Given that house prices are now falling across the board, it means that every valuation made last year was wrong.
In May 1720,William King, the Protestant Archbishop of Dublin, writing about the speculative mania for shares in a company called the South Sea Scheme that had overtaken the city, warned: ‘‘Most who go into this matter are well aware that it will not succeed but hope to sell before the price fall.”
Meanwhile, Richard Cantillon, the great Irish economist, warned about the South Sea speculation frenzy, pointing out that while prices can be kept up ‘‘for months, maybe years . . . a melancholy prospect awaits those who stay in the market last’’.
These warnings were triggered by the announcement in April 1720 that the South Sea Company, the entity issuing shares, would lend against it own stock. This would only mean that before the collapse, prices would rocket higher as people got into debt to the company to buy shares that the company had issued in the first place.
The so-called ‘South Sea Bubble’, which left thousands of Irish investors broke was simply an example of the speculation that has characterised financial markets over the years. (After losing a fortune speculating in the South Sea Company, Isaac Newton mused that he could ‘‘calculate the motions of heavenly bodies but not the madness of the people’’.)
The Irish have been involved in plenty of great frenzies down the years. Amazing as it sounds, in the winter of 1847, when half the country was starving, many Dubliners were up to their necks in debts speculating on Irish shares in the railway companies that were vying to roll out a rail network to a famished country.
In the preceding years, a railway boom across the water had led to mass migration from Ireland to England. An estimated 200,000 Irishmen worked on the British railways. Those ‘navvies’ (which stems from the nickname the ‘navigators’, which was what Irish workers who built the British canals in the 18th century were called) served exactly the same purpose as the Polish labourers on the sites in Ireland now.
Ironically, in 1847 the British parliament suggested that more and more workers would be needed, as there seemed to be no end in sight to railway building. Apparently, the ‘fundamentals’ at the time guaranteed this optimism. But, like all booms, the railway boom came to an abrupt halt when it was least expected. By 1848, railway shares were in freefall, exposing all sorts of malfeasance and skulduggery.
Again, the Irish were so prominent in this carry-on that Charles Dickens based his swindling banker, Mr Merdle, in Little Dorriton an Irish MP, John Sadleir. Little Dorrit was a serialised book published in the late 1850s.
Sadleir, the MP for Carlow, founded the Catholic Defence Association and was a leading figure in the Irish Independence Party. He was found poisoned on Hampstead Heath in 1856, having committed suicide.
Behind the respectability of his political career, Sadleir was a monumental fraudster. He had speculated wildly on railway stocks, defrauding hundreds of small investors as he forged shares in a railway company of which he was chairman.
He also misappropriated €400,000 from a consortium of Irish banks to cover his losses on railway shares. According to Dickens, Sadleir epitomised the greed of the boom, where no deal was too big to be financed and where other people’s money was there to be used and abused at will.
This is the lesson of all financial frenzies: when things are going well, no one asks any questions, but when the market turns, people get hurt, dodgy practices are exposed and reputations are tarnished.
What the boom hides, the slump exposes and former pin-up boys are often revealed as tricksters. This ebb and flow process was evocatively summed up by Warren Buffett when he said: ‘‘It is only when the tide goes out do you really see who is swimming in the nude.”
A similar development is occurring here as our property frenzy succumbs to the logic of financial gravity. This week we saw a solicitor being hauled into court over claims of questionable mortgage practices and claims that he misused client funds. This will not be the last of these types of stories.
The reason is fairly simple. During the great Irish housing boom, like the South Sea Bubble, the railway mania of the Famine years or the likes of Enron more recently, investors became carried away on the effervescence of easy money. As JP Morgan, the legendary American banker, observed: ‘‘Nothing undermines your financial judgment as much as the sight of your neighbour getting rich.”
This procedure – half virus, half envy – certainly applied here in the past few years as thousands of us joined the great property frenzy. Last year, 59 per cent of all houses bought were purchased either as investments or holiday homes.
More astonishingly, €8 billion was invested by Irish people in overseas property. At times, it seems as if most of the country is involved.
With so much cash sloshing around, there are bound to be some casualties and bad eggs. But what if, like all previous financial frenzies, there is a systemic failure which almost guarantees fraud?
Think about how money is raised from Irish banks to buy property. The most crucial number is the valuation that the potential investor gets on the relevant property. Given that house prices are now falling across the board, it means that every valuation made last year was wrong.
By definition, every valuation, therefore, overvalued the asset. When the market is rising, everyone has an incentive to overvalue the price of the asset: the valuer because he is often the same estate agent who is selling; the broker because he gets a commission; and the bank because it makes money lending cash. Systemically, the entire edifice is geared to making the upswing more dramatic and downturn more precipitous.
Anyone trying to sell a property bought last year will realise the valuation was wrong. Can they sue the valuer now? No: they were fully aware of the game and, in so many cases, the buyer was aware that the valuer was trying to get the value ‘up’, so that the buyer could get as much leverage as possible. Expect more questionable dealing to be revealed in the next few months.
