Spin masters continue to tell us that our economic fundamentals are sound, but they keep changing the fundamentals.
In the past week, various ‘experts’ have been wheeled into radio studios around the country to explain two things: first, why the Irish and global stock markets are so volatile and secondly, why Irish house prices are falling dramatically.
The most ridiculous aspect of this theatre is that most of these guys either work for banks and stockbrokers or estate agents. They are the fundamentalists. If you close your eyes, you could imagine them emerging with long beards, Kalashnikovs and a copy of the financial equivalent of the Koran under their arms, believing in the fundamentals. Last year we were told there would be no problem because Ireland was different. Our fundamentals were sound.
However, each month, the particular fundamental that was guaranteeing our glittering success seemed to change. Some days, we were different to the rest of the world because we had a young (or was it a growing?) population; sometimes it was because we had lots of immigrants or maybe it was because our housing stock was old, or we had restrictive planning – or was it because we had lax planning? Other days, we were catching up, we were high-tech, we had permanently low interest rates. I could go on, but you get the message.
Like Islamic fundamentalists, Irish property fundamentalists were driven by exceptionalism. Islamic fundamentalists preach that Islam is different, and Irish fundamentalists preached that Ireland was different. We now know that what they had to say about Ireland was codswallop.
These guys were the propaganda department of an orchestrated financial coup d’etat that took place in Ireland over the past few years. An unholy alliance of banks and property developers was allowed to create a property bubble that greatly enriched a tiny few at the expense of thousands of ordinary people.
How can you possibly take these propagandists seriously? Initially, they told us that prices could only go up, and those not ‘‘on the ladder’’ would rot in eternal monetary damnation. Then we got the mysterious soft landing. At the height of the binge, this became an almost quasi-religious term a bit like transubstantiation – you know, something that doesn’t stand up to scrutiny unless you are prepared (and many good people are) to suspend some of your more critical faculties.
Few people questioned the logic of the soft landing, and those who did, in time honoured religious fashion, were branded as heretics by the fundamentalists. Let’s re-examine the soft landing idea. Think about the imagery of a soft landing.
We have a picture of a superhero with a Rolex in the cockpit pulling levers, fighting with the elements, decelerating and getting the angles right. He is the safe pair of hands when everyone around him is losing his head.
The key to landing is to remove the uplift from the air using the tilt of the wings, so the plane almost drives smoothly into the runway. The tilt is controlled by the pilot using his cockpit instruments. Remember, he is disoriented, so he has to trust the tools at his disposal to give him altitude readings and speed of approach.
The margin for error is minimal: if the pilot releases the uplift too late, the plane will smash nose-first into the runway; too early and the aircraft will drop like a stone onto the ground, bounce and try to take off again.
The pilot adjusts the rudder, wings and balances the machine. He straightens the plane, eyes up the runway, drops the wheels and engineers the aircraft towards a soft landing. Everyone claps.
Now try to picture this with no pilot, no flight instruments, no air-traffic control tower, no tail fin, no fuel and, most importantly, no power over the wings. Yes, I’d be saying the rosary too.
The Irish property market is an out-of-control aircraft, full of petrified screaming passengers, with neither a pilot nor working controls. We abandoned our economic levers when we joined EMU in 1999.Like a doomed plane, the market can only go up and, when it stops going up, as it is doing now, it falls to earth. The severity of the fall is based on the pull of financial gravity.
Because of EMU, we now face the added problem of a housing market slump when interest rates are not responding.
No other country has ever faced this dilemma. Typically, at the first sign of trouble, a country cuts its interest rates to as close to zero as possible in order to avoid a credit meltdown. The US did this in 2002 after the dotcom crash, avoiding a recession. And that is what the US is doing today. However, the stock markets seem to have decided that the US will not avoid a recession this time.
Now the fundamentalists have changed their tack. Out goes the soft landing and in comes the short sharp correction – which is commonly preceded by the reassuring adjective ‘healthy’. The correction slipped into the lexicon just after the soft landing was discarded, some time in November.
When you look out for it, you will hear it in almost every utterance from the fundamentalists. Ironically, the fundamentalists have abandoned the fundamentals for now and we are being introduced to our new friend, the healthy correction. Today, we are being spun the line that the fall in house prices is good for us.
