Anyone who doubted the severity of the property slump here only has to look at the shares of the Irish banks. Last night, they were all touching new lows.
For those still in denial, consider that all the major banks here have lost over 50pc of their value since May. The reason is very simple — a housing recession is upon us and the banks are the only liquid stocks that investors who want to be protected from the downturn can sell.
It is highly likely that some of the same developers, who are now caught with property that they can’t sell, are the very ones speculating against the banks that gave them the leverage to buy property in the first place. Selling the banks is a logical hedging mechanism.
So, in the boom, the developers borrowed from the banks, helping to drive bank shares upwards by actively buying stock; today, they might be selling bank shares in an effort to reduce their exposure to the Irish property market!
JP Morgan once said that “nothing so undermines your financial wisdom as the sight of your neighbour getting rich”. This certainly held during the boom. Now that we are at the early stages of a recession in the housing market, the expression of John Maynard Keynes, with respect to financial markets, is apt; to those suggesting that share prices had fallen far enough in a slump, the great economist opined, “these markets can remain irrational, longer than you can remain solvent”.
So, in the case of Ireland, the upswing was made more dramatic by the behaviour of banks who lent to every Tom, Dick and Harry. This was normally a transfer of risk on the banks’ balance sheets as, in many cases, they had financed the developer who built the development in the first place. The banks took the view that, in a downturn, it is better that their risk be spread across hundreds of first-time buyers, rather than one big-fist developer.
The government, which gets 28pc of the price of every new house, was quite happy to keep the bubble inflated. As late as September, those who suggested that Ireland’s property market was the scam that it is, were denounced as “unpatriotic” by the Taoiseach. Well, by the looks of things, we’re all unpatriotic now! Even his dauphin, Brian Cowen, was uttering treasonous words yesterday, suggesting that government revenues were faltering because of the slump in the property market, “which had to happen”.
Hold on a second minister, you did not expect this. The minister and all the other cheerleaders were not forecasting that six months ago! Back then, the script — repeated like a mantra by every estate agent, stock broker, banker and politician — was that the economy was in great shape, a little tinkering with stamp duty and everything would be fine. So, these vested interests were still luring the average young worker into the fraud of houses that cost 15 times the average salary but which have no resale value.
Rather than observing their democratic responsibility, which should put them on the side of the people, this government and, worse still, the Fianna Fail party, stayed firmly in the pockets of the big developers. Instead of warning the average Joe that things might not be so rosy, they continued to talk up the housing market, when it was clear to anyone with even the slightest grasp of Junior Cert economics that our miracle was nothing but a large overdraft.
In reality, the thread that spun the tangled web, which linked government revenues to house prices, bank share prices and negative equity, is five years of economic mismanagement.
This shouldn’t come as a surprise to any of our top politicians, as it was they who presided over an economy that became totally interlinked with the fortunes of the housing market. To say that the economic debate became hijacked by property developers and their political and financial concubines, would be an understatement.
Now, we are facing the exposure of subprime mortgage practices in Ireland, which Davy Stockbrokers, in a report early this year, suggested might grow from €600m, now, to €4bn by 2010. The report implied that 10pc of the total Irish mortgage market could be subprime in a few years. However, this won’t happen, as the subprime market is dead.
A few days ago, a board member of Central Bank privately suggested that Ireland did not have a subprime issue and went on to congratulate the Central Bank and its ECB colleagues for their speedy injection of funds into the European markets when this crisis broke, in August.
However, the problem with subprime is that it is only the thin end of the financial wedge. Subprime is only a name; the real problem is not the name, but the predatory lending we have seen in Ireland over the past few years.
In my book, a subprime lender is anyone who lent 100pc of the value of the asset, as well as a loan to cover the costs of fit-out, while varying the interest rate by using a sweetener in the first year. In addition, this lender extended the credit over a 30-year period, to a borrower who was being terrified daily by estate agents telling them to get in now, or else pay more next year. This is what was happening in Ireland. And, finally, we have the dominant government party that is financed by the very developers who are driving the whole scam in the first place.
