A few misguided individuals had apparently been suckered into a classic pyramid scheme where the price at the top is dependent on new mugs coming in at the bottom. Thousands of euro were lost.
The logic of a pyramid scheme is simple: as long as more people throw their money in, a select few will get out with enormous returns. These lucky ones will obviously vouch for the ��miracle�� of a scheme which produces money as if by magic. Their enthusiasm is infectious and others hoping to get rich quick begin to throw money at the scheme. The notional asset in question can be anything; the common denominator in all these schemes is that they are based on hot air.
It is greed which drives people into a market where they can remember the price of something, but not its value. So a pyramid scheme is a fraudulent system of making money which requires an endless stream of recruits for success.
Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money. A pyramid scheme is called a pyramid scheme because of its shape. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, the pyramid would involve everyone on earth in just ten layers of people with one conman on top!
Thus, in no time, ten people recruiting ten more people, and so on, would reach ten billion, well in excess of the earth�s population. If the entire population of earth were five billion and we all got involved in a pyramid scheme, the bottom layer would consist of about 90 per cent of the planet – ie, about 4.5 billion people.
Thus, for 500 million people to be winners, 4.5 billion must be losers. Is the Irish property market displaying characteristics that are akin to a pyramid scheme?
Last week, we heard that house prices in Dublin were increasing by �230 per day at a time when average post-tax wages are rising by just under �5 a day.
Let�s just take that in. Are you getting that queasy feeling? Well, don�t fret: I have been worried about house prices since the turn of the century! So, too, has the Central Bank. Its latest bulletin, issued last week, examines the associated indebtedness, arguing that ��a situation whereby debt is increasing at a rate that is more than three times that of income is clearly unsustainable��.
But others argue that, while the Jeremiahs have been banging on about the crash for years, not only has the crash not come, but the boom has continued to roar ahead. Moreover, people are getting into more and more debt to finance this.
For example, last year we increased our borrowing by an extraordinary 29 per cent and, thus far, mortgage defaults have not been much of a problem. So is it game, set and match to the cheerleaders? Not exactly, because they don�t have the faintest idea when or how it is all going to end either. For as long as the Jeremiahs have been saying it�s all going to end in tears, the cheerleaders have been confidently asserting that prices will plateau out as soon as supply catches up with demand.
But this has not happened. Supply has far outstripped demand, by most demographic measures. In fact, supply has expanded so massively that the construction industry now constitutes a bloated 14 per cent of the economy.
In recent months, the future of our housing market and our prosperity has been put on the broad shoulders of our immigrants. The new argument is that, even though domestic supply has caught up with our own demand for housing, the 70,000 new immigrants a year will keep demand – and prices – motoring. So, the more immigrants, the higher house prices.
But the problem with this argument is that all studies of immigration show that at a certain stage, the cost of housing affects the choice to come here or not. A recent study by the ESRI – entitled Rising House Prices in an Open Labour Market, and written by David Duffy, John Fitzgerald and Ide Kearney – suggests that, not only will the rise in our house prices have a significant impact on the amount of new people that will come here but, more interestingly, the high cost of houses will drive the immigrants back home when they reach settling-down age. Let us examine the 120,000 or so Polish workers who are here. Will they all stay? Hardly! Again, new economic studies indicate that the decision to move to another country is now a temporary one.
The young Polish workers are emigrating by text. They are being bombarded by texts from friends and moving as a result.
If they don�t like Ireland, they will go home. If you doubt this, check out Ryanair�s website: 40 per cent of its new routes are to Poland, Slovakia and other central European locations. If you ask Polish workers whether they plan to stay here, the vast majority say no. These patterns are typical. They want to settle in Poland, and now they can. They will take the money they�ve earned here and then find value back home. Unless Poland and its economy revert to communist torpor, opportunities will emerge for them back home and they will go.
This happened here. The Irish emigrants of the 1970s,1980s and early 1990s came home in their tens of thousands – close to a quarter of a million Irish emigrants have returned here since the mid1990s.This pattern is likely to be repeated with Poland, and the price of houses will actually accelerate this process.
So, far from being the underpinning of further price rises, dependency on the ��immigrant factor�� contains the seeds of its own destruction. When our immigrants tire of living three to a room, ten to a house, they will reassess the Emerald Goldmine. Magda from Krakow will wake up one day after five years here and think: ��Hold on a second, I�m 30, in a serious relationship with a lad from Gdansk and I�ve no prospect of ever affording a house in Mullingar for my family – time to go.� This lifestyle choice will be repeated by thousands all over the country.
