This week the influential magazine the Economist suggested that Dublin’s house prices are 25 per cent overvalued relative to long-term income. The Economist was one of the early sirens last time out, warning loudly about the Irish property market in 2003, so it has good form.
More worryingly, in the list of 22 cities, although Dublin was not the most overvalued capital city, it is the one that has experienced most rapid house price growth since 2012.
In the past seven years Dublin prices have increased 72.9 per cent, compared with 63 per cent for Berlin, 54 per cent for Sydney, 56 per cent for Auckland and 60 per cent for Vancouver. Although cities such as London and Paris are significantly overvalued, the British capital has seen falls in the past year, while Paris has always been expensive and has seen prices rise only 6 per cent in the whole of the past seven years.
The reason Dublin’s rapid recent house price rise has not led to greater overvaluation is because prices fell so significantly in the bust. The question now is, with these sorts of dynamics, is another crash on the cards?
A good rule of thumb when talking about the future is the past. And, given that I was one of those warning in the past about the crash, it’s reasonable to explore the crash possibility this time.
But there is also one other general observation or caveat: being right once doesn’t imply being right all the time, or even the next time.
When thinking about the future and markets, it is essential to have a framework in your head as to how you think the modern, leveraged, inter-related economy works.
A good framework, which I have used for years and that proved effective in analysing the Celtic Tiger property market, was the Minsky or Kindleberger framework. These were two American economists who believed that once you introduce credit and herd behaviour, most house price cycles follow similar boom-to-bust patterns.
They cited a seven-stage cycle. Stage one is displacement. Stage two is take-off. Stage three is gearing. Stage four is euphoria. Stage five is bubble. Stage six is distress, and stage seven is panic, followed by bust. And then we start again.
So stage one, called displacement, is when something real changes in the economy. This, in the context of our current housing cycle, was the crash itself when prices fall dramatically, providing an opportunity for someone to pick up houses cheaply. This leads to take-off when prices start to rise from the trough, and those lucky enough to pick up bargains see their balance sheets improve dramatically.
The next stage is gearing, where the banks get involved and start extending credit. This pushes prices yet higher, leading to euphoria, where people get giddy and trade stories of great fortunes made and great possibilities all around. Success itself breeds a healthy disregard for the possibility of failure. And off we go to towards the bubble.
At the top of the market some players sell out, taking their cash off the table, driven by the relentless logic that no one ever lost money by selling too early. This causes distress in the herd as they see others selling, then panic, leading to the final meltdown. At this stage lots of money is lost and out of the rubble we start again.
The key fuel that drives the market from one stage to the next sucks people in and makes the entire system extremely fragile is credit.
Unlike last time, up to now at least, credit has been largely absent from the latest Dublin house price jamboree. This doesn’t mean a crash is not possible, but it means it is less likely for now.
Let’s look at the details of debt in Ireland right now. Total household debt stood at €140.5 billion in late 2017 and has been falling more or less continuously from a peak of €204.2 billion in the third quarter of 2008. This is a total decline of more than 30 per cent. Household debt had fallen to €29,307 per capita at the end of 2017 from €45,536 in 2008.
Indebted
Looking at the years leading up to the crash, household debt averaged €127.2 billion (€30,765 per capita) in 2005, €159.4 billion (€37,657) in 2006 and €185.2 billion (€42,319) in 2007.
Irish households remain among the most indebted in Europe, but debt as a proportion of disposable income has fallen to its lowest level since 2004. Irish household debt to disposable income fell 10.6 per cent over the course of 2017 alone, the largest decline among Europe’s highly indebted countries.
Total credit extended to Irish households for house purchases edged up slightly to €74.9 billion in the first quarter of this year, but remains well below the peak of €125.1 billion in early 2008. This is also comfortably below the average levels of debt seen in the years leading up to the crash – €85.8 billion in 2005, €106.3 billion in 2006 and €118.6 billion in 2007.
