August 13, 2008

Why bailing out housing market is a very bad idea

Posted in Irish Economy · 66 comments ·

In recent days there have been calls from prominent quarters for the State to take action to stimulate demand for houses. While these ideas are interesting and understandable in the face of the crisis, it would not be a wise course of action — either in the short term or in the long term — for the country.

For a decade, the housing lobby — builders, developers, the banks, estate agents and the like — hijacked the economic debate in Ireland. So much so, that it became an article of faith that what was good for the building industry was good for Ireland and, conversely, anything that might be bad for the construction business was bad for the country.

Ridiculously, any questioning of the wisdom of more and more houses and higher and higher prices was labelled “unpatriotic”. In fact, scepticism in the face of an orgy of greed was real patriotism.

We know that the housing boom was not a fundamental sign of economic robustness but a mirage fuelled by reckless lending and backed by incessant propaganda.

However, we are where we are, and there is little point in recrimination. The best thing we can do now is avoid a repeat of the housing nonsense. This implies allowing the market to adjust downward as quickly as possible and this means doing as little as possible by way of interference.

Such inactivity makes sound economic sense for a few basic reasons.

First, no country has ever become rich by buying and selling overpriced houses to each other using other people’s cash. This is what we ended up doing. The Irish banking system borrowed cash abroad and lent it here at home so that developers could make astronomical profits, while at the same time saddling an entire generation with monumental debts. This will be the long-term legacy of the housing boom.

Saddling one generation with debts is bad enough, but for the State to intervene now to stoke up first-time buyer demand again and in the process saddle another generation with debts, would be wrong.

A second reason against intervening with a tax-break is that it would be a dreadful waste of money when cash is tight. It is crucial now that Ireland invests as much as possible in our productive capacity, brains, education, infrastructure and technology. By spending on these areas, we create the conditions for export-led growth. Only by exporting efficiently can we sustain the living standards we aspire to. During the housing boom we forgot this and our current account went from an impressive surplus, to a lamentable deficit, as we borrowed to mask this weakness.

Speculating on houses does not generate any long-term benefit to the country. It sucks precious resources into an inferno of “cute hoorism”, where the lad who sells the most overpriced piece of crud to the next fella is the winner. This is no way to run a society, let alone an economy.

A third reason to avoid action is that Irish houses are still way overvalued and have to fall yet further for value to return to the market. If we assume that prices in Ireland can’t deviate from international prices indefinitely, how can the average suburban home in Dublin still cost nine times that of a similar home in Texas? We will not become internationally competitive at these prices.

Houses are one of the single biggest costs in the economy and it is the knock-on effect from inflated house prices on wages which is adding to our lack of competitiveness. Therefore, in the long-term, house prices need to fall dramatically if Ireland is to recover. Although this might sound counter-intuitive, particularly in the face of incessant propaganda from the housing lobby, it is the plain economic truth.

A fourth reason for allowing the market to work its way through this boom/bust cycle is that bailing out the developers and the banks would encourage bad behaviour yet again. This is not some puritanical point about wrongdoing, but an economic point about what is best for all of us.

We have to realise that houses are only places to live. A house is not some shortcut to instant wealth. Neither is it the ATM machine many believed it was when we dipped into our “equity release” pool, borrowing against the “wealth” in our houses.

The downturn gives us time to reflect on the past few years and it also allows us to think about the next phase in the Irish economic story. Maybe it will prove to be the best thing to have happened to us in some while, because it will help us to focus our minds.

We know what we have to do. Ireland needs to use its talent to create new industries. To do this, we need vision and we have to react to adversity with clear thinking which is unencumbered by vested interests. Because we are small, we can change quickly.

There are plenty of examples from other countries that have reacted to economic challenges and social challenges admirably. The Danes, for example, reacted to the first oil crisis by building the world’s premier wind-farm business. Not only does Denmark get 20pc of its energy from wind, but it also exports the technology all over the world.

Amazingly, in 1973, Denmark got 99pc of its energy needs from the Middle East; today, it gets nothing from that region. The Finns also reacted to their early ’90s property bust by investing in technology and education. Today, Nokia is a world beater; and in OECD tests, the Finns are consistently top of the league on maths and science. Also, in the late ’70s, when Finland discovered that it had Europe’s worst record for heart disease, the government reacted by changing the national school diet. In a generation, Finland has gone from having the EU’s worst rate of heart disease to having the least.

These are examples of countries which have learned from their economic mistakes and galvanised their population to change direction. Ireland could do something similar — our Taoiseach could go for a “game changing” policy initiative which brings out the best in us and makes a virtue out of necessity.

Propping up the housing market will not change the game. It will make thing worse. It will be more of the same and we’ll be back to square one with another boom/bust in a few years.

  1. walnut

    Spot on. Like the Danes, we could develop our own tidal power technologies and become a world leader in the field; we could get some of our under utilised post graduate resources to work on it. Unfortunately, I hold no prospect of our govenment doing anything radical. Good ideas have no currency in this land!

  2. Observer

    Spot on David,

    I’ve been speculating for years that the Irish Property Boom was resembling that of Thailand’s in the 80′s to Mid 90′s………… houses were being built up and down their country so fast, that prices skyrocketed beyond any Native Siamese’s salary and were vastly unaffordable.

    Thailand was the Fastest Growing economy and at one stage the wealthiest country in SE Asia………. In 1997, their economy collapsed entirely and now its very cheap compared to their period of exuberance.

    When you mentioned last year about Ghost towns appearing………… this should be the fulfilled prophecy.

    What happened in Thailand resembles exactly our own mess……… they had a growth of 9.4%!

    It’s great in the long run though! We’ll be cheap again and that’ll encourage more of our expatriates back………hopefully it will result in the Diaspora being more attracted aswell!

  3. MK

    Hi David,

    Yes, I fully agree with you that propping up the housing market would be folly policy. The Government has however over the decades been propping up the construction sector up, both residential and commercial, just look at a Form 11 from the Revenue Commisioners and the list of schemes becomes apparent.

