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.
An immoble population will be the last nail in the coffin of competetivness. We may as well just close the door and turn off the lights.
Garry, another example of the ‘spin’ was in yesterdays Sunday Business Post – an article by Professor Frank Gannon, director general of Science Foundation Ireland to a piece the previous weak which basically said the Government spend on SFI and ‘applied’ R&D is a waste of money and has little commercial value – Gannon’s rebuttal…. “SFI has already committed more than €1 billion towards this goal and, with an annual budget of approximately €200 million for the next six years”….”If SFI does its job correctly, then the returns will be diverse and handsome. The quantity and quality of Irish scientific publication will move up the international league tables. Irish scientists will be invited to speak at conferences worldwide, presenting high-quality research.” Is this the best measure SFI can give after so much investment ?? As far as I know ‘valuable’ people usually get paid for speaking at conferences !
To put this spend in perspective Janssen Pharmaceutical’s the largest pharma company in Ireland has a payroll bill of approx the same €200 million with 7k employees generating a revenue of €8 billion!
Coincidently, there was a ‘notice’ beside this article of the unfortunate voluntary ‘liquidation’ of a software company. This award winning company with an investment of a couple of million by the founders and VCs with ‘real’ customers such as Asda, Dixons and some of the leading Universities in the country, They have not survived as I assume there was no follow on funding available. Instead of bailing out the housing market the government should be helping productive export businesses survive and prosper…
The sooner we start addressing the ‘real’ issues the better, investing in our future employers/companies!
This video says it all..
http://www.youtube.com/watch?v=sLGygoQQnzs
Well written summary of where Ireland is at this juncture. I suspect DmcW bit his lip a little & resisted the urge to explicitly articulate the cretinous incompetence, shortsightedness and avarice of recent governments. Then again you get the governments you deserve. We are still in many ways a peasant nation who think locally, have a general poverty of understanding to what the term “International best practice” is and we vote accordingly. It’s not as if we dont have access to or visibility of societies that actually work: Scandanavia-Health, Education, Transport, Equality etc and attempt to learn from them accordingly. It’s more that as a nation we couldn’t be arsed in developing our political conciousness – when was the last time you proffered a view at work/ party/ pub about the state of modern Irish society and been met with a vacuous stare? This “couldnt be arsed” attitude facilitates the vacuum in which the anerobic lifeforms that have occupied successive government ministerial portfolios thrive in. Ireland for many (but not for all) is a better place than it was a generation ago but could have been so much better had we had good leadership over the past 15 years. By Jaysus we are slow learners……
KMD – you hit the nail on the head. Most people just could not be arsed and are just too lazy to think differently.
As long as I remember Finna Fåil has been synonymous with the building boom.
We know what the land (The Field) means to a man.
We certainly do.
When the money comes in from foreign investment the Gombeen men come out. The first thing they do is get involved with property because there’s little or no tax. You can make a fortune is a short while. That’s exactly how (I think David mentioned it recently: those in their fifties) most have made a killing over the last ten years in a small or big; through property.
The more property/income you have, the more tax you should pay. There’s no way to deny this anymore. Making more and more millionaires creates social decay by not facilitating the proper investment in education and science.
We should cut out (American/cultural idea of get rich quick buy now pay later) this Gombeenism and get back to the reality of cost.
Time to bloody well grow up.
“But who will deliver us from the body of this death?”
There is no opposition.
Fianna Fail pretend to govern-Fine gael pretend to oppose.
Two sides of the same coin.
The joke is on you good citizens.!
“when was the last time you proffered a view at work/ party/ pub about the state of modern Irish society and been met with a vacuous stare? This “couldnt be arsed” attitude facilitates the vacuum in which the anerobic lifeforms that have occupied successive government ministerial portfolios thrive in.”
This is so true, and not only do you get blank stares, someone usually answers you with the classic Irish response “well if you don’t like it, then leave”.
Shocked and stunned I was, shocked and stunned I tells ya.
I was reading the write in financial advice column of The Sunday Business Post from last Sunday.
From memory, the letter was as follows: we have a combined income of 80K and have been approved for a mortgage of 540K. We plan to go ahead and buy but ..
Stop right there. Ehh you plan to borrow nearly 7 times your salary when even the developers themselves are admitting there is a property bubble.
To me, its crazy both that someone is prepared to take on this debt at this stage in the cycle and that there is a financial institution prepared to lend.
Anyone who has a copy of the paper still lying around from the weekend might like to put up the exact figures.
@Paul. The notion that if you don’t like it you should leave and somehow this is connected to patriotism is a line I have been fed many times. I have been accused of being a West Brit, unpatrioitic, anti Irish, begrudging and many other things because I have never bought into the Irish dream and bought a house.
The classic Irish response is “well if you don’t like it, then leave”. My response has always been F you I am staying. I was born here and my family is here. This patrioitic nonsense is perpetuated by the gombeen party who jumped on the nationalist bandwagon and claimed it for themselves.
Buying a house in Ireland during the monumental boom made no sense unless you had some other eejit to offload it to at a higher price than you just paid for it. The economics made no sense. I don’t know where next weeks money is coming from never mind what I will be able to afford in 2043 and 2048 depending if i got a 35 or 40 year mortgage. What price is oil going to be then? What happens to the houses left vacant by parents passing on? What happens to the houses “appreciating” in value that are empty now that have been bought by speculators. What happens if Ireland gets booted out of the EU and international factors push unemploment up past 10-15%?
There are too many unknowns to take the risk from the bank. The market is still too high. If I am unpatriotic and “if I don’t like it I can just leave” is the attitude I might just do that. I don’t have negative equity to worry about and at least I CAN leave not like those nailed to their oh-so-expensive parquet floors.