So it’s clear that the “gearing” phase identified by Minsky and Kindleberger is not present in this cycle – yet. This means that this house price cycle is very different from the last one. But it doesn’t mean a local crash can’t happen. You might remember the dot.com crash, which happened without any credit.
People invested real cash between 1998 and 2002, and when the mania evaporated that money was lost. However, because there was no leverage, there was a modest impact on the general economy.
The one area where there is leverage, but foreign leverage, is the Dublin commercial property market. As this has become more and more the property of leveraged international funds, any serious slump in international financial markets could prompt a “Minsky moment”. This is when good assets have to be sold to come up with cash to pay for bad assets.
Interestingly, this could be good for Ireland, as we would get much lower commercial property prices, without a hit to our national balance sheet.
With markets at all-time highs, interest rates on their way up and emerging markets in serious trouble, that’s one worth thinking about in the near future – rather than an imminent, locally generated crash in Dublin’s residential market.
Hi, The article is incomplete as far as I can see and those guys whose matrix you use are also missing something; your article assumed that price is set by access to gearing with zippo reference to demand and more importantly supply. I think we only built 16k units last year. At the end if the boom I think it was around 80k PA. Here is my two pence worth reading between the lines. Since the determining factor in price is gearing with 16k units built last year indicating a poor supply side response, then the bubble thus time is… Read more »
At the end of the day, property prices are related to disposable incomes and to interest rates because no matter how much leverage and vulture funding goes on, no one (apart from moron Sean Dunne who bought a house for €58m to sell it for €14m) buys multiple expensive properties for them to stand idle rather than to generate income. Now, the last time we had a property bubble (early 2000s-07), our GDP was growing but incomes were growing even faster (excessive credit economy), and so was the cost of living. This time, property/rent prices have been growing as fast… Read more »
Hi just a question,when interest rates rise in the Euro zone and government bond rates increase causing a sovereign debt default,would smart money move from bonds to private assets including property ( commercial and private) causing prices to rise or would they just park money in the Fed as the dollar would be the last safe haven, just asking
One of the great errors of predicting is acknowledgment of the factors.
Politicians are well capable of interference with property by regulation and halting supply.
The UK as a non-Euro English speaker with limited immigration may increase / decrease the attractiveness of Ireland.
Taxation variables incentivise supply / demand.
I wouldn’t have confidence that any of these factors would be neutral.
Never underestimate Political Gobshitism in the history of Ireland.
I enjoyed this article. I am never satisfied just to allow the retiring mind of the writer retire blissfully and to support a narrow narrative . Economist can never rely absolutely on the interpretation of evidence gathered and what the real past represents and they never want to forecast the future because that takes them away from what they claim to be professionally: namely ‘economist’. The following have been ignored in this article : Bank debts became reduced because they was written off and not paid off from taxable income. This article infers otherwise.; and Irish Banks ( BOI ,… Read more »
The 7-stage M-K cycle is comparable to Christopher Booker’s 5-stage ‘fantasy cycle’, which he used in his precocious 1969 book about the extraordinary rise of the Swinging Sixties in England, The Neophiliacs. He identified two full cycles between 1956 (when the fantasy was ‘finding focus’) and 1968 (or thereabouts). The euphoria and irrationality of housing bubbles, if the last one is anything to go on, is the very same insanity that we see in moral witch hunts such as the Great Irish Catholic Church Witch Hunt. From memory there are: finding focus, dream stage, frustration stage, nightmare stage and death… Read more »
“”The key fuel that drives the market from one stage to the next sucks people in and makes the entire system extremely fragile is credit. Unlike last time, up to now at least, credit has been largely absent from the latest Dublin house price jamboree.”” Are you implying that people mostly paid cash for housing. i do not believe that so call “Bullshit” on that assertion. so does the Irish Times, although this article is a year old.. https://www.irishtimes.com/business/economy/first-time-buyers-borrowed-close-to-80-of-property-value-last-year-1.3096198 https://www.irishtimes.com/business/economy/the-crash-10-years-on-from-wreckage-to-recovery-of-sorts-in-six-charts-1.3346380 It would appear that Mortgage interest rates are higher in Ireland than neighbouring countries which should restrain the amount able… Read more »
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Over the past 12 months sixty thousand foreigners moved to Ireland, twice as much as Irish immigration. So long as this continues it is guaranteed to end in tears just like the surge in immigration post 2004 saw prices double in four years, then crash. Why does everyone support limitless immigration which has led to half a million adults living with their parents? Mean house prices in Birmingham and Manchester are €180k. Irish employers advertise unpaid jobs and are never prosecuted.Min wage? Average house prices in Dublin that are ten times mean earnings are unsustainable. A home bought for 50k… Read more »
@SLICKMICK
SURE ISNT “EVERYTHING” ABOUT MAKING MORE PROFITS?