    Additionally, the Government is currently propping up the sector by increasing investment in capital projects and infrastucture, some of which may not be so cost effective. (It is well recognisd that the Luas did not produce as much value for money nor will it going forward as a better QBC system would, for example). So the government will continue to prop construction up, and by borrowing to pay for it as well! There are 240,000 workers still in this sector, and vast swathes of ancillary services connected to property and construction, so the government cant let the bubble burst too quickly and such support is accepted by most as reasonable. Its 25% of our activity here. Have a walk down the quays in Dublin and it looks like there is a Dubai-esque boom on the go. This bust has a long way to go. But we do need to remove the supports that are there, such as tax incentives. They should always be removed at the first glimpse of a boom, and by the government not doing so and leaving them in they added air to the bubble, a lot of it.

    In terms of residential prices, I think the pattern here will be similar to other residential property bubbles. They dont burst with a bang, unlike shares, they just deflate to an ‘acceptable level’ in a slow manner. A bubble is perhaps not the best analogy to describe a set of property prices that have gone out of line with ‘reality’. In the mindsets of many, politicians, public servants, construction sector related people, etc, the bursting of the bubble never occurs, and thus they do not see it as a doomsday scenario, more a correction. To them, unless activity stops completely and 1m people have to get on boats to live, it is a soft landing!

    As for us changing, it takes time even if we are small. We do have a bad case of ‘property disease’, a bad case of the ‘global flu’, as it were. It has taken too much focus, but we are just starting to come off it, weaning us off it wont be easy, and onto what we should have been doing will take a lot of time. Companies like Icon are what we could be doing. But there are way too few of them. We will continue to rely (and hope) on foreign MNC’s coming in and using what skills we do have available. We need to continue to invest in education, good edcuation, not building libraries or new wet labs or putting money into buildings in the university sector (although at primary level we do need a bit of that for the most needy, although design and build costs should not be extravagant, but cost effective, bang for the buck). Ironically, a lot of the money gone into education and health over the last decade has been on their buildings. But dying in an old building or a new building is a moot choice. And giving state lands to co-located private hospitals for free is a bad deal for taxpayers – how dumb is that!

    We have a lot to learn as a country, and this property bubble will be a big challenge for one and all. Its also only just starting with the main challenges ahead. Like a death-defying rollercoaster, enjoy it if you can or dare to look!


  4. Bob

    Now I understand the Danish “two-fingers” to the Muslim world! (the cartoons!)

    Seriously though, for once I agree with you completely! Are you in favour of charging fees for 3rd level education?? Its another way of making more money available for investing in the future

  5. David your back to you best here again, excellent article. Our ‘Economy’ that others were looking at with ‘envy’ was of course just pure spin put out by the Irish Media here who also gained from this ‘Fake Market’ they were filling their accounts with pages of advertising been taken out by the Real Estate agents,Auctioneers and the Developers. Our inner Golden Circle who between them and their links to those we have elected ,made millions off the backs of the ordinary workers who have been brain washed into believing, they have to become property owners.
    Now though as you have written what money was borrowed by our banking institutions to lend to these developers has to be paid back and this is where the difficulty is arising because of external forces, so it’s easy see why some factors want to keep this housing market spinning.
    Reality though is within the corridors of power and influence we do not have any forward thinkers in charge,as all of our elected governmental officials have presently healthy bank accounts due to been able to profit from the sale of houses or land during ‘the good times’ so we are in a economic cul de sac when it comes to ideas to turn this situation around.
    Your right , been such a small country we should be able to change direction fast just as the Danes, the Swedes, and the Fin’s did but we have a more complex political conservative system than these countries have, I don’t read of any decade long tribunals running in their regions.
    We presently have thousands of square meters of retail and commercial properties lying vacant in every city and town here due to prohibitive rents been asked. Along with a bureaucratic system which does not encourage young business start ups.
    While you write about investing in a ‘Knowledge Economy’ our government wants to make us now pay to be educated, where do you go from here ?.
    Our Energy crisis could in the long term be averted with the building of a few safe nuclear power stations ( but this of course would be blocked by the semi state E.S.B.!). With the availability now within the construction industry these developers who have taken such enlarged profits from the Housing developments should now be given our schools and hospitals to redevelop
    But lets wait and see what Biffo is working on in his caravan !

  6. Garry

    an excellent summary (well it matches my bias anyways :) )

    Hopefully the next few months will pass without the credit crunch deteriorating too much further and our government being able to withstand the pressure “do something”

    On galvanizing the population, the govt could start looking at the real crises facing us over the next 20 years…. climate change, energy security and food security.

  7. VincentH

    In the past, the land commission and the forestry commission put a floor on land prices. It is not beyond the pale that something similar is put in place at the moment, only that very real value be had, and that they are sold on, and quickly.

  8. Garry

    Why do anything, VincentH?

    I wasn’t aware forestry commission put a floor under land prices …. I knew they bought land and put it to productive use growing timber …. I have heard plenty of stories of them aggressively trying to convince farmers to sell the land to them years ago for very very little money…. so Im not at all sure they were putting a floor under prices in practise.
    I don’t know enough on the land commission, but I thought the aim of it was first to rent fix and also to buy land from the old landlord class and re-distribute land to tenants who then became smallholders. In the early days, it was way oversubscribed …… with tenants looking to improve their lot!!!!

    We have a different problem right now…. we have an oversupply of houses…. and people trying to flog them!!! The problem is the empties. In the absence of an opportunity to gain by house price appreciation, theres nobody to buy them.

    Yeah, maybe from a social justice perspective, theres a need to eliminate the BTL (housing landlord class) we have been subsiding over the past few years and increase social housing.

    But lets not interfere with it right now, theres no “very real value” to be had out there at this point.

  9. My Lost Generation

    Nice article, bring down the prices of houses would definitely allow the people of Ireland to focus their minds and their monies on education and enterprise in order to be competitive again instead of talking how much their pathetic three bedroom dump of a house cost.
    But have we ever been competitive or have we been riding on the back of european fundings for too many years which allows this fucked up government to put in place a system of low corporate taxation to attract foreign companies? What have we to offer to the world that will make us competitive? Someone gives a serious answer they believe in.
    As far as getting this generation of Irish people focused to move forward, you will have to get them out the pubs where I think they will go back to in even bigger numbers than during the Celtic Tiger years.
    Vote Yes to Lisbon next time around and try to get some more help from the european financial institutions should be another one of your arguments David.

  10. VincentH

    Yes Garry, but FC land which was in essence valueless to production and at a price which gave some value. The LC, you need to look at how it proceeded in the early part of its life.
    What we have at the moment -along with much of what you say- is no one knows how far things can fall. And while we are in that situation nothing will happen. Also it is a rather neat way for the issue of social housing to be solved.