The Archbishop of Dublin was right: the people who will get really burned are those who hang on longest. Very often, they are the ones who were last in and can least afford it.
David, The property boom has simply been an outworking of the ‘Bigger Fool’ theory of economics. Everyone knows property has been overvalued – I could buy a cottage in Windsor, Berkshire, close to the castle, for the price of a semi in plain parts of Dublin – but everyone has continued in the belief that they could sell at a higher price to a bigger fool. Market forces dictate that as bigger fools become scarcer their price goes higher, sellers having to sacrifice more and more of their property price to pay for a buyer. The people who, of course,… Read more »
Now, if only I’d the nerve to sell my house at the top of the boom and rent for a while :-)
BTW, Think if any of these 10 predictions for Post Tiger Ireland are wrong?
Paul
David was recently talking about the irish diaspora returning to their native land,as a form of salvation for the distressed ship “SS.Ireland”, but a letter in todays Irish Independent starkly highlights the fact that no retired irishman living abroad in his right mind would want to come back the the nightmare that represents every facet of life there now. Where I live and retired to some 7 years past (Gran Canaria. Spain) we have nothing like the level of criminality reported in the irish newspapers daily-even in the larger cities such as las Palmas or Santa Cruz de Tenerife.A three… Read more »
In my opinion the residential property market has burst, and we should expect a fall/crash in home values. Based on the large amount of articles I have read over the last year or so, I predict that the collapse in the residential property market will look similar to what I hope to explain now. Once a month, the Permanent TSB/ ESRI publishes its House Price Index report. In my opinion it is highly likely that the average person is not going to have an idea of how the price of his house is performing against the indices that are available.… Read more »
Nice to know that our domiciled retirees for the most part don’t have to rely on the labour market over in warmer climes: the “Costa’s”, the Med, Bulgaria, Florida, etc. Meanwhile back in the “auld sod” – workers (taxpayers) here can tolerate high prices as long as we have employment. Though I would happily swap Ireland’s weather and property prices for the likes of Spain’s, they can keep their paltry wages and constipated labour market which I would think is also not immune to immigration from low-skilled economic migrants. Generalising on the subject of immigration for a moment: we in… Read more »
A very good and, as usual, honest article David. I am also very impressed with the comments here, especially those made by Paddy Cullen. At a company Christmas party a few years (but not too many) ago, I asked the, now retired, CEO of one of Ireland’s lending institutions if he would agree that there was a high posibility of an oncoming crash in the property market in the not too distant future (as I personally believed was the case.) He literally laughed at the idea and told me that it could never happen. About eighteen months later, I asked… Read more »
I’m still in denial and I don’t want house prices to drop. Turn those machines back on, turn those machines back on!!!. LOL
Lets look at some straight logic:
Buy a house in Dublin for 485,000 euros (average) on a salary of 45000 euros, yes thats really smart and therefore using Irish logic it makes sense to buy LOL
It’s a disaster waiting to happen.
Bertie says “we are talking the market down”
Answer: The market has gone so much up that you can’t talk up any more
Paddy Cullen seems not to factor in to his calculations the fact that a small number of very powerful developers (i.e. the well publicised Bailey brothers) control much of the availible building land in the Leinster area, so it is a chess board with a few powerful bishops and many pawns, open to more subtle manipulation than he envisages in his “free market” scenario.
To Glen
That’s the problem with these $1 dollar bets between friends
Good story about Sadleir – interesting to hear that the brown envelope brigade have been around for a lot longer than we think and aren’t just a product of the post-Independence gombeen takeover. Still, it’s amazing how many of Sadler’s descedants seem to have ended up as FF politicians…
They say that in crashes, first the stupid people lose their money, then the clever people, and then finally, the really clever people lose their money, before it’s over.
Oh come on David! “every valuation made last year was wrong”! I think you are confusing value and worth. Worth is the true value of any item. A valuation is only ever “right” at a moment in time and to suggest that the valuations of property made last year were wrong is rubbish! At the end of the day, a property’s value is determined by the person who wants to acquire it. If I was prepared to pay €500k for a property last year and am only prepared to pay €450k for it now, its a reflection of the value… Read more »
Hey DD, what exactly is “pair-shaped”?
‘Pair-shaped.’ ‘Down the toilet.’ In the crapper!’ ‘or even ‘Tits up!” Basically, going horribly wrong. But then you knew that, right? Bobby, I dont agree wth your other comment. True value is not what somebody is prepared to pay for something, it’s what the market deems it’s correct value in relation to manufacturing costs, including purchase of materials, transportation, labour, marketing, etc. Then adding on profit margins for the manufacturer and/or distributor, so to speak. What an individual might be prepared to pay for something does not deem it’s true value and simply reflects that persons desire to purchase it.… Read more »
This has happened in Spain too in recent years. Banks were accepting unrealistic valuations and allowing clients to borrow almost 100% of what they were actually paying for a property. By facilitating this subterfuge to facilitate the flow of business they contributed to house inflation and created a “sub prime” market of mortgage holders. Perhaps the American story is similiar.The spanish banks are getting nervious now following on the american experience and unreal valuations for loan applications are now longer in flavour here.
