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 ï¿½ï¿½miracleï¿½ï¿½ 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 earthï¿½s 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 ï¿½230 per day at a time when average post-tax wages are rising by just under ï¿½5 a day.
Letï¿½s just take that in. Are you getting that queasy feeling? Well, donï¿½t 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 ï¿½ï¿½a situation whereby debt is increasing at a rate that is more than three times that of income is clearly unsustainableï¿½ï¿½.
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 donï¿½t have the faintest idea when or how it is all going to end either. For as long as the Jeremiahs have been saying itï¿½s 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 donï¿½t like Ireland, they will go home. If you doubt this, check out Ryanairï¿½s 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 theyï¿½ve 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 ï¿½ï¿½immigrant factorï¿½ï¿½ 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: ï¿½ï¿½Hold on a second, Iï¿½m 30, in a serious relationship with a lad from Gdansk and Iï¿½ve no prospect of ever affording a house in Mullingar for my family – time to go.ï¿½ 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 todayï¿½s 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.