  11. DavidS

    I think builders and developers need to be taken down a few pegs- they have no right to blackmail this country to suit themselves, and their own back pocket. David McWilliams is right- housing is somewhere to live, not a brick-and-concrete ATM machine. And the place to start in sorting out this- is in Fianna Fail and Fine Gael. Ever since Haughey came to power in the late 70s and 80s, the political system has been b*stardised and has turned the once reliable and trust-worthy Fianna Fail party into a corrupt, laughable, personal profitting making, mafia-style machine. Eamon De Valera once said that “haughey will ruin the party”. My own grandmother said she agreed with this, even before he came to power. Frank Aitken even stepped down with disgust at the thought of Haughey having more power. The developers in this country are selfish traitors who holding not only a million or more people to ransom- but have their gluttonous fingers around the necks of our political parties. I know Cowen seems to be a more “listen to me” style of leader- but he is of little difference from our former pandering, yellow bellied, smirking, sniggering clown of a Taoiseach Bert when it comes to dealing with this disgusting, bloated and immoral industry.
    And as a former poster brought up the land commision, I too would like to point on that matter. As somebody who loves our farmers- and all the hard work that they do for us, I think that they should be stripped of the right to gain financally from development, and that the only sale that is acceptable is for the sale of the land for agriculture (as it is private property), or if the land happens to be on the edge of Dublin/Galway/Cork etc, that is should only be sold at its agricultural price, regardless of whether houses are been developed in that place. Farmers do NOT have a right to make millions off of land that might sell for €250,000 at agricultural prices. I hope one day we get a compentant, no-nonsense leaders like De Valera again to kick these arrogant, greedy horders up their arses, and kick them out of politics. If other countries like England, France, Denmark, America etc can build houses at reasonable prices, and their citizens can buy houses at more reasonable prices- why the hell shouldn’t the Irish people. UNPATRIOTIC? If it wasn’t for the fact that people we’re convinved that it was for their own good- these people would have sparked a war long ago. And as somebody whos great-grandparents moved from infertile soil in the West of Ireland to the productive lands of the east in the 1940s (courtesy of the land commision)… I know what i’m talking about here- and i’m not merely moralizing or begruding because I in fact happen to be on a long list to gain that land (as somebody who lives in a village its of little use to me, but anyways). This country should be self-reliant and self-sufficient live David McWilliams said, including when it comes to energy. And this country’s economy should be based on things like energy export, high-tech manufacturing and most importantly agriculture and agricultural export

  12. Ref Mr David S……. I like so many others could not agree more with you, with regard to the corrupt politicians we have elected in this country and their ties with the Greedy Developer,….. but what can we do ( collectively ) …. Get Mr Williams here to start his own party to get us away from the rotten system we have found our selfs in thanks to our parents generations ?
    Alas MR David S , sorting out F.F and F.G. will not solve our problems alone, our upper civil servants are rotten too with power and they too need to be sorted ..most of them are where they are due to the two big parties. Our whole political class needs a clean sweep , as the LOT of them down to the new boys S.F. are ALL just in it for the perks we have allowed them to take from us the naive tax payers….
    Mr Williams here mentioned the cost of a house in Texas versus Dublin , there is no simple justification as to why fellow Irish rip each other off with the bloated prices we are asked to pay apart from sheer greed.
    Perhaps if it stays raining and shares keep falling and our economy slows even further ,..then maybe the thirty somethings and younger with the high property loans , negative equity and been sent to the social welfare offices will take to the streets and demand change……..who knows ! ……

  13. DavidS

    I never suggested Mr McWilliams start a political party

  14. The multi-million-euro salaried directors of the principal irish banks who recklessly fuelled the current economic and financial crisis, will one day settle into happy retirement with their earnings and pensions intact and untouched by the whole debacle.
    Ditto our political overseers who dispassionately watched it all happen, and also profited enormously (in the medium term) as the big developers grew richer,year after year.The present government is thereby, complicit in the ultimate meltdown.
    The interest rates dictated by the European Bank greatly facilitated the exercise of total abandon, as banks re-wrote time and time again, their once prudent lending criteria, to keep pace with the rising price of property.
    At boom´s end, “5 year interest only repayment” style loans were commonplace in the market as banks endeavoured to maintain the momentum of the doom laden vessel, “SS Irish Construction Industry”.
    When the big developers went for the lifeboats, the bank captains were left,as it were, to go down with their ships.Problem is-they did´nt. They just kept increasing their bonuses.!
    The fate of many small speculators is yet uncertain,but many of them will soon be lost at sea, as the financial house sharks close in on the weakest of the casualties first.
    A smoke and mirrors exercise continues as the banks tidy up their books and create the illusion of stability by the strategem of extending indefinite credit to their larger debtors, so as to enable them pay interest on loans and interest which are now, in reality-in default.
    Mention of bank failure is now as taboo as such topics as hospital acquired M.R.S.A., and deviant clergy, once were.!
    The decimation of shareholders assets and private pension funds is meekly accepted by all. Lambs for the slaughter.
    The awaited rescue ship “Liquidity” looks as spectral and phantasmic as the Marie Celeste.
    If the White Star Line had suppressed the foundering of their unsinkable flagship “The Titanic”, by launching a a massive cardboard cut out float of the dead ship´s profile on the high seas, to postpone the day of accountablility by their directors; they would have eventually been found out and probably gaoled-or hanged.!
    Corporate strategy and P.R. evolution has- thank heavens for bankers and politicians alike- moved on from those distant days. It´s much more sophisticated nowadays..reassuring statements at A.G.M´s: the ship is in no danger: no need to panic and head for the muster stations..etc. The ship is UNSINKABLE.(or is it?)
    or maybe brass balls have just grown bigger and harder.!

  15. An open letter from Padraig Walshe,
    President of the IFA (Impecunious Farmers Association)
    Bluebell Lane,
    Cuckoo Land.

    To the Dept of Agriculture & Fisheries


    Kildare Street. Dublin.