But what might pull them home apart from lifestyle choices? There is no reason to believe that the Polish economy will remain in the doldrums forever, tied as it is to the German economy. It seems likely that, as Germany emerges from its post-unification coma, Poland will recover too. If these economies do turn around, Poles will return home. Euro interest rates in Europe will rise in tandem.
Where might that leave us, with our enormous mortgages, investment properties and our massive housing overhang the product of today�s building splurge?
As we have seen with Australia over the past 12months, interest rates do not have to rise enormously to hurt an excessively borrowed population – particularly those at the bottom layer of the pyramid.
Media reports on the subject of house prices increasingly remind of the boy who cried wolf. Journalists seeking the sensationalist headline have anaethetied Irish public so much to the dangers of the property bubble in Ireland that we no longer pay any heed to the warnings. We listen more to the reassurances of biased econmists working for the mortgage providers than we do to the Central Bank. However the real problem is that the vast majority Irish public have no interest in seeing house prices moderate. Obviously anyone working in construction, solicitors, surveyors, autioneers, banks don’t want to see the… Read more »
Although as a non-house-owner I would love to see this pyramid scheme collapse, I’m not convinced by this article. I’d really like to see some stats showing that supply has exceeded demand. It just doesn’t feel that way on the ground. As for Magda heading back to Poland when she’s 30, she might (if there’s a job for her to go back to), but she might then just be replaced by a younger Pole. Or her serious relationship might be with a lad from Mullingar. I’m sure there are some immigrants living 10 to a house, but plenty live comfortable… Read more »
Hi David, I enjoyed your article. I’m with you on this one. I live in North Wicklow and work in South Dublin and on my daily travels on the M50 I am amazed at the amount of property construction along the M50 corridor. I just can help but wonder what is driving ‘demand’? I can’t afford any of these properties in South Dublin but wonder who can afford 700k EUR on that 3-bed duplex with magnificent Junction 13-M50 views. I mean there are hundreds of new housing units coming on stream in South Dublin (Carrickmines Manor & Carrickmines Green are… Read more »
OK David, time to call it, if you dare! Notwithstanding the
fact that we might talk ourselves into a downturn when do
you think we might see a downward trend? Will it be the
next ECB interst rate hike or the one after? Will we last
until post USA presidential election when that particular
piper will have to be paid? What’s the most likely timing?
Couldn’t agree more David, it seems to my uneducated eye
that the economy looks increasingly unstable. This
property boom is unsustainable and the fatuous commentary
by estate agent and bank economists is not helping the
situation. I wonder which genius came up with the wheeze
that immigrants were bound to buy all of our over-priced,
badly built, poorly serviced starter hovels? Is there
anything that can be done at this stage to halt the
impending train-wreck?
I think the long awaited bursting bubble is not too far away now. Dan Mcloughlin bank of ireland’s main economist and one of the main chearleaders of the celtic tiger economy is predicting that the ECB interest rates will be at 3.5% at the end of the year and the euro will rise to 1.30 against the dollar. What ever you think about Dan mcloughlin he has been very accurate in predicting the fortunes of the celtic tiger economy. He was spot on at the beginning of 2005 in predicting that the dollar would be strong against the euro during… Read more »
The government has encouraged the arrival of our eastern colleagues by having he most relaxed access to work approach in western europe. This relaxed approach was taken approximately two years ago in order to prop up a dipping rental market. The reality is that the property bubble has been luckier than Delores Macnamara. It ducked and dived nothing managed to touch it….the dot com bust, 9/11, euroland stagnation, foot and mouth, war in afghanistan, war in Iraq, rocketing oil prices. Long may Delores be lucky and you’re looking good honey, but this market looks ugly and its lucky days are… Read more »
Hi David, I think you need to unpeel a bit more the the ‘70,000 immigrants’ per year argument. For example, the Irish Times Feb 7 editorial describes new numbers from the Central Statistics Office Quarterly National Household Survey from last year. It shows that there were 159,300 foreign workers, representing 8 per cent of the total of 1,989,800 in employment. Can 8% of the workforce (who are ostensibly on ‘lower paid’ jobs, thus are probably paying low-end rents) really prop up the entire property bubble? Maybe the interesting metrics would be a) what % of all rental properties are rented… Read more »
Hi David, I enjoyed the article. I just thought it was
worth noting the amount of responses to this particular
article, which deals with house prices, compared to your
more general pieces. I suppose you could simply put this
down to the now near universal interest in property in
Ireland but I think it highlights a widespread underlying
anxiety with the market.