When Soldiers of Destiny fall out:
The trial of a man charged with mugging publican Charlie Chawke during an armed robbery was dramatically halted after he changed his plea to guilty on all counts.
The accused, also known as “The Dunner” is a high profile “Soldier” member of the largest mafia type organization in Ireland, the “Soldiers of Destiny” .They have affiliations with other criminal outfits such as “The Brotherhood”; “Cosa Nostra”;and “Fianna Fail”.This heretofore elusive mastermind,who is prominent in high society and rugby circles, was on trial on charges arising out of the robbery and shooting at Chawke’s rented pub, in The Jury’s Hotel.
The prosecution case collapsed when it was heard that Mr Chawke did not have a leg to stand on.
The Judge told Dunne that he had taken “a sensible attitude in light of the evidence that was emerging”
Pleas of “not guilty” had initially been entered on the Dunner’s behalf to all the charges
In opening the case for the prosecution, it was indicated that Dunne’s was a “well planned and organised operation.” which had gone dramatically wrong.
Mr Chawke told the court he was getting into his silver Mercedes outside the pub with a bag containing cash and cheques when he noticed, in the driver’s mirror, the man afterwards identified by several witnesses as “The Dunner”, running from a yellow Rolls Ryce.
He opened the driver’s door of Mr Chawke’s car with the gun pointing downwards and said; “Give me the f**king money.”
Mr Chawke said he saw an opportunity and “dived” for the gun but missed and fell to the ground. The man(Mr Dunne) said: “You are a f**king smart ass” before he took aim from a distance of 12 inches and “blew my remaining knee away.”
(Mr Chawke lost his first knee defending a bag of cash during a previous attempted heist)
He was taken to hospital where his remaining leg was amputated five days later.
Mr Chawke denied during cross-examination that he had “as a businessman” sought to use the situation to take advantage of an ‘ODC’ — an ordinary decent criminal (Mr Dunne).
It was then acknowledged that “The Dunner”‘s only “previous”, was for ripping of house buyers, in conjunction with the “Soldiers of Destiny” brotherhood.
The judge gave “The Dunner” a suspended sentence when ten prominent bankers admitted to placing “impossible pressure and conditions” bordering on blackmail, as Mr Dunne, had failed to make interest payments on previous bank loans totalling some 800 million Euros.
Three prominent psychiatrists testified that the balance of Mr Dunne’s mind was clearly disturbed when he carried out this drastic plot which at most would have netted him a few hundred thousand Euros, if successful.
Mr Dunne expects to be able to clear all his debts if he gets planning permission for a 40 storey tower black from Dublin City Council in Dublin 4. Fianna Fail councillors have indicated that will then rent all the apartments from him for social and affordable housing, which is likely to stave off bankruptcy. Local residents are known to be furious at this turn of events as mr Dunne promised that tenants would be vetted and only
serious high rollers and millionaires would be admitted to the exclusive tower.
NB.This is a fictitious work and any coincidence with real names, places or incidents is unintentional and purely coincidental
I went to a major Irish lending institution yesterday to apply for a mortgage. I am a married man with one creche attending child. Our combined basic annual income is about 70,000 euro for this year. This will probably be increased because of bonus/commision etc, but not to much more than say 75,000 euro for the year. We sold our house in Dublin last May and made some money on it so our mortgage requirements are not too astronomical, however, for curiousty, I inquired with the lender what would be the maximum amount they could lend (I told them we had a 20,000 deposit).
What with all the talk of credit crunch, job losses, combined with falling house prices I expected at the very the least that that the lender would be quite cautious in the amount they would lend – my mistake. The lender said they could give us a 322,000 mortgage!!!, at 2150 per month repayments for 25 years!!!
To say I was shocked was an understatement, in fact I was disgusted. I asked the lender how they could justify lending such a large amount considering I had told them we also had to pay for childcare (730 a month)? She justified it with some fancy footwork on figures and percentages (she basically used one of those mortgage calculators you can try anywhere).
In light of the current economic circumstances, particularly one year into the ‘credit crunch’, can anyone figure out what is going on here? If lenders are still able to thrash around so much money (4.5 times earnings) then surely any house price correction is still a long way off? At best we can expect house prices to fall gradually but not dramatically and not near the 30%-40% levels being muted in some circles.
Skin
I wonder how this institution has been re-financed.?
All their(banks, building societies) shares are worthless, they have no borrowing power, most of their cash is tied up between bad investments, bad developer loans, and house mortgages.
Perhaps the fact that you have a very secure job is relevent,(civil servant etc.?). I would imagine they are only betting on sure things.
I doubt that every other applicant was as lucky.
No doubt the fact that I am a civil servant does help, but my wife is not. She works in tourism which is surely one of the most vunerable industries at the present time. If she lost her job we would be down to 39,000 a year. Even if that does not happen, between the mortgage, childcare, bills, groceries, etc…there would not be too much left of our wages to ‘live a life’. I think I would be driving around in my 8 yr old car for at least another 8 yrs.
The mortgage they offered was nothing short of a blood sucking exercise, how is this still continuing???
I can’t explain.As you indicate it seems reckless-and incredible, that they (the banks) are still trying to prop up their biggest bad debtors(the big developers) in a downward spiraling market.
it is kind of understandable,for if they can save the developers they can save themselves!!
but I still would like to know where they will get the money for this exercise.
Is there something going on between Fianna Fail ((the speculator/developers best friend) and the banks that we don’t yet know about..?
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