    Dear Mary Coughlan,

    I am sorry for blocking the streets around Government Buildings with our new tractors recently, for the 89th time this year, but can you ask the Powers-that-be in Brussels, to do something about that interfering british b*stard, Peter Mandleson.
    Not only is he determined to cut all the subsidies we get to produce beef that nobody can afford to eat anymore; he has capped the handouts for dairy farmers who just keep producing more and more milk every year ,and now the poor beasts tits are as sore as the bleedin taxpayers who are also being endlessly milked in taxation and high food prices.
    Farming was just becoming such a lucrative business.! Now a poor farmer has to buy the milk licence quota from a rich one if he wants to increase his milk output.
    This is outrageous.It reminds me of the pub racket/monopoly run by many of your comrades and part time TD’s in Dail Eireann; in which licences to sell drink change hands for millions of Euros.! It’s a total disgrace.
    I am writing to you to seek more information about one of the newest setaside schemes.
    As you are aware,most of the farmers I represent now get money for doing absolutely nothing.They get money for not growing corn & wheat or any kind of crop that would entitle them to the ruinous C.A.P.subsidies. Mandleson claims the well is dry, and Europe’s taxpayers have been bled almost to death, to keep us in our poverty.
    We now get money for trimming our hedges, and putting out food to feed the pigeons and crows, and not cutting turf on our bogs and so forth,under the environmental protection scheme.
    I understand there is a new grant in the offing for the purchase of barbed wire and the maintainance of new fences, to keep hillwalkers and tourists from trespassing on so called ‘setaside’ land-and also new grants for those of us who promise not to use harmful pesticides, and are willing to build massive containment pools so the pig and cattle slurry does not contribute to the numerous outbreaks of clostrosporidium poisoning among city folk in Galway and elsewhere
    Now to the main business..
    A neighbour of mine-a pig farmer- recently received a cheque for 5000 Euros from Brussels for not rearing we do not represent pig producers we were completely unaware of this.I amd my many comrades (120,000) in the I.F.A. would now like to go into the “not rearing pigs” business.!
    In the opinion of your army of agricultural advisors,what is the best kind of good farming practice when not rearing pigs and which is the best breed not to rear.?
    We want to be sure our members approach this new endeavour in keeping withGovernment policy as dictated by the EEU under the Common Agriculture Policy.
    we weould prefer not to rear bacon pigs, but ifif this is not the type of pig you want us not to rear, I will just as gladly not rear porkers.
    Are there any advantages in not rearing rare breeds such as Saddlebacks or Gloucester Old Spots,or are there too many people not rearing these.?
    As I see it,the hardest part of this programme will be keeping an accurate record of how many pigs I haven’t reared.Are there any government or Local Authority courses provided by Teagasc on this.?
    I recall that some years ago many of our members who were unskilled in keeping track of their sheep on the Cooley Mountains, inadvertently miscalculated the size of their herds and received subsidies for “phantom” sheep. We do not wish to see a recurrence of this problem with our “phantom” pigs.
    My neighbour who has been rearing pigs for many years is very satisfied with this business.The best profit he ever made on them was 1500euros in 1972.
    That is-until this year when he received a cheque for not rearing any.
    If we get say, 3000 Euros for not rearing 50 pigs, will I get 6000 Euros for not rearing 100.? Most I.F.A. members plan to operate on a small scale at first, holding themselves down to about 4,000 pigs not reared the first year, which will generate income of about 240,000 Euros.
    As they become more expert in not rearing pigs they will likely become more ambitious, not rearing perhaps 40,000 pigs in the second year from which each one would expect to qualify for about 2.4 million Euros in Department of Agriculture grants, the second year.
    Incidentally we wonder if we would be entitled to receive tradeable carbon credits for all those pigs not producing harmful anf polluting methane gases.? Another point:These pigs that I plan to rear will not eat 200 tons of cereals. As we already receive payments for not growing crops on “setaside land” will we qualify for extra payments for not growing the extra cereals not needed to not feed the pigs I don’t rear.?
    I am also interested in the proposed “not milking cows scheme” which will compensate farmers who are not eligible for subsidies under the current milk “quota” scheme.
    Please send me any information you have on that too.
    With regard to the current DEFRA advice on set aside fields, do you propose to extend the payments to e-commerce based farmers with virtual fields (of which I and my members will shortly have several thousand hectares.?)
    In view of the above you will realise that our members may not have time to engage in the normal activities of actually producing anything, and are likely to be totally unemployed and will therefore qualify for unemployment benefit.
    rest assured,we shall continue to support Fianna Fail in future elections,and we only said no to our generous European partners as a muscle flexing exercise.If you get rid of that b*stard Mandleson rest assured of a “Yes” vote in the next Lisbon Referendum.
    Yours faithfully, Padraig Walsh. Chairman. I.F.A,

  16. Malcolm McClure

    I agree with David that the housing market should be allowed to adjust downward as quickly as possible, with the proviso that it should be stabilized when house and ancillary loans are three times family income by enforcable lending regulations. However, there is the obvious residual problem of the boom that David doesn’t address. What happens to the unfortunates who can no longer afford to repay their mortgage commitment and interest on other debts?
    The prospect of widespread evictions and ‘midnight flits with the fittings’ would lead to widespread and serious social instability;– 21st century echoes of the Derryveagh evictions with snotty nosed children crying in the street?
    It just won’t be allowed to happen in the age of TV journalism. So the lenders will have to swallow hard and accept widespread defaults whilst the most feckless borrowers get home scot free?
    Isn’t capitalism wonderful?

  17. David Williams would not last ten minutes if he tried to found a new political party based on justice and good governance.
    Can you imagine him trying to satisfy the demands of every cute hoor voter in every village in every parish in Ireland?
    His first Budget day list:
    1 New state of the art hospitals in Cahersleeveen and Castletownbare and the Cooley Mountains.
    2 Topped up setaside pensions for life for every poor farmer.
    3 More fishing licences to catch the last of the salmon still running in Kerry rivers.
    Followed by;
    3a Compensation for impoverished part time drift net salmon fishermen when the salmon are extinct.
    3b Grants for new state of the art fishing boats for poor fishermen.
    3c Special lump sum payments scheme for retiring fishermen, to assist them moving their hardship to other Jurisdictions such as The Channel Islands and Leichenstein.
    4 Permission for developers to build exclusive holiday homes and 8 story apartment blocks, in every bog, and on every mountain top in the country.
    5 Permission for poor farmers to grow food on the “setaside land” so as to avoid hardship (high food prices?) among poor families in urban areas, while still retaining the EEU pension for life /single payment scheme.
    6 A new rail line from Skibbereen to Sligo,commencing at Jackie Healy Rae station and ending at Beverly Flynn Junction.
    7 10 billion euros to bale out the banks.
    8 A first time buyers grant of 100,000 Euros ,to help maintain current prices in the property market and kick start economic activity on the derelict building sites around the country.
    And so on. I cant see David getting his head around much of this s*it.! I reckon he would be a total failure as Minister for Finance.