Regards.
if you agree with the “pyramid” argument you would have to
be extremely concerned for the people who pay €280k to
€330k for small 2 bedroom apartments in the likes of
Finglas, Blanchardstown etc etc. Even Eddie would agree
that this is not value for money !!!!
Thanks very much for all the comments. We are all clearly
sensing something nasty brewing. I’ll keep coming back to
the theme and keep the mails comming.
Best regards,
David
What will it be that tips the scale, well no one knows and in many ways its futile t predicte, but merely to note, something will happen. I agree witht the above poster, PROPERTY is currently in the back, side top bottom & front of everyones mind to some degree. Even those without a mortgage or non-owner (talk about the North, feck that are you propertied or not propertied…) If a bust don’t happen then Ireland will in economic terms be responsible for rewritting the book. There ain’t nothing new under the sun this ain’t gonna happen. 1 more year.… Read more »
David. You are clearly right that the immigrant population is helping push up rent and possibly property prices. At least, if the immigrants were not here it is clear that the prices would be lower: clear supply and demand. The question still remains though. Is supply greater than demand? Is there a bubble regardless of the demand? There are 80,000 houses built a year. Is that not more than enough for 70,000 immigrants per year. If we assume the immigrant numbers are under-estimated ( which I am sure is the case) even then is 80,000 supply enough, or too much?… Read more »
I read a book by Phillip Coggin, the Financial Times Economics correspondent. The book was called the money machine. In it he explains that if somebody puts money in the bank, the sum becomes a liability on the Banks books. To keep it looking as if the bank is in control, the bank then has to offer the money out as fast as possible to keep their balance sheet looking positive. At the same time Irish banks operate in a monopoistic manner with regard to administration charges and this pushes up their profitability. Both effects together are used by the… Read more »
Thanks for all the comments. There are more than a few
articles in each one. I’ll keep ploughing this particular
furrow. Thanks again, D
In reference to Australia , house prices in Sydney have
fallen by 10% since their peak in 2003.One of the factors
was indeed a few small interest rate rises ( bank Standard
Variable rate is now is 7.32% )
Another factor in my opinion was people were just not
getting value for money!It is this factor I would see
influencing an Irish crash. From what I see ,I will not be
returning to Ireland to live in a 2 bedroom hovel that
costs more than a 4 bedroom house 10km from Sydney city
centre!
Hello David I work for a company in Galway city for a residential letting agency.What a demand for houses we have from people from Eastern Europe,I would say 70% of our properties are rented to people from Eastern Europe and more and more each day.What that saying? As longs as its a good and clean property it will be rent full time and the landlord will be able to support the morgage.I think if that people from other countries stop coming here to work and the demand stops then we are in trouble and until that happens the prices of… Read more »
Very interesting article. I think that you are spot on with your observation about Polish people. There are a few fundamental differences between the Polish mentality and the current Irish mentality. Firstly, Polish people are very risk averse. Many still have the mentality that it is better to save and buy a small house for cash than to get a mortgage. It seems incredible in this day and age but this attitude is related to the fact that housing is still so cheap there that you can buy a house there for cash. My wife is from Zielona Gora and… Read more »
Is there any gas left in the tank to push prices further ? We used to be able to purchase a ‘Gaff’ on three times our income – now we need close to ten or even higher multiples. We used to be able to purchase with one good bread winner – – now we need a minimum of two working their ass off. Interest rates at record lows – but hey, they look like they’re only going in one direction now. We used to borrow up to a max of 90% of value – hey, we need 100% We used… Read more »
David. I have agreed ENTIRELY with you on this matter, for years. I admire your courage, in speaking out. Its not a popular position being one of the first people to stand up and say ‘ the emperor has no clothes’. I think that as well as higher interest rates, it will also take the loss of jobs (in multinational co.’s etc) before we see lower house prices.Inflation is bringing this closer, as well as the east european countries ( Poland etc.) who joined the e.u. in 2004. The AVERAGE hourly wage in Poland is equivalent to €2. In China… Read more »
David, Great article! Stock market and housing bubbles come and go, and then a correction. Ireland is tied into the global economy and it is enevitable that her housing market will correct. Here in the US, we have experienced a correction despite historically low interest rates. Sub prime lenders have gone out of business and borrowers are being forclosed beacuse they cannot pay their balloon ARMS. Lenders have put greater restrictions on new loans and while capital is available, loans are harder to get. Lenders are getting burnt and the forclosure market is heating up. Why should Ireland be different?… Read more »
Without even wanting to get into will-they-wont-they-fall house pirce debate, i would ike to point out that in the same way that over the last 10 years there has been a huge industry and incentive behind keeping house prices rising, there is now a huge, generally media based, industry behind calling for house prices falling and a collapse in the property bubble. There’s going to be a program on RTE next week that predicts up a crash of up to 33% in property prices. Does anyone actually see this happening (short of unemployment rising significantly, ie towards 6%+, ie 200-300k… Read more »
Ok, my maths was incredibly poor there (im hungover, gimme a break), should have said that jobs losses (net of job creation, which is still growing) would need to be 30k or so. Ooops.