-> INCREASING GDP !?
-> WHAT DO YOU THINK DAVID?
=> BUT EVERYTHING HAS A PRICE!
.
.
-> TOO MUCH FOCUS ON THE BOTTOM LINE?
=> “SURE WE’VE LOST THE COUNTRY ALREADY LADS”
https://www.youtube.com/watch?v=8AbqOyCBgIw
[…] Dublin’s housing market not yet ripe for a crash (DavidMCWilliams.ie) […]
https://www.rt.com/business/437595-post-us-dollar-world/
”China’s actual gold reserves mighty enough to kill the US dollar – RT’s Keiser Report”
IT article “A bogus we-want-our-country-back narrative has taken hold in Sweden” Talk about deluded. Does the Blessed Leo V realise he has backed the wrong equine yet? Does he know who and what’s around the corner?
Around the corner or around the bend? “”Conclusion The prospects for fiat currencies and welfare states are not good, but it is a mistake to think homo economicus will sink with them. The views of the super-bears appear to be fundamentally parochial, particularly among the preppers in America. Instead of society’s destruction, we face a period of seismic change, notably the rise of Asia as the centre for global economic power. Asia’s two major currencies, the yuan and the rouble, will not survive in their current form. They will have to be backed by gold, but fortunately for the world… Read more »
https://www.zerohedge.com/news/2018-09-04/global-financial-system-unraveling-and-no-us-not-immune “”As the chart below illustrates, a great many currencies around the world are in complete meltdown. This is not normal. Nations that over-borrow, over-spend and print too much of their currency to generate an illusion of solvency eventually experience a currency crisis as investors and traders lose faith in the currency as a store of value, i.e. the faith that it will have the same (or more) purchasing power in a month that it has today. Here’s the key takeaway: a currency crisis is a symptom of a deeper disease–it is not the illness. The same is true of… Read more »
Imagine what paper money or a digital wallet, found, in an urn, 1500 years from now, would be worth?
https://www.dailymail.co.uk/news/article-6148791/In-mint-condition-Huge-cache-pristine-5th-century-gold-coins-found.html
Manipulated statistics make less employment into more, Labour participation rate as up rather than down, black is white, good is bad, wrong as right.
“”The Employment Report Has Become Orwellian In The Extreme””
“Today’s job numbers might be the biggest disaster I’ve ever seen reported. This Fall could get real ugly real fast. The deterioration of the participation rate is so big it makes me suspicious of earlier numbers.” – John Titus, producer of Best Evidence videos.
http://investmentresearchdynamics.com/the-employment-report-has-become-orwellian-in-the-extreme/
There are lies, dam lies and statistics….. and then there is MSM
“”In a Crisis, Sometimes You Don’t Tell the Whole Story””
By John Authers
Financial Times, London
Friday, September 7, 2018
https://www.ft.com/content/1fcb4d60-b1df-11e8-99ca- 68cf89602132
‘Of course anyone who suggests that there might be institutions called central banks and an association of central banks called something like the Bank for International Settlements risks being derided as a “conspiracy theorist.” But then government operating in secret is the very definition of “conspiracy,” if language itself is to retain any meaning.”
