures with poor acoustic insulation, travelers on the DART can see the Gasworks apartments near the Barrow St Station, where residents have to park their bicycles on the balconies.

    Planning was granted for developments with less parking spaces than units. Try selling one now without a car space and 5 more on the market!

    A half-million euros or more for a typical 2-bed apartment with no on-site or facilities including shops that can be reasonably walked to, is just crazy – unless you live in some exceptional place where the rabbit hutch is the norm – such as Tokyo?

    As for Japan post-bubble, life is grim for many.

    Toyota in Japan has 110,000 temporary workers in Japan on $10.50 an hour – less than the Irish minimum wage. The temps have very few rights.

    Last March, top Japanese companies like Toyota agreed annual pay increases for workers of €78 despite pleas from the Prime Minister; The Monthly rise wasequivalent to cost of 3 regular cups of Starbucks’ coffee.

    The PM begging companies to hike pay!

    http://www.finfacts.ie/irishfinancenews/article_1012890.shtml

  33. Eugene


    A mortgage taken out in 2000 of 180K over 25 years to buy a 200,000 pounds house would be costing 1,367 euro a month to service today, not factoring mortgage income tax relief. And you would have nearly 1/3 paid off, and that assumes you never took advantage of rock bottom interest rates to pay more off in the meantime.

    Borrowing 360,000 euro now over 25 years to buy a 400,000 euro house costs 2,153 euro a month, not factoring mortgage income tax relief, and interest rates are probably only going up”

    Inflation will always eat into repayments. You should try and max out what you pay in most circumstances, except a boom. Particularly if rates are at peak ( or seem to be) Some leg room is needed, of course. From the peak a fall in interest rates will increase housing prices, reducing your LTV, and your repayments. Inflation will reduce the real replayments further. The time to not max out is when rates are at a historical low. Which is not what the banks were suggesting two years ago ( in fact: many bank econmists would use the phrase “historical low” to encourage people to buy.

    Anyway the 360K euro there assumes that the prices will stay where they are now. Not so.

  34. Nostramartus

    Excellent point as usual Garry, second last duty for the army shoot the PR consultants and assisted seppuku for the vested interests, removing the coded language “savings” when they mean “vicious cutbacks” is a good first step to remove the haze of hype so people can plan for a more realistic future.
    With oil prices hitting 146 dollars a barrel there could yet be another interest rate hike after today’s in the pipeline.

  35. Philip

    My prediction for the next few weeks as our leaders release the first view of their revised budget and capital expenditure…

    1) You (all you whingers) will be told yet again to stop talking the country into a slump.
    2) The public pay talks will yield yet another increase and the ministers “will” get their pay rises – plus some – on the basis that they’ll probably have to work harder at spending all that extra cash (increased output requirements don’t you know).
    3) Taking a pay freeze or cut would mean acknowledgement of a slump by our esteemed ones. Which contradicts 1).

    I think the level of self denial is actually pathological. But it’s to be expected.

    I do hope people are starting to see through the complete lack of leadership. And I believe David has hinted at a situation far worse than has occurred in Japan. At least they had some internal monetary controls and they have a serious industry/ financial complex and still, they could not fend off a fall of 70%. I would see houses here in this country falling like pink sheet penny stock shares – going to zero. It would make more sense to demolish and turn back into farmland in some cases.

    About 60% of the developed world is heading to or in recession. The countries with maximum productivity are the current winners and will be immune. I was reading a business week article (last week’s) on China Manufacturing moving back to US. Conclusion – it ain’t goin to happen for a decade or more – China’s productivity is just too good even if oil went up another 100 USD a barrel. No one wants to take the risk of investing in modern plant and it’ll take a long time to rebuild skillsets. Does this sound familiar?

    The banks/ developers etc are now nose diving. Their fate is sealed and the sooner they wake up, the better for all (including themselves). The Public service payroll needs to take a hit…a big one. If this does not happen, the social contract with the general public will be seriously damaged. The current costs (due to government) of doing business is impacting people’s tendency to take risks. We need to understand that productivity is a function of the ability of people to invest with confidence in their own businesses and that the Public service’s take needs to be a managable/ visible auditable one which can be related to improving that situation. Right now, I am optimist of this happening becasue the approaching crisis is happening fast and will precipitate this kind of thinking. If it does not cure, then we have a Zimbabean scenario where the ruling elite will have walked out of Europe, brought back the Punt and shut down blogs like this for spreading dissention.