David, This article is good, but as you say, Pyramid selling is based on selling ‘hot air’. Property is a bit like precious metails, (It always has a value over time). Apartments might not hold their value as well as other types of property. One important reason for the start of the property boom was the increase in two income families, all competing with each other, driving up the price of property. The Celtic Tiger has driven up property prices even more. When the downturn takes place the property prices may not fall to the levels of the depressed 1980’s… Read more »
Well, as for Polish – many of them are to stay – the real property prices in Poland skyrocketed and there is little chance for them in Poland – for average salary in Warsaw you can buy 0.27 of square meter. Current average price of a square meter in Warsaw is 2600 EUR !!! And Warsaw is a traffic nightmare – a lot of traffic jams 1 hour drive during rush hours from city border to the center is nothing unusual. A small house 1.5 hour one-way drive from city center in rush hours is currently over 1/4 million EUR.… Read more »
David, my departure from the Isle shortly before the boom was followed by a period of self-approbation and anxiety: had I slept through the lecture dealing with radically different laws of economics – if not, when would the inevitable price correction permit an affordable return? Any mention of a “correction” or “soft landing” gave immediate pariah status; from economists with vested interests, friends and family alike (also vested). For anyone with doubts concerning the future, read Desmond Norton’s “Ireland – a small open economy”. Probably no longer on the compulsory reading list and very unfashionable but nevertheless appropriate as it… Read more »
David, well done on telling it as it is. You have come in for a lot of derision over the years, then again you have made a nice few quid out of it yourself. But I don’t begrudge you that. It’s small change when you consider what the developers have made. If anyone needs proof of an over supply here. Take a look at a town like Drumlish in Co. Longford. Juts look at the amount of houses for sale there. I come from around there and these houses are empty. Why were they built in the first place? There… Read more »
Hello David, Yes the FF corruption, the debate of many a tribunal (taxpayer’s expense of course), will come home to roost eventually and very soon. Life and life’s work is NOT about having a brass key for a fully furnished “exclusive” 3 bedroom semi D in a good area (tomorrow’s drug ridden slum), a place to eat (take aways), sleep and launch the 2 hours commute to work. The new era is follow the work: Europe, USA, Australia….where ever and move as often as possible to maximize what is in your pocket and minimize what is in the property developers… Read more »
adult chat network…
Irish property pyramid can’t rely on Polish foundations…
We’re effectively a country in denial. The current economic situation is highly precarious as we’re continuing to invest our hard/accidental property wealth in yet more property. In particular I’d like to single out the comments by the Taoiseach about “irresponsible criticism” of the Irish property market by the media as the most irresponsible drivel I’ve heard in years. Perhaps he was thinking of all that stamp duty revenue. I’ve heard arguments that the “smart money” has diversified into Eastern Europe. Sure, there’s money to be made but how smart is it to invest millions in a developing country you don’t… Read more »
I originally made a post on feb 9th 2007, expecting a property crash also. Funny there have been no new posts since September 30 2007, on this issue.The reason is that the secret is now already out. Property is now a four letter word. It had to happen. Everybody knows now that ‘McWilliams’ was right, all along. Fair play to you David. One question is now how many people will emigrate OUT of Ireland. This will also have an impact on the property market /rental market. ‘Apartments’ in scummy areas will soon be called just plain ‘flats’ again. Also, lets… Read more »