Check your spelling there DD. Bit pedantic though Bobby. maybe you should correct all the comments.Anyhoo,I heard A.I.B say, that the economy is facing “strong headwinds” I had to laugh.It kills them to actually call a spade a shovel. John McDermott makes a good point about the likes of the Bailey brothers.They can manipulate the market.I am not a believer in conspiracy theories, however in Ireland we have the mother of all conspiracies to keep this ridiculous property boom going. Certain sections of the media, the banks, the builders,your neighbour the list goes on. They are all guilty. Shame is… Read more »
Ha! Good point Andrew. Or should that be points? I sit corrected and apologise to anyone who didn’t quite understand that I meant ‘Pear’-shaped. Pedantic indeed… or just plain dumb perhaps.
Has anybody heard anything about banks renting houses out to owners who can’t pay the mortgage as opposed to repossessing the houses? Apparently this is a means of keeping repossession figures down and preventing panic in the property market.
Hi SpinstaSista, No, I havn’t heard of banks doing what you outlined above, in any case it would not make sense for a bank to do that because the bank will be holding onto an asset thats decreasing in value each year and this value gets reflected in the banks loan book which in turn gets reflected in the Banks balance sheets that shareholders use to calculate the net asset value (NAV) of the bank. So if a bank did this with a lot of there properties, then as resposseions rise and on there next financial results they would announce… Read more »
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Of course it’s always possible that rather than property prices falling, the prices of other things, except labour, will rise.
David,
high inflation, huge levels of personal debt, multinationals downsizing, crime wave on the increase, overdependency on construction sector, property market crash, acute lack of child care, rising stress levels, no more craic, etc. etc. etc.
Seems Ireland has surpassed Germany in the art of talking down a nation – anything positive going on in Eire these days? Any chance at all of a ray of light emerging over the horizon? Or should resign myself to retiring to a Costa-del-nowhere.
“Seems Ireland has surpassed Germany in the art of talking down a nation -” Oh God! That’s Bertie Aherne speak if I ever heard it. There is a difference between idle comment and reality! Aherne also said the same about the health service. There is no problem there either apparently. In fact all is fine and dandy here. Please can we all just look at the stae of this country. Despite apparent prosperity over the last 15 years our govt. which is mostly made up of school teachers have squandered the money. Health service is in a mess, our public… Read more »
Thanks Andrew, that’s settled then. John McDermott, would appreciate tips on nice sunny beaches. Meanwhile, maybe someone at home could do the honours and shoot the criminal teaching government.
House prices aren’t the only thing that are going down in this country…. the moral practise of Ireland too.
The National Identity is declining because of uncontrolled Immigration
The Tax system is ridiculous where if you earn over E28,000 you are charged 42%
The family is under threat because of children being born out of wedlock (33 – 39 %) and the greater unreasonable concessions for Homosexuals (They should just be protected from the basic rights of employment and housing)
Also idiots trying to advertise illicit services on this site isn’t improving matters
Donal, you should perhaps think of going back to the 18th century, where I’m sure your views would go down a treat. Children born out of wedlock? Concessions to homosexuals? Whatever next?
Andrew,
I understand that things are different now but surely there are limits in society to what are acceptable?
How would you feel if you learnt that your daughther was with child and unmarried or if your son wanted to marry his boyfriend.
Unless you’re David Norris or someone who doesn’t recognise the sanctity of marriage, I would like to see your reaction.
I hope you practise what you preach
Donal and Criostor, you guys are the epitomy of that sad little e,barrassing kip that ireland was under Dev, fortunatly that old ireland is long since dead and buried.
lets all enjoy the ride to the bottom eh, and maybe we’ll pick up a nice semi-d on the way back up eh?
Oh Dave, Donal and Criostor will be very annoyed with you. Using words such as “ride” and “bottom” in such close proximity is clearly a breach of moral standards!!!!
Leave them to it Dave we all know what their problem really is. They aren’t worth replying to, bigots generally aren’t.You’re not going to change their minds.
Dave, Andrew. Why don’t you just have a cup of “shut the hell up”? The only bigots that are really here are you, the two of you just seem to pick fights with people for no good reason without establishing the facts. A mature arguement means respecting the opposition and slandering them or calling them names and insinuating they are prejudiced when you don’t share their viewpoints? Andrew, didn’t you suggest that ireland doesn’t have a naturally talented workforce? That’s sounds very ignorant to me and bigoted! Double standards don’t apply to anyone! Donal and Criostor at least know when… Read more »
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