Many people in recent weeks have tried to explain what is happening to the economy.
How can we visualise why credit has dried up? How do we rationalise the fact that we went from a situation of so much money we didn’t know what to do with it, to a situation of no cash at all? Where did it all go?
One interesting way to look at this, and this column has used it before, is to think of events in the natural world.
Think of the aerial photos of the Serengeti at the beginning of the annual rainy season. What was a parched arid climate where nothing grows suddenly become florid, verdant and full of life. Animals, flowers insects flourish and the place is abuzz. We see migrating wildebeest, crocs and birds and then, at the height of the season, the whole plain is crackling with energy, fuelled by that most precious of commodities, water.
Then as the seasons change, the water begins to evaporate. Life disappears from the edges of the plain, animals flee, plants die and as the waters recede life recedes with it. In the end, there is only a pathetic lush patch at the source of the river, everything else is barren, lifeless and arid.
Credit in the Irish economy acts the same way as water does in the real world. When it gushes into the various different nooks and crannies of the globe, economic life and vitality springs. So, all over the country, the water of the economy ushers economic vitality in — credit. Anything is possible, anywhere. Money gushes out of the traditional core countries such as the US and Europe and finances projects in the most remote places, giving people hope.
Then the financial season changes, due to the psych- ological interaction between investors’ hopes and fears, and the money retreats back to the centre again, leaving the exposed areas like the high plain of the Serengeti, exposed and lifeless. This process is happening all over the country now as businesses are left to fend for themselves without their lifeblood, credit.
This is why Irish house prices will continue to fall and fall. We are the victims of the retrenchment of credit. No-one will lend to our banks and they won’t lend to everyone else.
Yesterday, I drove to Galway from Dublin and then up to Letterkenny. It was quite a trip, but it gives you a good idea about what is happening in our towns around the country and why the thousands of vacant properties will continue to fall like a stone.
Every single town I passed has a huge ghost estate on the outskirts: Athlone, Craughwell, Oranmore, Tuam, Castlerea, Sligo, Ballybofey, Bundoran, all the way up to Letterkenny. The place is full of them. These houses will never sell for the prices that are demanded. The reason is simple: they are still madly overvalued.
In most cases the houses will never produce any rental income. With unemployment rising so quickly and emigration replacing immigration, there simply are not the people to fill the houses. Even if credit were available, there is no demand.
Also, if we look out a few years, the banks will have to wean themselves off all the money they were borrowing abroad to sustain the boom. For the two main banks this was 160pc of their deposit base. Put simply, the banks were lending €16 for every €10 of deposits. In order to get their capital ratios back to a reasonable level, this figure needs to go back to parity. This financial pendulum swing means billions of euro will be sucked out of the economy in the next few years and not replaced.
So, how low will Irish house prices go? To establish this, we need to figure out what a house is worth.
A house is just a simple investment and should be valued according to some financial benchmark. In America, where they have had booms and busts in every generation, the long-term price of a house is equal to 14 times the annual rent the place can generate. Using this valuation, where could Irish prices go?
So, let’s pick a typical ghost estate area such as Oranmore in Galway. If you go on Daft.ie you will find all the answers. If you want to buy a three-bed semi in Oranmore, it will set you back €335,000. However, you can rent the same place for €800 a month. What’s more, there are 75 vacant three-bed semis in Oranmore advertised on Daft.ie alone.
Using the American valuation method, it implies that the house generates rent for the owner of €9,600. The house is worth 14 times that which gives us a value of €134,400. Yet the seller expects to get €335,000 for it!
In other words, to make it worth your while buying the house, the price would need to more than half from where it is now. We have to assume that the days of large capital gains on houses are over. Therefore, the average Irish house in these estates is likely to fall by anywhere between 50pc and 60pc in the next few years. And even that is assuming that prices don’t undershoot on the downside the way they overshot on the upside.
This is a tragedy for the people who own the properties, and for us, because, ultimately, many of these shells will find their way into the NAMA. However, looking out a few years, the fall in the price of houses will be very positive for the economy.
Cheap accommodation, like cheap energy, is a competitive plus for any economy. In fact, if we look at successful European economies, cheap accommodation relative to wages is the basis of a dynamic economy.
After all, we are amongst the least densely populated countries in Europe. By the time this recession is over we will have house prices that will reflect this sparse population. And the economy will be stronger for it.
Over the long-term, for those who did not buy, competitiveness improves as less of their income is required for a roof over their head. But for those with negative equity? Of which you have spoken many time, what of their fate? And no government can rescue them, none, ever, so what are the long-term consequences for their families, for their children? Very dim indeed.