The fundamentalists don’t believe this and have been doing all in their power to prevent it, but they have reverted to this mantra as away of buying time. It is also crucial to accept the new fundamentalist line that the ‘healthy correction’ will be short-lived and that house prices will recover in early 2009 when – guess what – the fundamentals (which presumably have taken off on a bit of a break to Krakow) will reassert themselves!
This is all pronounced with such certitude, despite the fact that all the historical evidence from around the world says the opposite – housing slumps typically last for years, up to five years, and even ten in some cases. There is no real reason to believe that Ireland will be much different from other countries. So prices are likely to keep falling for some time. But the positive side of all this is that it gives us a chance to think up a Plan B.
I’m writing this column from Davos, where many of the world’s leaders in politics, finance and technology are meeting. Nobody here is talking about property. The talk here is about what’s next. The major point of discussion is how can countries best harness their people’s brain power. These industry leaders are not in denial, they are not pretending that the world stands still. They are looking at global trends and figuring out ways to react to, or even shape, these events.
This is what we should be doing, rather than repeating mantras, like fundamentalists, to the false god of property.
David: So the new false god is to be Brain-power, is it? Then I fear Ireland has scant hope of salvation in that direction. Assuming brain-power follows the normal distribution, then from population size alone, there are 315 TIMES more Chinese than Irish at any particular intellectual ability level on that curve. Taken with the fact that top American universities can afford to attract the cream of the crop world-wide, how then can Irish universities compete? I fear the future for us is “back to spuds and butter, with a rasher of bacon on Sundays”. Maybe Dev was right all… Read more »
Malcolm, we might be stuck for a few comely maidens though! One thing we won’t be stuck for is foreign workers, there are too many here to compete against our own workers and pose as a threat to the existence of the nation as a cohesive whole. We have to look at the definite areas of growth/stability in our economy-public sector, IT, financial sector etc., balanced against areas of decline-manufacturing, construction etc. Is securing employment for Irish nationals in the short term a good priority as we adjust to future global trends or is it too late for that? David,… Read more »
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Can any one here try to explain these incredible increases in rent that are occuring in Dublin at the moment? Will they continue? I would of thought that at some point that once all the property in the Docklands and other areas of Dublin that are unoccupied or unsold begin to enter the rent market. They will begin to create downward pressure on rent, thus causing problems in relation to repayment of loans for many landlords.
John Q: Surely David is mistaken to identify “fundamentals” as merely the distinction between a soft landing and a healthy correction. The true fundamentals of Irish economics relate mostly to agricultural potential, probably enhanced by global warming. We have fertile soil, plenty of rain and a long growing season. We just need gale-resistant varieties of barley and oats and local cooperative abattoirs to restore economic primacy to agriculture. This land once supported ten million Irish people, mostly beyond the Pale. Let’s consider whether that again can be a sustainable objective. Otherwise the Chinese will come, buy us out, and do… Read more »
David’s image of a Property ‘plane crash’ is interesting in that people behave differently in such dire circumstances. Some go into denial. Some lash out at the steward/stewardess in anger, whilst others sensibly adopt the brace position and attempt to remain calm and rational, knowing their ability to survive is enhanced by rational thinking rather than blind panic. Greed and Fear. Bulls and Bears. This story is old, yet, once more: It’s being retold before our eyes. Whether it’s sub-prime USA, nationalised Northern Rock UK or Paddy Last’s collapsing property pyramid: It’s the Governments of Nation States who should be… Read more »
“Aidan said, on January 28th, 2008 at 10:20 am Can any one here try to explain these incredible increases in rent that are occuring in Dublin at the moment? Will they continue? I would of thought that at some point that once all the property in the Docklands and other areas of Dublin that are unoccupied or unsold begin to enter the rent market. They will begin to create downward pressure on rent, thus causing problems in relation to repayment of loans for many landlords.” The high rents will remain for properties located within reach of central Dublin. 1 Immigrant… Read more »
To John Q. Public: I am a foreigner and I have been working in a Irish company for the last 2 years in IT. My company had trouble to recruit someone with my skills and if they had randomly choosen someone they might have serious trouble right now. I think foreigners are a great opportunity for Irish companies to grow properly and create more job and wealth. Moreover since we are paying taxes, spending loads of money in Irish economy, tourism and rent we are not really useless. If the economy slows down, we will leave and you won’t have… Read more »
Read David’s other article in the Business Post about the ethos of the Davos “locals.” It should serve as an Irish role-model.