  18. I forgot one last important item:
    9 A large supplementary grant of 2 million Euros for our ailing public service broadcasting company RTE, specifically to provide useful employment there on chat shows etc. and assist in the rehabilitation of for disgraced former politicians such as Ray Burke, Liam Lawlor,- er sorry not with us any more- and particularly G.A.A. stalwarts such as Mr Bartholmew Ahern.

  19. Ed

    Compare these two ventures competing for the same prize – one has adequate funding and the other is operating on a shoe string – guess where the latter is based?, and we want to support the building of more houses???

  20. Ed

    Forgot – perhaps we feel more comfortable with this area of expertise !!

  21. Koomapotilas

    Actually Finland didn’t just change the school diet. They changed the diet for the whole country. For more information, check

  22. David, have you ever been asked to provide any policy input to the Irish Government? I think I know the answer in advance, but it would be interesting to know for definite.

    It’s interesting who the Irish government ‘choose’ to advise them. Desperate Dan McLaughlin cosied up to FF in Inchydoney ; Country Tom has an inside line to the Cabinet. This bunch of country town solicitors, teachers on career break, publicans, farmers and hacks (otherwise known as the Irish Government) wouldn’t know enterprise if it came and slapped them in the face. This is why I think they will attempt some measure to resucitate construction. It’s all they know. They won’t change until the situations bites them in the ass, and forces them back to the day job.

    Unless I’m mistaken, they don’t want to listen to constructive and imaginative arguments like those you are presenting. After all, in their eyes, by ‘talking down’ the Irish property pyramid scheme, you caused the crash.

  23. Eric

    Good article- if only the government listened to this type of advice more.

  24. Gerry

    In response to Malcom above and the age of tv journalism…..and the feckless getting away scott free. I was in Chicago in the US as a young graduate where I lived and worked downtown from 1998 untill 2001.When the bust came in 1999/2000 (bare in mind this was prior to 9/11) a recession hit the city in terms of loss of convention business,and the closure sme’s which were web-based and for the most part were private investment business and foreclosures just like we are seeing now. I lived in an apartment block in the Gold Coast and the amount of Cook County Sheriff evictions that were executed in my block was quite numerous. To see eviction notices on neighbors doors with five days to vacate which ultimately led to locks being changed and personal belongings being thrown onto the street I have to say really left me mentally scarred. I never thought that I would ever witness this especially in the what was then the richest country in the world. However this was common for about 18 months but the up side was that apartments became cheaper to buy and let and prices have relatively remained the same. My landlord at time told me whether in bad times or good you are only 60 to 90 days from being thrown out on the street…….based on monthly paycheck and rent/mortgage. I really do hope that this will not happen in Ireland

  25. Garry

    Hi VincentH,
    I don’t know enough about the Land Commission but people I know speak well of it… I do know they had compulsory purchase powers which I think were aimed at ensuring absentee landlords could be forced to sell up. If you could recommend a good article or book on it, I’d be interested.

    In the case of forestry it also provided employment in areas where there was nothing while building up some national resources. My father worked on it, he always said the work was better than the break…. Working they were kept warm compared to having to wait for the hours break to pass standing out in the cold and rain, on the side of a mountain; they would have the bread and milk eaten in the first minute. True most of the land bought was worth f all but they paid f all for it. Nobody got rich out of what they got, it was a tough station, though there wasn’t any alternatives in those days. As far as I know both schemes were driven by ideology and the national interest as much as anything else, they benefited a lot of people who needed help and did change rural society and benefited the country long term.

    Back to today, introducing any scheme means making a conscious decision as to who you are trying to help. To put it bluntly, do you want to compensate existing landlords/developers/banks/owners or help those not yet on the property ladder? Property prices increased 5 fold in between 1996-2006. Theres now 74,000 houses on sale on daft, 1667 of them looking for 1million+, so you cant have both unless you want to spend billions.

    I cant help feeling that if any scheme is introduced at this point it will be billed as protecting existing homeowners assets, while really capping bank/developer losses, and at the same time putting an artificially high floor on prices thats not related to their intrinsic value. Why? Because of the mix of voters as outlined above determines what is politically acceptable, it wouldn’t fly for a stage agency to offer say 40% of the current asking price for a house even though the market rent for some houses in some locations would justify that value.

    I’d be very wary of any scheme without there being a very clear, even ideological vision as to who the scheme will benefit… Where you put the floor and even if you should put a floor depends on who you want to benefit or bail out. The collapse in bank share prices provides a clue as to where the real floor is.

    Yes there is an opportunity on social housing, and yes the taxpayer should look at how to do something. But let it benefit the people who will live there, not the ‘housing market’ or some banks share price. Given the mix of people, its difficult to get it right and whats right depends on the type of society we want……, in any estate targetted there will be BTL investors, owner occupiers in negative equity, owner occupiers who aren’t in negative equity, new tenants of social housing and hopefully new owners either paying market price or whatever new social scheme is introduced, all of which have competing interests.

    Theres no perfect way out, somebody will have to get hurt, it might as well be the guys who got greedy… My personal preference is for the state to do nothing for at least 18 months, let the market find its level, then let the taxpayer be the biggest meanest capitalist out there (buying up distressed inventory from banks/developers/BTL landlords, and subletting/selling for social housing), rather than jumping in too early and being the fall guy for the banks.

  26. Garry

    I think Malcolm the question of how to cost effectively repossess homes without damaging the banks brand is occupying the brightest minds in all the banks.

    I just wonder will they try to outsource it, get the state to enforce it, position it as the duty of a common agency (so no banks brand is associated) or even try to re brand it as protecting depositors/shareholders interests, maybe even learn from the military and come up with a reassuring new phrase like friendly fire.

  27. VincentH

    Exactly, Garry, that is it exactly.