It will be a buyers market in 12-16 months, so for those who can, sit back, save and wait.
For those with houses and financial issues, I am deeply sorry that you, for whatever reason, got taken in by people who smiled and told you what a great decision you made. I can only hope that it ends being such a royal mess that some sort of transformative social and political revolution takes place that will free people from debt slavery.
Like I said the setting up of NAMA will slow down this neccessary process as without it we would be having developers holding fire sales on some of these estates to recoup what they can. This drastically and quickly move on the revaluation of a most property as other sellers would have to suit. Last year the indo ran a story as did RTE about 5 bed houses in Carlow that were dropped down to 300K from 550k. Those houses are STILL on daft. Sellers overall are a long way off getting some reality. Estate agents are not been helpfull… Read more »
‘meant to say above, sorry’
This would drastically and quickly move on the revaluation of most property as other sellers would have to follow suit.
David:
.’….banks lending 16euro on 10euro deposit’
Not the case. Banks lending officially 8:1, lending out 8euro on every one euro deposit. Also, banks borrowing on interbank lending markets to boost artificially deposit capacity to lend further.
David. The banks are portraying proclamations over and over credit is available from what i can see. Adds every place advertising loans etc. All know though the banks are telling porkies and are not providing credit accordingly. The credit freeze is the reality. Now, the put – out by the banks is capital ratio’s are fine, it’s the toxic assets are the problem, and if we remove ’em all will flow again,. so from what i can see here alot of confusion and misinformation. Have you decided David the banks are re – fixing capital ratio’s on the sly sotospeak,… Read more »
David, I agree with you on everything except the valuation formula. Every country will have it’s own factors, but in Ireland there is an menagerie of inherent costs associated with home ownership that are much higher than in other countries. Rates, taxation, energy costs and insurance to name a few have increased dramatically over the last few years. When you relate these to the cost of renting vs ownership it makes a big difference. I do not differentiate between a personal loan and a mortgage. A house is an asset that needs to have the ability to generate revenue if… Read more »
David. Absolutely concur, Irelands only hope of recovery is through sanity returning to house prices according to the P/e ratio,. will the vested interests permit this to happen. The property market is riddled in vested interests, cronyism and wholesale market rigging across the spectrum and geographical land space. At last DAvid, the battle line has been drawn and an exit out of this dark chapter in our economic life is visible, now, how are we going to get the prices down to market equilibrium price. Time to name names point fingers and put hand cuffs on to put the fear… Read more »
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More Power to Ga Gee – the morgagee has an absolute right to prevent possession of their home through foreclosure by any bank .Look up furry’s bill of right in the constitution A45 and use it .NAMA should be entwined into a new financial system to write off bank loans held by the electorate and to set them free again to work free of the chatels of slavery and indentured slavery.We have a free country and that is what the constitution guarantees to all of Irish Men /Women.We want to earn an Income for ourselves alone and our families so… Read more »
Hi David, Its hard to get a perfect analogy that explains the credit bubble. Water in the Serengeti is not one though, there is analogy breakdown there. In your earlier posts back to Feb 2008 I used heroin as an analogy, not perfect either, and others and I have used alcohol, etc, to explain the human social interaction and how we “lost the run of ourselves”. The thing is, your article is about housing and its value. Yes, there are too many places built, there is not enough demand to purchase them even at falling prices people will wait and… Read more »
Ireland is not going anywhere economically until the price of property returns to it’s market equilibrium price, as clearly stated in Davids Article above.
Folks, I think it was G and wills above that expressed sympathy for the serfs who got sucked in by the property bubble. There is an easier way of helping them out of the problem than enriching solicitors and barristers. I see many of these young couples in my area; 20-30 somethings with small babies; at the height of the boom (2004-2005), they paid up to SEVEN times the price that I paid in 1995, for the exact SAME house! I was baffled by it then and I am still baffled by what jobs they must have in order to… Read more »
Furrylugs – I never said it before but I think the greater part of the ‘ring fort’ on Dun Aengus was consumed down the devils hole ‘poull an diabhal’. You can check that .When you see it you will see the incoming tide rise upwards through the hole .I just hope the Irish Euro does not go the same way .
Maybe there might be an original A45 found embedded in a nearby stone.