  36. Ed

    “I was reading a business week article (last week’s) on China Manufacturing moving back to US. Conclusion – it ain’t goin to happen for a decade or more – China’s productivity is just too good even if oil went up another 100 USD a barrel. No one wants to take the risk of investing in modern plant and it’ll take a long time to rebuild skillsets”

    Philip, you’re so right there – although the minimum wage in the US is very low by our standards – $4.75 for first year and $5.15 from then on – there’s no stomach for investing in plant. The Skills shortage is becoming a major problem, as it is for other developed countries like Japan. http://www.mwrf.com/Articles/ArticleID/19178/19178.html
    I was in China some weeks back and they’re investing in state of the art equipment, so labour costs can increase without a significant impact on productivity. The real plus for them into the future is emphasis on skillsets – they produce around 400,000 engineers per year and this is where the developed world is falling down.
    The shortage of skills in the US could be an opportunity for us, but I think that we would have to abandon our neutrality stance to get in on the really meaty stuff.

  37. Garry

    Fair play Ed and Philip, ye have put it far better than my “you cant eat spin”.

    I’m concerned at the build up of ‘spin based’ industries in the west (circular financial instruments, brands/shell/marketing companies, entertainment, toothless regulators and frameworks etc. etc.) while moving old style manufacturing, development, support, even some legal/old style financial etc to cheaper locations.

    I guess if the new industries turn out to have real substance i.e. they can be self sustaining without a backbone of unfashionable/dirty/old style industries….then we will have a new economy on clean almost virtual industries, where everyone is gainfully employed doing something ever further up the ‘value chain’. To me its like the energy situation, if the new green stuff works, is actually green and can be scaled up…. great.

    Where do ye see it going?

  38. sean

    sexitoni,

    With regard to house prices I did the figures recently on a house we bought 7 years ago in Dublin west. The peak asking price seemed to be about €480k -500k. They’re now being advertised at €380k on daft and that’s assuming people are willing to pay €380. From our purchase price I reckon that a 4% return would be acceptable which means a we’re up approx. 35% if we could have achieved a 4% return.

    Of course this excludes that fact that we were able to reduce the mortgage by approx. €60k, it wasn’t a 100% mortgage aws you can imagine. On the surface this looks ok, 95k in the bag from 2001 to 2008 if we we able to realise €380k. But this does not include the periods of no occupancy when we had to pay the mortgage, the maintenance fees, the repairs to baths, etc. and the fact that the rent didn’t quite cover the mortgage and associated fees.

    The question really comes down to, with the same money what could we have done. Could we have started a business or invested successfully in shares,(it’s very easy to sell these when targets or stop losses are hit)? Or alternatively by simply banking the deposit money, forgetting about it and focussing on carreer and life goals how would things have fared?

    €95k seems great for 8years on the side work (€11.8k p.a.) but is it really?
    What about the deposit interest that would have accrued I haven’t subtracted that! Anyway who cares….

    My second point is that I don’t think we can compare Japan and Ireland without looking at some of the differences.

    As DMcW rightly points out there is a large Irish diaspora and as such tourism counts for a huge portion of income from the former Irish. This contrasts strongly with Japan where they did not leave the country enmass as the irish did.

    The presence of the Irish around the world has helped business relations enormously and also the Irish have already broken with tradition(church, classism, etc.) to a large extent.

  39. Fox

    I ask myself why after all this time there is still no real and true database of house price sales? The Permanent TSB House Price Index is extremely inaccurate and is produced by a party with a critical vested interest.

    Every property sale in the country is completed via solicitors who record exactly the amount paid. Why is there no record of these centrally? Surely, based on stamp duty alone (knowing this would exclude new builds) the Revenue should be able to produce exact sale price figures?

    The current situation allows continuous vested parties to tell us whatever the feel like based on whatever “facts and figures” they choose to show. The public have no meaningful location to source the true nature of house prices that they can trust.