  28. Malcolm McClure

    If banks or other lenders want to get an eviction and repossession order on a defaulted mortgage they have to seek a Civil Court Order. They will then be confronted by two pieces of protective legislation.

The 1976 Family Home Protection Act was the first legislation to deal with the issue of the family home. The Supreme Court established that a `family home’ was “primarily a dwelling in which a married couple ordinarily reside.” 
and ruled that both parties had to be properly informed in order to consent to a charge over the family home.
The purpose of the act was to protect the family home and “to prevent families being evicted when a spouse, through either stupidity or greed or whatever else – or bad business or bad luck – lost the family home”.

The 1976 act was amended by the 1995 Family Law Act, which says a conveyance will be valid unless declared void by a court.

This may mean that, once general written consent is given by one spouse, the other spouse may thereafter secure any future borrowings against the family home, effectively contracting out of the safeguards of the original legislation. 

    Given that in these circumstances, the defaulting mortgagees will usually seek access to Legal Aid, the banks will be very reluctant to go to court.
    They are much more likely to re-negotiate the terms in line with the fair market value of the properties.

  29. “Yes there is an opportunity on social housing, and yes the taxpayer should look at how to do something. But let it benefit the people who will live there, not the ‘housing market’ or some banks share price. Given the mix of people, its difficult to get it right and whats right depends on the type of society we want……, in any estate targetted there will be BTL investors, owner occupiers in negative equity, owner occupiers who aren’t in negative equity, new tenants of social housing and hopefully new owners either paying market price or whatever new social scheme is introduced, all of which have competing interests.

    Theres no perfect way out, somebody will have to get hurt, it might as well be the guys who got greedy… My personal preference is for the state to do nothing for at least 18 months, let the market find its level, then let the taxpayer be the biggest meanest capitalist out there (buying up distressed inventory from banks/developers/BTL landlords, and subletting/selling for social housing), rather than jumping in too early and being the fall guy for the banks.”

    The only fall guy in Ireland is always the taxpayer, with Fianna Fail in government. Wait and see.!
    The small time speculator who bought a few properties to let will be the first to go bottoms up.
    The big developers will sit on their sites and empty apartments until the cows come home-or the banks go bust.
    Interesting dilemma.
    Mostly for the unfortunate shareholders of the major banks.

  30. B

    I agree that we can’t see people turfed out on the street but I am totally opposed to bailing out banks for reckless lending. We bailed AIB out in the early 80′s and they turned around and bit us in the ass for it.

    Once bitten twice shy. Let them go bust.

  31. The principal irish banks simply cannot be allowed to fail. Such a prospect would be an appaling scenario. The fact that a government bail-out would indirectly rescue their developer cronies is a double plus (for the government.) My guess is that it will not happen though, until things worsen, and public opinion is more favourable.
    The only alternative may be a foreign bank coming in and feeding on some tasty-if fleshless- morsels, in the course of time, when some clarity develops from the present appaling situation..

  32. Paul

    An apartment complex near me was repossessed over two years ago (when everyone was still in denial, and you were laughed at for suggesting there was a problem). I see that the security fencing has now been removed and they are up for rent, rather than up for sale. So someone must have stepped in and bought them up. I think with regards to banks and everything else, Fianna Fail should just let it be, let people step in and buy up the banks, construction, apts .. and the rest. I think it is known as creative destruction.

  33. B

    We had our own banks. They went NUTS with credit and got greedy. Why should we have to bail them out? Their problem not ours.

  34. Great article, yet again! It’s a sad state of affairs when you read not just your excellent commentary but all of the comments here – all of them concise, prescient and realistic in comparison to the ridiculous hyperbole that our government spit out at every available opportunity. Why can’t even a single one of the spineless government ministers actually acknowledge what is so obvious to everyone else; ie, that we have been living in a bubble for the last 5 years, the bubble has burst and our public finances are in dire straits. To put this into prespective, last year we had a suprlus of 3%, this year a deficit closer to 4%. So in the space of 12 months we have basically lost nearly 1 whole months worth of tax. Can you imagine any normal business being run in such a fashion? Of course not. But then again, very few of our politicians have actually ever worked in the private sector. Here’s my plan to get us moving again

    1) bring back fees for 3′rd level so we can create a real pool of highly educated and capable people.
    2) force banks to reveal their losses on a mark to market basis and not on one of their ‘models’- as AIB did recently.
    3) build a nuclear power plant / invest in renewable energy technologies – we should have energy indepenedence so we are not at the behest of every mad Arab.
    4) leaving the euro should be considered – inflate away our debts and get our exports moving
    5) passports for the diaspora – what have we got to lose?
    6) Privatise the HSE – can’t get any worse can it?
    7) de regulate the following : solicitors/barristers – should be one lawyer like it is in the states and not the system of double marginallisation we have at present – de regulate pubs and off licenses – should have a cafe culture like they do in the continent, de regulate pharmacies – why should we pay way over the odds for healthcare?
    8) maybe in terms of protecting consumers we should organise more aggressive boycotts of stores that are ripping punters off !

    just a few thoughts

    Peter K

  35. We also need more aggressive citizens-particularly those who have lost large sums on stocks that should have been the safest on the ISEC.
    If the Mafia families (the USA families-not Fianna Fail) were ripped off for billions in a pyramid/Ponzi style scam similiar to the Great Irish Property Windup, by bank directors and politicians- I imagine there would be a few contracts out by now, for the main culprits.!

  36. Stephen Kenny

    Why can’t the banks fail? Is it the retail depositors? the debtors?
    The retail depositors can be supported (up to, say €100,000, or whatever you chose), and the debts can be transferred to the national bank, for their duration. The banks positions (currencies, securities etc) can similarly be transferred to the national bank, and unwound at best.
    National responsibilities (government borrowing, for example) can be carried out by the national bank until whatever rises from the ashes is ready to take over. You can be quite sure that a new, and better, phoenix would arise, in one form or another. Banks are like death, inevitable.

    Sorry, I don’t see the problem. The banks have persuaded us that they are, on the one hand, tough, brilliant, market based companies, and on the other, the exact opposite. They’re neither, they’re just companies that borrow and lend, for a living.

  37. b

    National bank? There is NO WAY that AIB or some other pile of crap that calls itself a bank be nationalised. No way whatsoever. We, the taxpayer are not going to be forced to carry the can for their recklessness.