~I am going to go to DMCW philosophical meeting in Tempel Bar next tuesday night
TIm: elucidation >>>> the property market is run on the basis of compromise and place on the totem pole. Most people secure mortgage by a certain smile. If person refuses to play into this secret little game they all know they will be refused the mortgage. The smile represents the commitment to an underlying agreement never spoken but understood, an agreement a person made in their heart in childhood to themselves which generally goes like this…… “all work and no play makes me a dull boy or girl”….. so i’m going to do it my way, and a pact is… Read more »
Why are you guys so hung up the idea of a property market anyway? Does there need to be a market in residential property? Hasn’t anyone in Ireland taken a long hard look at the rest of Europe where most people rent at very affordable rates. The surplus supports major pension funds and pays millions of pensions. Until madame T screwed it all up up in Britain to feather the nests of her banker friends, 52% of all housing was publicly built and owned and only a tiny proportion as crappy high rise estates. The crappy bits are almost all… Read more »
This is going around: Dear Mr. Darling, Please find below my suggestion for fixing Britain’s economy. Instead of giving billions of pounds to banks that will squander the money on lavish parties and unearned bonuses, use the following plan. You can call it the Patriotic Retirement Plan: There are about 20 million people over 50 in the work force. Pay them £1 million apiece severance for early retirement with the following stipulations: 1) They MUST retire. Twenty million job openings – Unemployment fixed 2) They MUST buy a new British car. Twenty million cars ordered – Auto Industry fixed 3)… Read more »
I do fully agree with the analysis in general. But I am missing out some important factors that could even contribute to more severe decline of vacant houses and apartments. 1. Modernization of unoccupied buildings after few years 2. Deficit in energy efficiency 3. Suitability of houses and apartments in the light of demographic developments Ad 1. Newly built but unoccupied buildings need as well maintenance. Although it might be basic but there is a need for heating to fight moisture and damp, especially in the Irish climate. Appliances need to be run as otherwise within short time rubber sealings… Read more »
David:
The two links below provide how it is the irish banks ended up gambling with property and destroying our community.
http://www.independent.co.uk/arts-entertainment/books/reviews/fools-gold-by-gillian-tett-1676686.html
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
I blame the banks. I blame the Government. I also blame the people who thought that buying a badly designed house in the back of beyond for 400K was a good idea. Today you can buy a peach of a house in the beautiful (and sunny) Languedoc region of France for 200K. In fact, five years ago it would have cost you 160K. Just a glance at our continental friends’ property market should have been enough to make one realise that our prices were nuts! And have the prices in Languedoc crashed? Have they heck.
David:
below is a link to BASLE and the legalities set for fractional reserve lending ratios.
http://ideas.repec.org/a/ijc/ijcjou/y2007q3a4.html
Banking an Egg : Tradition has it that piseogs deliver your message when all other avenues fail .That determined damaged injured matured pensioner showed his feelings at the recent AGM of AIB when he demonstrated how he gave the Bord a piece of his mind .His actions removed the sterility of the banality in the room and added a circus to a new beginning in Banking Governance and Regulations .Long may he live and long may his actions be seen to inflict the message like a Scorpion.
As an aside: Just finished watching 3/3 Pope’s Children on BBC4. I’m sure DMcW was introduced as ‘the hero of the Celtic tiger’ in the programme lead-in! New sombre introduction from David, wearing scruffy jeans, putting the programme in it’s current context. Seems even more prescient analysis now, even though it turns out to be Deflation, not Inflation, in Germany -and Obama’s Tax Policies that threaten to destabilize Ireland Inc. I’m looking forward to reading/watching David’s ‘Plan B’ for Ireland after the Celtic Crisis as a C21st Venetian-style independent City State trading allegiances and alliances with all and sundry. Especially… Read more »
FF have squandered this country’s progress and future on a ‘whimsy & a misgotten prayer’, the fianna fail emperor and his minions have been naked all along. We taxpayers are now liable for their conceit. Can Irish people vote for these ‘lugubious slugs’ excusing them of the cock-ups and having pigged-out on the boom trough for so long, now having blown up on their watch?
Peasent class politics for a peasent class people.
