April 7, 2014
The frenzy has started again. Six years after a property boom practically destroyed our economy, we are at the same nonsense again. When are we ever going to learn that buying and selling over-priced houses to each other is not going to make us rich, but will make us poor?
At the moment, there is no credit in the system and no leverage, but this won’t last. Credit will find its way back into the Irish property market in time and then we will, yet again, take our seats in the rollercoaster, with predictable results.
All week, I have been subjected to relentless propaganda by the usual coterie of property pornographers suggesting that the frenzy is normal. It is not. No other European country destroys itself with such regularity, bar the British – and even they don’t do it like we do.
Today’s mania has been fuelled by two myths. The first is that there are loads of young people looking to buy homes in Dublin now. The second is that the young population is growing.
We are told there is a massive demographic bulge emerging of young people, particularly in Dublin, who needs thousands of new houses and apartments. This contention is taken as gospel and repeated by newsreaders and producers of radio shows and in no time people are queuing up to buy houses – this time with Mummy’s and Daddy’s money.
Well, can I tell you something?
The population of the crucial demographic between 19-34 actually fell in the last census. Not only is the population not rising, it is falling in the capital. Look at chart one. This shows you the change in the population in Dublin between 2006 and 2011 of the critical age cohort 19-34. In 2006, it was 521,000 and more importantly it had been rising very rapidly. These were the Pope’s Children cohort, a reflection of the baby boom of the late 1970s and early 1980s.
Now look at the figure for 2011. The population in the city of 19-34 year olds has actually fallen by 5,000, not by much, but it has fallen. Where have they gone? Many have emigrated and also there was a dramatic slowing of the baby boom by the later 1980s – itself, a function of the 1980s emigration surge in people in their 20s.
So myth number one is not true. The population of ”twentysomethings in Dublin is not growing, but it is actually falling or at best it is static.
The second myth is a more general yarn, which contends that Ireland has a massively young population coming up behind us that will need lots of houses and apartments in the next few years when they move out of home.
This is also not true. Have a look at chart two. It shows you the Irish population pyramid and it reveals what anyone who has been looking at birth rates could have told you. There is a dramatic fall-off in the population of teenagers and early twentysomethings in Ireland.
Look at the pyramid. You see the population bulge in 2011 was in the 30 to 34 age group. These people are now heading towards 35 now on average. Behind them, the population falls off quite sharply. So, for example, there were 420,000 people aged between 30-34 in 2011, but only 300,000 odd between the ages of 15 and 19. This is a difference of 120,000 and this is a substantial figure in the context of the housing myths.
The reason it is substantial is because these people who were between 15 and 19 three years ago are not between 18 and 22. This is the time the more adventurous people begin to move out. In time most, but not all, of them do. A few years later and they will begin living with their girlfriends or boyfriends and they will begin to nest.
Nesting drives the economy because people tend to buy stuff they had when they lived at home. So rather than one kettle there will be two, and two sofas and beds and fridges. The parents keep their room, with the bed made, but they have moved out and are buying stuff for themselves. This ”nesting is what drives consumption of ”big-ticket items, queues at the check out at Ikea and retail sales all over the developed world. It is also what crucially drives house buying.
So the demographics are telling us that we will have as many as 120,000 fewer people moving out of home and looking for a place to live in the next few years than we had in the first years of the century. This is a huge issue for a housing market whose pornographers are painting a picture of hundreds of thousands of new twentysomethings hanging out in town, looking for place to live and party.
The truth is that there will be far fewer of these types of Irish people out there then there were ten years ago. So unless we are going to see a policy of forced repatriation of over 100,000 people aged 20 to 25, where is the demand for housing going to come from?
This leads me to what is happening now because the price rises in Dublin and other urban centres are real. Indeed, despite the analysis of demographics, I think house prices will continue to rise because what is happening this is a form of savings or pension fund provisions for rich middle-aged people.
The cash buyer is the buy-to-let player of a few years, except he is doing the buying without a mortgage. He is taking his wealth out of the banks because the banks are yielding nothing on his savings and he is buying a house, playing the capital appreciation game, paid for by the renter who is priced out of the market by the guy who ends up being his landlord.
On Thursday, the ECB softened up the ground for zero interest rates in Europe. This will drive more money out of deposits. This could ironically cause mortgage rates to rise (not fall) in Ireland as the still bust banks try to make money on lending.
This process will drive an even bigger financial wedge between the first-time buyer and the old cash buyer, exacerbating the sense of a housing crisis, when there needn’t be a crisis at all.
Ultimately, in an environment of zero eurozone rates, new credit will come in as it always does and we will be off again into bubble territory. Except this time we won’t even have the demographics to support it.
We’ve been here before. We know how this story ends.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com