    We had a national bank remember? The CENTRAL bank. We got rid of it along with our economic controls with the Euro.

    If the banks fail so be it. It is not our fault and certainly not the responsiblity of the taxpayer to take the shitty end of the stick and bail them out.

    They wouldn’t bail us out so why should we extend the hand to them?

  38. Stephen Kenny

    I’m not suggesting that banks are bailed out, not at all.
    Some consideration might be given to people who have money in their accounts at those banks. Also, I presume that you would be in favour of ensuring that the people who owed those banks money, paid it back.
    So, transfer the assets (peoples accounts, and outstanding loans) of the failing banks to somewhere else, and let the banks i.e. their shareholders, fail.
    The argument in favour of bailing out the banks tend to imply that to let a bank fail would mean everyone’s accounts with that bank would be lost, and that mortgagees would get off scot free. It’s a flawed argument.

  39. The Swedish Bank Sveriges Riksbank which awards the Nobel Prize in Economic Sciences every December, also collapsed in 1668 due to over issuing bank notes with out collateral to cover them, so we are not looking at any thing new here with the current mess the Banking world has got it’s self into ,while we do have a new phrase in ‘the Global Credit Crunch’.
    Bankers by their very nature are self opinionated and greed for a profit is their very corner stone of existence.
    Certainly for a Country, State or region to function economically and commercially we need such institutions,for accounting purposes and our daily transactions for services we provide within our communities. What we don’t need but we are landed with is this obsession with gaining wealth. The last few years what has went on here is farcical, a false economy was created with the aid of our banking institutions and a governmental party transfixed and heavily tied into the construction developers pockets which created this dilemma, and because of the combined forces of our Government and media we are left today with outside of North America with the highest personal debt in Europe when you consider that seventy pre cent of our infrastructure was given to us by the European’s we should be ashamed , well at least our Government who have held power over this period should be, and now that this funding has dried up , we still don’t have a modern rail or road system and the cronies who are appartently running the country don’t know what to do so like the primary school children they are taking a long summer holiday but they won’t be going back in September to sit in porta cabins or over crowded damp rooms, so much for building a ‘knowledge economy’!
    The Construction federation has also in the last decade made a lot of their members wealthy and cash rich but they are more interested in buying up Bulgaria than reinvesting here , and why should they when you consider the cost of doing business in this country has went up so much in order to afford the badly built houses and apartments they threw up in such a hurry to meet the demand that was artificially created. What is really so special about our capital city that the value of a house went up 300 percent in little over a decade ?
    While I don’t want to be a total pessimist , unless some radical steps are taken , it is going to take a lot longer than eighteen months to sort this mess out. Unfortunately it will be us the average tax payer on the average wage who will pay for Galway race goers decade long party.
    So Mr Williams with December not too far away and now that you are refreshed after your overseas break , maybe you can sit down in Dalkey and devise a plan to give to our Mr Biffo , which could see you picking up a Nobel Christmas present ?

  40. As you say,the bulk of the enomous wealth that has been borrowed by housebuyers over the past decade has gone into the coffers of the big developers and exported overseas to create further fortunes in foreign property markets.The government has overseen this incredible Ponzi scheme. There are calls to let the banks fail as if they were some kind of an ugly troll type monster preying on the citizens, and deserved to be wiped out. One point that is missed here is that the banks are in reality a collection of citizens/shareholders who invested money in the belief that the directors would prudently manage their affairs, and generate reasonable profit.
    We have seen the results of self regulation in the legal profession; in the medical profession; retirement home industry; the stock market(insider dealing) and now in the banking industry.
    Then again,the state has created over 400 Quangos in recent years with grandiose titles such as The Environmental Protection Agency: The Telecoms Regulator;The Consumer Protection agency:The Taxi Regulator, and so on ad infinitum.
    The latter body´s main activity has been spending a fortune in newspaper and TV advertisements asking taxi customers to send in letters giving their viewpoint as to whether they believe that taxi fares should be increased (?) while overseeing the slow demise of the small number of remaining wheelchair accessible taxis from the streets of Dublin and elswhere.!
    Unbelievable. In reality these Quangos regulate jack sh*t. They are a massive waste of taxes. ! “Jobs for the boys” schemes. The main qualification for membership of these gravy trains such as The National Consumer Protection Agency(Celia Larkin) is a long association/friendship/cronyship with prominent politicians cronies of the government of the day.
    Frankly, David McWilliams will never receive a fat consultancy brief from the Mafiosi who are entrenched in power in the Republic of Ireland.
    If he were to cease his common sense articles on the Great hHusing Rip Off set up a PR agency in the style of Dr Goebells former propaganda ministry in the Third Reich, he would have a better hope of gainful employ by this government.

  41. Johnny Dunne

    ” It is crucial now that Ireland invests as much as possible in our productive capacity, brains, education, infrastructure and technology. By spending on these areas, we create the conditions for export-led growth. Only by exporting efficiently can we sustain the living standards….”.

    There is a lot of talk about property, banks, tax etc but where is our “game changing” policy initiative ?

    The whole economy is now going into reverse fast with no good news on the horizon — it was put well above – “So in the space of 12 months we have basically lost nearly 1 whole months worth of tax”.

    This week it was reported that our consumer spend was at €90 billion, compare this to the €13 billion Irish indigenous companies exported last year — we’ve borrowed & spent savings. Everyone now knows we have a big problem but none of the ‘public servant’s are coming out with the real impact & solutions ?

    As Denis O’Brien wrote in the Irish Times this week, we should have all our Ministers, Politicians, Top Civil Servants, Dept of Foreign Affairs and Diplomats out SELLING all over Europe and the world to set up ‘internationally trading companies’ here of all sizes. There is no point in the staying at home worrying about local issue such as fixing ‘pot holes’, if we don’t sort it out now we won’t have the cash / budget.

    We have people and infrastructure but not enough companies selling product and services. We have low tax to offer and an excess supply of commercial, office and residential property.

    Make it ‘easy’ with little admin, regulation and taxation, this will create employment and exports (then demand for houses). We have had the benefits from the big MNCs now we need to also get SME’s from all over the world set up in Ireland. We don’t have the capacity to do it from our own start-ups — EI back 60/70 per annum. Many start-ups have great potential but unfortunately they do not have enough revenue in the short term. We need to ‘import’ the companies to do our ‘exporting’ ie trade inIreland.