http://rlv.zcache.com/part_of_the_solution_t_shirt-p235249229002552130400t_400.jpg
“Many people in recent weeks have tried to explain what is happening to the economy.” Then we get this talking up a ‘transfer pricing’ induced balance of trade surplus and pretend we are reducing private sector borrowing requirement….you’d think from this recovery is on it’s way ???? http://www.independent.ie/business/irish/anoraks-now-all-the-rage-for-new-pioneers-of-industrial-tourism-ireland-rowing-its-way-to-a-safer-port-on-turning-importexport-tide–did-you-know-that-we-1738351.html “The trade statistics tell us that while many other countries continue to run large current account deficits, Ireland has reduced its standard of living to realistic levels. ” – how can he conclude this ? Imports are underwritten by ‘massive borrowings’ as we have less than 2 million in gainful employment with… Read more »
I came across this post recently and thought it might be relevant.Thanks to the original poster John.I had to calculate the average new house price (avnhp) against the average industrial wage (avindw) from 1973 to 2006 for a project last year. These were the figures I obtained. As the data sources were not the best, I’ll be happy to correct my figures if anyone suggests they are wrong and supplies a different data source that I can use instead. I had to use the Dept of Environment figures for house prices as the ESRI/TSB figures only go back to 1996.… Read more »
In conjunction with My previous post I would like the Members of the Forum to consider to what extent they consider all the rest of the bubbles in this “AERO” Republic, should be reduced by.Shall we row in with Davids 50-60% for the following 1.price of clothes bubble…2 price of food bubble…3 price of cars bubble…..4 price of pay in Public Service bubble…..5 price of drink bubble…6…price of every thing in Ireland bubble??????.Why stop with the Developers when were dishing out the Bankruptcy’s ?. What about all the people that Yeats described thus “But fumble in a greasy till And… Read more »
I have learned from the site contributions on this topic the following: 1 That if unemployment becomes worse ,which it will ,the value of property is 14 times the anual rent ; and 2 That if employment is available near the said property the value will be 6 times min the reduced average annual wage which might become €36,000 x 6 = €216,000 ; and 3 That location has some influence to increase the above values ; and 4 That the ERSI forecast ( cowen’s propaganda ) of 12% min increase from 2011 will cause a massive increase in house… Read more »
John ALLEN, indeed, all citizens are entitled to an allotment to grow their vegetables according to the local authority Allotment Act of 1926:
http://www.irishstatutebook.ie/1926/en/act/pub/0008/index.html
Visitors to this site should familiarise themselves with this and lobby the canvassers on it when they come to the door of your houses asking for your vote.
David;
IT IS ILLEGAL FOR IRISH BANKS OVER-LEVERAGED LOANS COME TOXIC ASSETS BE TRANSFERRED TO THE TAXPAYERS
IT IS ILLEGAL FOR IRISH BANKS OVER-LEVERAGED LOANS COME TOXIC ASSETS BE TRANSFERRED TO THE TAXPAYER.
IT IS ILLEGAL FOR IRISH BANKS OVER-LEVERAGED LOANS COME TOXIC ASSETS BE TRANSFERRED TO THE TAXPAYERS.
IT IS ILLEGAL FOR IRISH BANKS OVER-LEVERAGED LOANS COME TOXIC ASSETS BE TRANSFERRED TO THE TAXPAYERS.
IT IS ILLEGAL FOR IRISH BANKS OVER-LEVERAGED LOANS COME TOXIC ASSETS BE TRANSFERRED TO THE TAXPAYERS.
I was away for a few days but I caught up on the discussion and as usual it’s been absorbing. Now for something more prosaic, drawn from my own experience (evidence of a lack of imagination): even my father in law, a farmer entering his 90th year, is concerned that we haven’t yet bought again, having sold in December. His fear is that we’ll lose the sale proceeds in a bank collapse. Someone here was kind enough to provide a link to Kunstler’s website which was well worth a read and pretty much what I was expecting, not having read… Read more »
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! NAMA is doomed !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
http://www.politics.ie/economy/68927-no-nama.html
………….one stroke too far for the POnzi Rep financial oligarchs and cohorts.
………….everyone involved will end up jumping ship on it cos it’s an illegal act been carried out by a democratic gov.
…the man charged with running it, Dr Michael Somers, expressed reservations about its operation….
The Minister appeared today to echo those reservations, saying there would be huge practical difficulties in the areas of law, staffing and valuation
jeez, they really are making this sh!te up as they go along…. You’ve still got the guarantee, and the recapitalisation happening. Bizzarely, NAMA in and of itself is as far as I can work out actually the least damaging of this trinity of insanity. Without the other two, NAMA makes some sense. I await further more intelligent comment with interest…
“We’re bad news, we’re bad news everywhere. There is nothing but bad news coming out of Ireland,” said Mr Somers forlornly. Irish banks had borrowed up to €200bn to fund a credit spree and now the likes of “Fritz, Heinz and Gunther” wanted it back. “This is awful stuff, awful stuff,” he added. As ever, the only winners in this whole saga will probably be the lawyers sorting out the inevitable legal tussles, predicted Mr Somers. “This is completely new territory for us all. The people down at the courts are delighted because there is going to be a bonanza… Read more »
..There is nothing but bad news coming out of Ireland.. well of course…what should we expect….we have muppets in charge of many aspects of the country….and the media has spent the last ten years passing the message of the muppets to the great unwashed….celebrate, spend, be irrational, follow the herd of lemmings…..and the greater the compliansce….the worse the eventual disaster… The ESRI are back in action again…do those lads have a copy of great projections of economic bliss in the speeches of Nikolai Ceacescu in their standard training induction….The ESRI project that between 2011 and 2015 Ireland will have 5%… Read more »
Space News – I have shown here before that at the time ( in recent years ) of the change from age of pisces( water ) to age of aquarius( air ) that many of the world leaders that were Pisces saw great downward changes unfold in their countries ie Kohl , Gorbechov , de Clerk , and more recently Gordon Brown .What was common in all of them was the fall of what was to them a ‘world order of things’ to an immediate disjointed society without a national plan.Luckly we here in Ireland had none such leaders in… Read more »
Alien Location – if you place your rotund aeriel in your garden across from your neighbours facing each other and stand in the middle and look up and deeply and think and stare and then talk , you will begin to hear furrylugs answer back to tell us all how he is and the news from extra terrestial land.