    My question to everyone is – why there is not a simple web-site (for example) tracking all real completed sale prices?

    Secondly — why has the process of bidding for a property not been completely over hauled in Ireland? The current situation lends itself to complete corruption and uncertainty for both the buyer and seller (as much as a buyer can be lied to, a seller could move all the furniture out just for the buyer to pull out the day before signing contracts).

    A simply solution would be to have all bids legally binding and presented to the seller via the buyers solicitor. The buyers solicitor would ensure the mortgage/savings where in place to complete the purchase prior to allowing an offer to be put forward. Once an offer is accepted the house is sold.

    In addition all buyers should have a unique “Buyer Registration Number”. Although the buyer would remain anonymous from the number, a competing buyer could be assured that the other bid(s) coming in for a house were genuine (possibly being able to track all bids on a web site). There could be no concerns over other bids not being real as each one would be legally binding (obviously void if rejected or out-bid).

    This would also stop buyers putting numerous bids on multiple properties. This system would be of benefit to the buyer, seller, and even estate agent (as bids would be guaranteed).

    In fact this system would allow for easy tracking of actual sale prices as well.

    Why are buyers allowed put in bids they do not have to honor and why are sellers allowed to change their minds also?

    If estate agents, mortgage providers and solicitors got together they could put something like this together and present it to the government so that it could be put into legislation.

    A large reason for the bubble we now find ourselves in is the severe lack of clarity and mechanisms to monitor and retrieve meaningful information on both real sale prices and the sales process itself.

    My second question — is there any body/group looking at changing these processes in Ireland presently, or will it lazily be left behind with the umbrella for some other pub patron to take home?

  40. [...] ir nuo pasiūlos. Kolkas visi šie rodikliai rodo tik į kainos mažėjimo pusę. David McWilliams prognuozuoja (beje nemažai jo ekonominių prognozių tikrai išsipildė) jog kritimas gali būti ir iki 70% nuo [...]

  41. walnut

    “I’m flat, and I’m nervous!”. David, I’d like to hear your opinion on what impact the ever increasing gasoline costs will have on Irish society and in particular the commuter lifestyle; and why oh why did the government not electrify and expand the rail network.

  42. Ger Kennedy

    In response to Fox, Ireland should have an ESCROW system similar to the US. No Solicitors. No BS. Very practical paralegal service that checks documentation and funding and handles the transfer of money and paperwork for a nominal fee. However it didnt stop the madness of price increases in California. That is a human phenomenon unfortunately. Greed is the ultimate motivator.

    I do agree that house sale prices should be public record. It will never happen however because of the cute hoor cabal. Also they should can stamp duty and bring in a property tax. Or force the seller to pay stamp duty. It is a crazy scheme that forces the cash strapped buyer to come up with a large chunk of change on top of the deposit/loan for a house. A property tax would force the issue of house prices being public record. One of the main reasons why house valuations in the US are essentially public record because the county assesses the tax on their valuation of the property and as such it has to be public record because it is county data and all county data is by definiton public record.

    I think it will be a wild ride for a while. I dont see a drop of 70%. More like 40-50% I think. Then property will be the “poison” investment for 5-10 years. Think “Tech Stocks” and replace with “Property”.

    Ger

  43. S Wall

    Fox, you have made some good points – Perhaps we should turn auctioneering over to ebay?

  44. Nagelz

    There it goes…….oops missed it…..tiger left lol.

    What could and should be done to alleviate the demise of the building industry (‘construction industry’ is a Tiger phrase..lets call it building industry again :)

    Why not have the government purchase the many houses that will be repo’d by the banks. They could purchase the houses at base cost from the developers, this would allow the banks to be repayed what the house actually cost. The developer gets out of hock to some degree, (I have no pity for developers it must be said)the banks get their outlay back and we have sufficient house stocks to fulfill a social housing need.The government then becomes a body through which affordable housing is available for everyone.

    If people have paid over the odds for their home at readjusted values then why not hand the house back to the government with the provision that the homeowners will be given a government funded mortgage on the next house?

    The government is hugely responsible for whats gone on ………instead of digging the banks out they should help out the citizens.