This is what happened in Ireland. The minister’s crocodile tears for the lost boom are not believable. The slump in bank shares is simply the corporate equivalent of the pain being felt around the country as people realise that the era of easy cash is over. Now, the hard part begins.
The Government has options, but we need vision — much more than the semantics and budgetary whitterings we heard from the minister yesterday. In the words of his erstwhile cabinet colleague — it is now time to be radical or redundant.
There is a huge difference between a problem for the state and a problem for the FF party and her followers. You might pick up the reason for this by close listening to the Ulick McEvaddys recent interview with RTE. The hint, the thing that really gets to FF, is answered by him when he responds to the Q of the Iraqui army. While the money thing is just crap, any who matter has moved from this market, long ago. All that has been left is squidgy money. Off topic a bit, how are they getting on with the road… Read more »
C, Rabs,
You could try holding on to the little F’n Effers. Convince yourself that they are really little pets? Perhaps even name them? They may itch, but the pained expression of people trying not to scratch in public is becoming much more common lately! ;-)
Has anyone got any figures on what % of Irish mortages are 100%+ borrowed and what sort of distress levels could we be seeing as well as default rates there are now and may be in the future? I would imagine that they can’t be anywhere on the scale of the US Subprime ie lending to the so called NINJAs? Or do I assume too much? Would also be interested to see what % of such loans are from property investors or those folks who invested into a second or third investment property during “the boom”? Also, anyone know what… Read more »
The first time buyer was competing with the investor/speculator for his home in recent years, and 40% of all property purchased during the last decade ,we are told, was purchased speculatively. As the economy falters, thousands of foreign workers who rented these houses will leave.Speculators will likely flood the market with property when faced with a no rental income situation, and hope to retain some of the rapid appreciation value achieved in the boom (up to 100% in a recent 5 year period) Builders are wisely downing tools at present,and it may be some years before there is any worthwhile… Read more »
About the only certainty in the whole dismal situation, is that the Taoiseach will continue to serve as leader, and will be by our side throughout the looming recession,and for the full term of this government.
He has re-iterated that, time and time again. Thank God this man thrives on adversity. Better men would have jumped ship by now. He is truly “The Great Survivor”, as this u tube video indicates:
http://es.youtube.com/watch?v=AWmSq46Wmks
Might as well enjoy-as your shares and property assets plunge into the bottomless void..
Back in April 2007, fears of a property crash swept the Spanish stock market, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market. Spain’s biggest property group, Sacyr, fell 8.15%, while developers Colonial and Inmocaral plunged over 11%. In all Spain’s 10 largest publicly traded real estate stocks lost 1.7 billion euros ($2.3 billion) on concern that its eight-year rally in real estate may be over as interest rates rise and the government has confirmed that house prices are rising at the slowest rate since 1998. The concern also spread to Banco Sabadell and… Read more »
In Ireland there is more money tied up in residential property than in any other single physical asset. Accordingly, more vested interests dominate this market than any other market. The biggest vested interest of all is the current government. The proportion of the population who now own their own home are a very powerful political force. Any government in charge over a period when property prices collapse will not stand much chance at any subsequent election.
Quite simply, Fianna Fáil led us into this mess. Despite boatloads of cash, we still have massive deficits in transport, communications, infrastructure, health and more. The failure to control planning has allowed Irish society itself to dissolve into a nation without communities, and families scattered across the counties in the effort to find a half-decent home worth living in for the long-term. For all this, the nation signed up for ridiculous mortgages it can’t afford, while Fianna Fáil pretended to all and sundry that we earned, and not borrowed, the cash. The social and economic effects of this mess will,… Read more »
This might not be the point but I don’t think that the Fianna FáÃl government can be blamed entirely for the coming house price crash. Everywhere in the world has experienced a property asset bubble in the last few years. Sure there policies in place to encourage property owning (and speculation) – but the country also has high stamp duty levels and the government makes 28% of each new house. We also had a large demographic shift and immigration added to the mix. The government has been if anything a little naive about the current situation – and if their… Read more »
“Everywhere in the world has experienced a property asset bubble in the last few years.” I doubt that very much. As far as I know property prices in Japan and Germany have been flatlining for quite some time. Demographics can only explain so much. A ridiculous number of residential properties in this country are empty, which suggests there isn’t much in the way of demographic pressure on the rental market. In spite of having both the highest natural population increase and immigration in Europe there isn’t an actual shortage of accomodation in this country. P.J. O’Rourke once said that when… Read more »
We deserve a bl**dy revolution.!
there´s nothing naive about Fianna Fail.