Not just hung – drawn and quartered too! The housing market is a 747 that grew and grew as it flew through the air. Now it’s circling the country, seeking a place to land – but all the runways are too small. Faith in the power of central planners to manipulate markets is touching: the US bond and treasury markets are currently giving the Fed the finger, and I think laying blame for the credit boom at the feet of EMU/euro/ECB misses the point – the lunatic lending came about because of fictitious capital created by private banks. Fictitious capital… Read more »
Too optimistic Joh McD The “continued influx” of immigrants depends on the economy continuing to boom, which is unlikely this year: a likely year of recession. In a recessionary year, net jobs are lost. If this number is 80,000 ( to pick a number) then a net influx of 80,000 immigrants would mean that 160,000 jobs would have been lost in the Irish economy and 80,000 people drafted in from abroad ( at what only be lower wages). This is very unlikely to happen. any government which allowed it to happen would lost most of its chances of ever being… Read more »
The most fundamental of fundamentals is that a market economy is cyclical and that David is all you have been saying thusfar. Now the “prose” bit about landing planes and all that is entertaining, but guess what, the old plane is going to fly again. If you consider house price YoY change, house price inflation has been in a downward trend since 2000! Agreed that we are in a deflationary phase at the moment, but the supply tap has been closed big time and that means a strong possibility of supply shortage once the inventories are depleted, given that it… Read more »
Just a note regarding the rental questions. I don’t really believe that rents will collapse. What will happen is that centrally located houses and apartments will always rent for high enough prices. In fact the old adage of location, location, location will ring true in this regard. what will happens is that prices of houses and rents will decline in poorly located areas i.e. outside the M50 belt. Face it, the commute that most people will suffer is only going to worsen so renting nearer the city centre will seem even more attractive. There is a limited enough supply of… Read more »
The universal characteristic of all politicians is that they never realize when it is time for them to move on.
For Bertie Ahern, that time came in the last millenium.
Currently there are a lot of house builders who are holding on to their stocks of unsold houses. However, most of these guys will probably be forced to sell the properties at distressed prices to meet overdue construction loans. I can see the exact same happening with investors and their “highly priced” properties, at some point in time they will have to lower rents to get the tenanats in to cover their mortgages. I personally think that rented accommodation will become more plentiful because of what might be happening in the buying market. Investors in property will have no choice… Read more »
First-time buyer here. I suppose its too late now but i just bought in Athlone and i intend to rent out a couple of rooms. Does anyone have any positive to say about this transaction? Do ya reckon 20k or somet could be knocked off me new house?
There are lots of positive things about buying in Athlone. I am assuming you intend on living in it? If so that’s fine and renting rooms out will bring 7,000 p.a. tax free. The people will be/are already being hard hit, are those who bought on the premise of making a quick buck. Those intent on living in their purchases are on much firmer ground, provided they can cover their mortgages of course! The market should never had kow-towed to the investor the way it did, it was insane. People in difficulty will be those finding they have to fork… Read more »
Thanks for your input Rob. Yes i will be living in the house and renting a room or two. Cheers Rob that puts my mind somewhat more at ease.