    There should be a building department within the government fully responsible for legislating price and purchase of property imo.

  45. Ger Kennedy

    Naglez

    I think you are calling for communism. The tried it in Russia for about 60 years. It doesnt work. Capitalism is not perfect but it is better than the alternative. People are greedy by nature which is why capitalism works, imperfectly I admit, but it works unlike communism. Markets must set the price of commodities, including property. Governments need to set ground rules and enforce them (mortgages at 2.5 times salary for example) and then get out of the way. They certainly should not be fuelling the fires of a bubble which is what the Irish government did with their courting of the builder/banker/estate agent class and their crazy tax breaks for section 23/50 properties, hotels and parking lots.

    Ger

  46. Philip

    Garry, I think where this whole thing could go if there was a modicum of leadership would be to deliberately move thinking from “spin” industries (as you so nicely put it) to Irish IP based industries.

    Dreaming on…
    1) Radically shrink Public Service to about 20% of current size and do it quickly.
    2) Reduce corp taxes dramatically on all Irish businesses and startups and incentives for keeping it onshore. This will mop up 80% of the folks fired from PS and some.
    3) Tax all land and commercial property to rates which make it prohibitive to keep property or sit on land while it’s not productive. If in a high value area, then it’s productivity should be higher and should be taxed accordingly. Tax Capital Ownership – Not Productivity or Profits.
    4) Start sending an invite to all 35M of our diaspora (of the emerald empire) to come and join the party. That’ll mop up the rest of the fired Pub Service and get construction going on a solid sustainable footing.

    Forget about choosing Green Energy or other specific industries. You cannot channel creativity. But you can create the basis for allowing growth.

    My hope is that the new 40 somethings are running Government are starting to think radically. They are a different type of person than those of the previous Haughey era. They have kids and they are thinking of the world they may inherit. A crisis like this may be just the green light they need for a radical makeover.

  47. Nagelz

    Ger, social responsibility from Government is not communism, it’s commonsense.

  48. RB

    At the end of the day, it is not just property prices in Ireland which are a rip off, we are being ripped off left right and center, from mobile phone costs to groceries and everything else in between. An entire generation is left to burden a recession , extortionist property prices, massive debts, a disaster of a health service and for what?

    For a stress-ridden life as a commuter-consumer ? And for an eternity on the nightmarish vision which is the M50? …

    It’s an absolute joke…

    For a nation which has survived countless invasions, 800 years of oppression by imperialism and catholicism , a civil war , a famine and was still impoverished and backward just two decades ago, is this all we amount to? ..
    Is this all the Irish people are worth?

    Sold out to globalization, sold out to big business and sold down toilet all for a quick buck?

    Personally, I think the forecast for Irelands economic future is far worse than we are led to believe, the whole world is rapidly changing, politically and economically. Basing an economy and a nations wealth on the price tag of a 3 bedroom semi detached dog box in Irelands suburbia is ridiculous. A property market should never be allowed to behave like a casino….

    The Celtic Tiger boom will not be without consequence for Irish society, the Irish Identity and the future of Irish generations… The social problems will begin with the next generation and all those massive dog box apartment blocks scattered around the country will become the ghettos and ganglands of the future…

    Isn’t it ironic that the county councils in Ireland decided not to build anymore council flats like Ballymun because they realized what a mistake it was to create huge communities with low incomes and no amenities…. But what did they do?…

    They sold the land to developers who built bigger flat complexes which would dwarf the ballymun towers, the developers ripped off the desperate tiger cubs and they were built also with no amenities …
    So what will happen when the owners of these apartments lose their jobs to outsourcing in Asia and end up on the dole? Who will pay their mortgages?
    In the end , as always , it is the workers and the ordinary working people who will suffer…
    And with the erosion of the middle classes, what will happen to the pillar which cements the divide between the wealthy and the poor? …
    We can only imagine the dire social problems of the Ireland of the future..
    It won’t be pretty…

  49. Fionn

    “Sold out to globalization, sold out to big business and sold down toilet all for a quick buck? ”

    Selling out ( whatever that means) to big business was a good idea. The local property casino market was a bad idea.

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