http://www.gata.org/node/18484
https://www.independent.ie/irish-news/cramped-conditions-holes-mould-and-overflowing-sewage-and-the-rent-is-1400-a-month-37286950.html
Just been watching a lecture by Mark Thomas of Reaction Engines – Skylon space plane and Sabre engine. After a series of technical questions some pillock asked him what about “diversity” within the company. I have never seen anyone so absolutely nonplussed – engineers don’t think that way – they hire the best they can irrespective of all that rubbish – absolutely amazing.
FFS!
https://www.rte.ie/news/2018/0911/993113-donald-trump-ireland-visit/
Speaks volumes about Ireland’s geopolitical significance (reassurance: Ireland is in the centre of the universe and the Red Dwarf is in the centre of that centre).
EU LINK & UPLOAD TAX
https://www.theverge.com/2018/9/12/17849868/eu-internet-copyright-reform-article-11-13-approved
No Irish MEPs voted against against triggering Article 7 against Hungary to punish them for their anti fake-refugees stand, including the allegedly Eurosceptic and anti-migrant Luke “Minx” FLANAGAN – who also voted in favour:
https://www.votewatch.eu/en/term8-the-situation-in-hungary-motion-for-resolution-vote-text-as-a-whole.html#/##vote-tabs-list-1
http://www.plata.com.mx/enUS/More/358?idioma=2
Interesting observations on the concept of money and the changes in perception of the value of money over the last 100 years.
This contributor argues that all the tales of not only Dublin’s commuter belt but even the Kingdom caving in to the housing crisis are only a myth:
https://twitter.com/RositaBoland/status/720851744960290816
A fascinating map showing the use of grammatical cases and genders in Europe:
https://twitter.com/simongerman600/status/1040276474090213377
Taking back control of the banking system from the central bankers will be one way of lowering costs and so easing the international housing problem. https://www.truthdig.com/articles/central-banks-have-gone-rogue-putting-us-all-at-risk/ “”[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex… Read more »
One rule for the elites and another for the rest of us. Real estate beats cash. Fitts goes on to say, “The real push are for real assets: real assets reflected in a stock, or real assets reflected by real estate or precious metals.” There is good reason people are going to real assets. The U.S. government is “missing” $21 trillion between the DOD and HUD. This fact was uncovered by Fitts and economist Dr. Mark Skidmore last year. What was the government’s answer to this gigantic accounting fraud that is the size of the federal deficit? Give the government’s… Read more »
http://www.goldtelegraph.com/the-committee-to-destroy-the-world-the-federal-reserve/ The Committee to Destroy The World: The Federal Reserve POSTED ON SEPTEMBER 16, 2018 BY VIRGINIA FIDLER The Gold Telegraph The general belief among average citizens is that the purpose of central banks is to help the economy by fighting inflation and mitigating financial crisis. It’s a fairy tale that politicians like to encourage. If there were any truth to it, however, where was the Federal Reserve during the crisis of 2007? Rather than helping, it was widening the crisis with its easy money policies. While central banks are not a government entity, their primary purpose is to create… Read more »
http://www.shotguneconomics.com/2018/09/the-global-financial-reset-has-already.html “””All of a sudden, the country which issues the US dollar starts making steps which are shattering trust in this reserve currency. More and more countries, not only in the East but also in Europe, start mulling ways to minimize their dependence on the US dollar,” Peskov told Rossiya TV channel. “They suddenly realize: A. it is possible, B. it should be done, and C. save yourself if you can, it should be done as soon as possible.” Peskov noted that it is not easy to replace the dollar- dominated system, however, “the fact that the trend of searching… Read more »
Your article helped me a lot, is there any more related content? Thanks! https://accounts.binance.com/ph/register-person?ref=V2H9AFPY