I am one of many Irish people in the 25-35 age group who has yet to buy a house. I have been gleefully watching the prices drop over the last year hoping that someday sooner or later I can nab myself a fairly priced home, possibly a bargain even, and avoid the fiancial sword of damocles I see hanging over so many of my brethren. Watch out for the developers offering gift incentives as they struggle to maintain a high price in their estates and apartment blocks… Free Cars for everyone who pays full whack for their Gaff!!! No Thanks… Read more »
Good to see that people like David McWilliams have the courage to tell the truth in a time when everybody is wearing pink sun glasses and don’t see the black pitch in front of them. Ireland..prepare for very bad times…this is history like it always has been… how can a household with debts for the next 35 – 40 years, hope of better times… dont you see that all this wealth was not your money…………..my college next to me who has the same salary like me bought a house for 530k….he thinks he owns it..in 40 years…am I stupid to… Read more »
yes, there does seem to be a definite tightening coming. It is interesting to note that when prices were going up the developers were screaming don’t interfere with the market, now that the shoe is on the other foot, they are shouting interfere! interfere! I would say a couple of things in favour of perhaps buying in a few years if prices come down more. Firstly low interest rates look like they are here for a while making money cheap, secondly the current dip if it does make a property affordable then think buying it. The key to it is… Read more »
“The key to it is affordability, it you can stress test your mortgage and still afford it, then give it serious consideration.” Affordability, the mantra of the estate agents and developers is by and large nonsense as a criteria for buying a house ( clearly I admit a house has to be “affordable” but…) 1) The real cost of a house the the payments you will end up paying at the end of term. Clearly a 40 year mortgage is going to cost you a lot more than a 20-35 year loan. Banks are not too different to loan sharks.… Read more »
Yes agreed affordability is important but i would never suggest a 40 year mortgage, which is crazy talk, as really that is almost renting by another name. Affordability is future affordability in my view (otherwise what is it?) I don’t really see interest rates returning to the high old days and in that sense will be low. I think German rates have been much above 5 per cent for a long time. Just as we should not be afraid to question the property market, in the same way i do think there may be a good buy out there in… Read more »
“The one thing we should also be aware of, in talking to older people who bought years ago, they all seem to say that the first 5/6 years of paying the mortgage were tough” Actually this is where affordability leaves you down once again. In the eighties the interest rates were high, and so was inflation. Both are good for debtors. The high interest rates, if historically high, could only fall. The time to no worry too much about affordability is when interest rates are high, not low. Inflation eats into the real debt, and increases the nominal value of… Read more »
I would advice all house buyers to wait another year and the house prices here will be 40% of what they are now…there is absolutely no reason why the property market should catch up like they say…there is no demand for property any more…a simple fact of life: offer meets demand or better in this case offer chocked demand…in fact the demand was met 5 years ago… the prices for commercial property were dictated by the land prices and not businees prices…what small business can afford to pay 10k monthly on rent if it will only make 12k a month.… Read more »
Renting is only dead money if you consider the roof over your head to be a financial investment for the future – a pension. Otherwise, you’re simply paying the market price for an essential service. The money you save every month by not getting stuck with a ridiculous mortgage on your principal residence can be put in to genuine investments – you know, stuff that yields dividends and other regular income. So how’s the pension doing? If asset deflation sets in, getting in to debt on residential property will become as profitable as renting – ie. not at all –… Read more »
During the period November 2006 to November 2007, Dublin house prices declined about 5.6%, measured in Euros. During the same period, both gold price and Brent crude price increased by about 30%. Gold and oil prices are measures of real value, that suggest that the value of the euro has decreased by 30%. Of course, this kind of invisible inflation is ignored by those who have chanced their arm on a long-term increase in property prices, measured in euros. The actual value erosion of your property investments in just over a year has now reached 40%. Perhaps it is time… Read more »
Mr McWilliams,
Read “The Dignity of Difference” by Jonathan Sacks, the Chief Rabbi of the U.K. or at least checck it out on Amazon. You and he are onto something.
Dear David, I have read many of your articles and I tend to agree whole heartedly with you on many aspects of the downfall of our celtic tiger economy. I believe that we are in the middle of a perfect storm. The downturn in the US economy,the fall off in construction, the increase in interest rates and fall off in manufacturing employment leaves us with a very bitter pill to swallow. But what I don’t agree with is your opinion that EMU was a bad thing. I think that the governments incompetence is the problem. The EMU took monetary policy… Read more »
Fianna fail always created the s**t -in their long history in office- for somebody else to come and clean up after them. The three “tions” were the backbone of their fiscal policy: inflation,taxation and devaluation kept the wheel turning nicely for decades. They have bought enough of the electorate (public service unions, farmers etc) with their own money to retain power at the expense of the common good and the result will be a very divided society in the coming decades-far worse than the two tier society/ american style-that they worship so faithfully. Given their track record of corrupt practices… Read more »
we appear to have covered every rant old and new here from fundamentalist developers landing planes to the flood planes.citizen kane has left mammy to rent or watch not sure(age 25-35)he is keeping the faith (she is keeping her fingers crossed)…estate agents have been asked to hand over the guns they were putting to peoples heads.was it greedy house buyers or developers who drove prices up?was the re-mortgage used to buy the cars to go to the galway races?the piper is waiting to be paid!{all together}it must have been someone else who called for the tune!!!