The Sicilian Mafia could take lessons from them.
The housing bubble was caused by the government and it close friends homing in on the basic “nest instincts” of the human and exploited it for all it was worth. The public went along with it like a bunch of heard animals, but herd animals are always on the move and don’t build nests – so the great “ Irish Takeaway” has no parallels in nature except that of the government and its friends behaving as a pack leading and driving the heard into a trap where it could easily be savaged.
Now, the question is, will the species survive?
well said David, after that article i’m not supporint digoutday, http://www.digoutday.com
All I have to say is “Bertie Ahern is on the right path to become a dictator”
Glen Quinn said, on November 24th, 2007 at 4:45 pm All I have to say is “Bertie Ahern is on the right path to become a dictator” Yes,he has arrived there with the help of the Green party and an assortment of hisown “gene pool” comrades The Labour party would have filled the vacuum, if they were unavailible. Hungers Mother ,one and all. France recently elected a “right wing” president, Nicolas Sarkozy who is currently trying to curb the powerful public sector unions there. Ireland elected a unique and indefineable government, the Taoiseach of which has managed to be a… Read more »
I’m going to bore people with this, but I see inflation as more of a problem than house price crashes – just consider how many people you know are waiting to ‘pick up a bargain’ when the prices crash. You’ve got a whole cohort of buy-to-let people just waiting for the same thing. So, prices fall 20%, or 30%, is that really enough? We’ve had 100s of % rises during the past 10 years. Prices would have to fall something like 75% or more to get back to trend. That would shatter the economy. I just can’t see it, too… Read more »
Inflation depends on the euro – if it stays strong, then the EZ should have a better time of it than, say, the US or even UK. It’s probably best to take a hit from currency strength rather than inflate the problem away. But then we’ve also got to look out for deflation because of a credit contraction. And do people sitting on the sidelines waiting to pick up residential property bargains really have sackloads of cash? Too many people tot up their assets without admitting their liabilities. And expectations of continued easy credit from the banks should be in… Read more »
Stephen, Politicians are not lazy – they’re simply incompetent. Look at the motley crew and ask what have anyone of them done in their lives other than play politics – it’s a sport. They’re all latching on to machiavellian techniques, but most people can see through that at this stage in our development. One minute they’re the big “kick ass” CEO commanding a massive salary and the next, they’re only a sort of PR front for what is really going in their departments and consequently they don’t have to take responsibility. It’s a great deal – don’t take it seriously… Read more »
In case anybody missed today´s Sunday Indo article which pretty well defines the crisis and the culprits.
http://www.independent.ie/opinion/analysis/berties-chief-sins-are-now-cast-in-bricks-and-mortar-1229923.html
I hope the road to Sligo does not go thru Tara or I’ve been going the wrong way for years!
Get use to whats happening in France because its going to happen in Ireland. Think about it, most of the workforce are employed by the civil service, total up there out-rages salaries and pensions and try to balance the books. The simple answer is that Ireland can’t afford it and there will have to be cuts right across the civil service and a re-negotian of there pensions. Also our exports have been in decline for years, we have a very very small manufacturing industry which is getting smaller by the day and our agricultural industry is gone eg sugar Tough… Read more »
I doubt the transport will affect us only.
Look at the riots that have broken out again after a two yer absence, that’s what exactly will happen here in the next few years!
I doubt we are mature enough to deal with such problems or prepared!
“worse still, the Fianna Fail party, stayed firmly in the pockets of the big developers.” We’ve had 10 years of Moriarty and Mahon to tell us this, yet nobody has really listened. Part of the danger here is the kind of recession we’ll have and the fact that there is no longer an escape valve of other countries to migrate too, since they’re already in recession. I predict a recession that will make the 1980s look like a Children’s tea party in comparison. This government will almost certainly collapse, and sadly, leave the mess to the next coalition who will… Read more »