    Unfortunately, no political party is coming forward with any ‘solutions’ which suggest ramping up the amount of exports and value add to Ireland ! Where is the urgency & vision ? Would the EU allow ?

  42. Ed


    Our politicians are mainly ony teachers, solicitors and other dependant professions – they’re main interest is in consolidating the gains made by their fathers in 1916/21. The whole exercise was about isolation and getting their hands the cake – nothing has changed – they’re still inward looking and, to the determent of the country, they’re obliged to look after their supporters. These sons/daughters are next to useless, as they’ve had an easy run at life and are only good at milking the country – until we get rid of this nonsense that we owe these people and their supporters a living, we’re not going anywhere.

  43. B

    If we gave them all our money and a 30 year mortgage on our future incomes they cannot possibly come back for more.

    Let the banks go bust. Let the construction “industry” correct but artificially propping them up with even more money is a hiding to nothing and to be avoided.

    If you do the crime you have to be prepared to do the time.

    If the government do prop them up again all we can do is not vote for them again. If we vote them in again we are complicit again and deserve whatever nightmare we get.

  44. Singing the praises of the Finns and their investment in technology and education makes me think. I live in Finland, have done for eleven years now. Definitely different from the Drimnagh Dublin 12 I grew up in. Education I agree second to none, and the school food too. A far cry from Mourne road school, the half pint of milk, white slice pan with jam and sometimes some excuse for sliced meat in between.
    You paid for education in those days and it looks set to become that way again. (some would say it has never been any different)
    It’s all spuds to me; technology, from wood chips to micro chips. They (the Finns) just got lucky jumping on a growing concern. A bit like Bob Dylan being in the right place at the right time, for we all know science and technology are usually slow to develop any reward. Ireland could pour everything into education and technological development and have nothing to profit by for yonks. Finland had the land (five times bigger than Ireland with the same population) and trees. (By the way: their property still remained half of what it is in Dublin/Ireland; so much of it or?????)
    I think you’re giving the impression Finns suddenly switched/invested in education. Finland invested in its people after its independence, in fact education and achievement was applauded. They still celebrate the leaving cert (A levels) with the presentation of a white cap to those who pass and a national day of celebration where the cap is worn proudly. (I think they are the only ones in the world to do so)
    Socialism has been the back bone of Finland’s development. A lot of people don’t realize or recognize this. There are no children begging on the streets in Finland. You don’t have a differential rent system. (rent is the same for every one) There are no sprawling suburbs with 40/50/60% unemployment. I could go on. But really, Irish society is far form ………. You fill this in ………… being able to use a country like Finland to base its model on. You can’t develop a mentality in the short period of time Ireland has to get back on its feet.
    Ireland has been nothing but Europe’s show case. The show is over the promoters are pulling out. The wise guys (bankers, mortgage brokers, land dealers, boulders) who pulled the wool over your eyes are off to somewhere other greener pastures if they can find them.
    I would start like you say to invest in people, but I would start at home lest you invite a wiser wise guy who will again rip ye off.

  45. Malcolm McClure

    Maybe after instilling the 3 Rs, our approach to education should be changed. Instead of making youngsters regurgitate facts (that they can easily get off the internet) perhaps we should encourage them to understand that life is a game.
    Teach children to play poker for small stakes, chess for glory, scrabble and crosswords for the bookish types. Those who excel at poker would be encouraged to go into business, the good chess-players would be pointed towards public service and the crossword fiends would become dramatists, journalists etc.
    So leave chemistry, physics and maths to the dour Germans, languages to the cheesy Swiss, engineering to the earnest British.– and promote Ireland as ‘The Nation of FUN’.

  46. Garry

    Looking at todays Sunday Business Post and it strikes me how timely this article is and also how much spin will occur in the next few months… There are 2 articles illustrating exactly what David was saying

    1 “Solving the state’s housing dilemma”
    From the headline you might ask. What dilemma? Are we going to introduce a new program to help those sleeping rough or in hostels this winter? Nah, dont be stupid, its the housing market.

    2 “Government prepares boost for homebuyers”
    Reading the article, “Government officials have held discussions with some banks about the possibility of state guarantees for certain classes of loans, which they hope could restore liquidity to the market.” and “A number of informed sources confirmed that a housing package aimed at stabilising the market was being drawn up and discussed by officials and policymakers at the highest levels. They emphasised that it was part of a wider consideration of measures which could stimulate growth and restore competitiveness. ”

    I would ask those “officials and policymakers at the highest levels” …
    1) How this policy will restore competitiveness… by ensuring the cost of the biggest purchase an individual will ever make (their home) remains outrageously uncompetitive with respect to the cost of homes in countries competing for investment, jobs and exports, surely this plan does the exact opposite?
    2) What growth will this package stimulate?
    3) Surely a falling property market is enough of a boost for homebuyers? Prudent home buyers now can save for a deposit on a house in the sure and certain knowledge that prices will remain within reach, in fact will most likely become more affordable.. What else can our government do for them you might ask? Or is there another beneficiary for this program you’d rather not tell us about.
    5) Fast forward 20 years. How much will this program have cost and will it have been worth it. Will it be remembered as a worthwhile initiative?

  47. mishko

    I agree with you Paddy (and David) about “investing in people”. This requires long-term vision, starting with the very young. Start at home in Ireland, by all means, as you suggest, but learn from the good teaching practice of other countries. It is not impossible to import teachers from countries that have been more successful in certain fields. This has been done here in Korea in a big way (as it was earlier in Japan), with the purpose of raising the level of English.

    Rewrite the curriculum, with emphasis on creative thinking skills (which CAN be taught), on financial skills (Unit 1: Living Within Your Means) and on learning Mandarin (a bit more useful than Irish, just as French was when I was a kid 50 years ago!). My own bias would also be for including horticultural skills and golf coaching, two fields many of us are naturally good at.

    And surely, if one or two of our Ministers have experience of teaching, the introduction of a programme of teacher evaluation (as effected in the UK long ago, also being introduced in S.Korea now) is not beyond their grasp.

    With a more 21st century curriculum and an even better and more international teaching force, at least some of the groundwork will have been laid for improvements like those we have seen occurred in Finland or Denmark. All that’s needed is the will and creative accounting in the budget. And someone like DMcW in government?!

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