“”Think of the aerial photos of the Serengeti at the beginning of the annual rainy season. What was a parched arid climate where nothing grows suddenly become florid, verdant and full of life. Animals, flowers insects flourish and the place is abuzz. We see migrating wildebeest, crocs and birds and then, at the height of the season, the whole plain is crackling with energy, fuelled by that most precious of commodities, water. Then as the seasons change, the water begins to evaporate. Life disappears from the edges of the plain, animals flee, plants die and as the waters recede life… Read more »
bloggers: interesting link below, ‘handcuffs on’ hedge fund owners city of london, listed in Dublin.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5331692/SFO-arrests-two-in-hedge-fund-dawn-raids.html
bloggers;
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! NAMA REpublic !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
http://www.independent.ie/national-news/massive-job-of-valuing-landbanks-is-biggest-threat-to-state-agency-1741466.html
Back in a wet and dreary recession hit Cork, Galway seems a million miles away. I don’t think property there will fall as much as David suggests because Galway has always generated it’s own demand due in no small part to it being a cracking place to live. Whilst engaging in an activity muchly adverse to Deco’s beliefs, namely The Black Stuff liberally dosed with diddly music, I had a Marxist orientated discussion with a Professor of political science. He was struggling to articulate the nascent catalyst required to get Ireland Teo moving. I simply summarised all we say on… Read more »
interesting link here from, ‘the guardian’ newspaper,, further opening up the murky world of shadow banking.
http://www.guardian.co.uk/world/2009/may/15/bilderberg-charlie-skelton-dispatch1
interesting link this, Irelands membership of Bilderberg club.
http://www.bilderberg.org/g/Bild-Ireland.html
NAMA is a legal minefield. Expect many developers to sue the state and/or their banks (joing tortfeasors) should they try to transfer assets to NAMA without their consent. NAMA only works if the developers are established as being in default or have agreed to transfer the assets to bank ownership. I strongly doubt NAMA can be done that quickly and I think that’s why the government have slowed down despite their initial (speculative IMHO) announcement. It’s a huge mess and who’d expect anything less…
I included the above table on average house price/av.industrial wage because it is often dragged out by various people with different agenda’s.It looks ok with its ratios included but what information does it include that has any relevance to anything tangible?.Nobody that I know could bring Me to an Average house,its bullshit,and what of this infamous average Industrial wage and what great Victorian yardstick is it meant to represent?.According to the C.S.O. av.ind.wage in 2006 was 641 euro per week,while some basic catering jobs etc. came in lower.However all other jobs came in much higher on average,examples being prison officers… Read more »
Malcolm Mc Clure – says : “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.” I fully concur . My messages are to be perceived on a different level and will not defy logic or reason no matter.It is in the connecting of the two levels that causes the misunderstandings . If I may draw an analogy : should the weather forecast say it will be cold with heavy rain tomorrow and should you go out in short sleeves ….would it be fair to say ‘only an eegit would do that ‘, and… Read more »
Deco – you will be written in history if not already .Congratulations.
Just listening to a discussion on the NAMA here on RTE1: (1) The proposed head of NAMA is apparently saying he doesn’t have the expertise, the HR resources or it would appear, any ingredient necessary to get this NAMA project off the ground. If this is what the proposed head of NAMA thinks, I can’t understand what he expects to achieve in his role as head of the organisation. (2) A new organisation naming itself the IPDF (Irish Property Developers Federation), seems likely to oppose on a legal front, the NAMA and it’s objectives. This could all be avoided if… Read more »
Deco: I am with you all the way. WE WILL SUCEED AND RETURN A DEMOCRATIC REPUBLIC TO THE SHORES OF THE ISLAND OF IRELAND.