A few weeks ago this column stated that the economy was growing at 4 per cent plus and would grow much faster than most economists thought. The contention was partly based on the array of figures that were coming in more positive than before. However, the main factor was the “feel” that could be sensed out in the economy. When you are self-employed, this feel or what I termed a few weeks ago the “buzz” is perceptible. You know when it’s not there and, if the buzz returns, you can sense it too.
This isn’t the most scientific approach to the economy but economics isn’t too scientific. In fact, I’d go so far as saying that in economics what is important is rarely complicated and what is complicated is rarely important. We are irrepressible social animals, prone to bouts of optimism and pessimism. We are deeply irrational and emotional. We are the polar opposite of what economists contend we are, beings driven by rationality and calculation.
This “invented” rational human being was “made up” by mainstream economists because this rational character’s reactions could be measured and then these perfect numbers could be fed into an elegant mathematical model that delivered a definitive, quasi-scientific answer. But this search for measurement, science and accuracy falls foul of the trap that Einstein highlighted when he warned that “not everything that is important can be measured and not everything that can be measured is important”.
As a result many economists don’t get the “confidence” thing. The confidence thing is the collective feeling that only the deeply irrational get. And this giddiness is infectious on the up and the downside. It’s the same giddiness that prompts us to fall in love, follow ridiculous football teams and be enormously influenced by each other’s moods, attitudes and notions.
It is what Keynes referred to as the “animal spirits” which dictate the ebb and flow of the economy.
However, the fact that the confidence thing is nebulous doesn’t mean it can’t be influenced by policy. It can be, and in Ireland the primary influencer of confidence is the property market. This is because property prices are the means by which macro-economic policy works in Ireland.
At the moment with real wages static, bank lending negligible and income taxes extremely high, the only new money in the economy comes from savings that are now being drawn down after six years of zero consumption. Sure there are exports, but as they are primarily multinational-driven, the extra income coming into the economy is from wages in the multinational sector and that is only 6 per cent of the workforce.
So why are savings being drawn down? What is the trigger?
House price increases are the trigger.
This is because the recession in Ireland was a balance sheet recession. The balance sheet of the middle class was broken because on the asset side, property collapsed in value. But in contrast, on the liability side, the debts that were incurred to buy these assets didn’t fall but remained the same or rose because interest rates were positive. People with broken balance sheets don’t spend, they save what they can or pay back what they can.
In order for the balance sheet – on paper at least – to improve, the value of assets has to go up, or the debt has to be forgiven. Since debt forgiveness has not been contemplated, the only way the conditions for a take-off in local economic confidence can be engineered is for a rise in house prices to be encouraged. This changes the “paper” value of assets in the economy and triggers confidence.
This process is highly controversial because higher house prices encourage banks to lend against property – which, added to the savings that are being drawn down, leads to house prices rising. The very increase in house prices coaxes the banks to lend yet more and we begin again. This is how the process of deleveraging leads to re-leveraging.
In short, the only way monetary policy can work in Ireland is through the medium of house prices. The only way near zero interest rates can affect the confidence thing is via rising house prices. This is the game, not just here but all over the world.
I am writing this article on the plane back from the US and the soundtrack is the same there. In fact we are copying it.
So where does this leave us?
Far from depending on monetary policy in Ireland to stop house price rises, as some people seem to believe, the opposite is the case. Successful monetary policy in Ireland (and by success, I mean generating the conditions for the “confidence thing” to take off) is dependent on monetary policy which will push house prices up, not down. I wish I could say it wasn’t, but it is the case.
The State – the Central Bank and the Department of Finance – in Ireland is implicitly targeting upward house price movements. This is the recovery policy.
Now long-term readers of this column will know that I believe this land obsession is a disaster for the country in social terms, in efficiency terms and in terms of our ability to compete with countries where accommodation isn’t used and abused to manipulate the economic cycle. But we are back to square one.
The “confidence thing” drives animal spirits and these spirits are infectious. One of the most crucial conditions for confidence is repairing the middle classes’ balance sheet so that deleveraging can lead to re-leveraging.
As a result the success of monetary policy and the ability of monetary policy to work and support the broad economy means that it works through the property market.
Over the course of the next few weeks, the column will look at other ways to run an economy and look around the world at places that do it differently, but for now it is important to acknowledge that seven years after the peak of the bubble, we are back to square one.
Growth will continue apace for a while, maybe a few years, and it will feel better. But a sugar rush is a sugar rush.
Those who don’t know their history are doomed to repeat it, eaten bread is soon forgotten, etc etc. Oh and subscribe!
The State is not, of course, pushing higher house prices so that the middle class punter in the street can feel good about his balance sheet. It is because five years ago we bet the farm on house prices going back up from where they were then. It’s as simple as that. Brian Lenihan’s educated take on the matter was: “Shur we only need prices to increase by 10% in ten years to break even”. Since prices fell about 30% between then and 2012, to where they were “merely” outrageously overpriced compared to comparable economies, there is an awful lot… Read more »
The European banks, including the Irish banks, are correcting their balance sheets by taking advantage of zero % loans from the ECB to refinance their borrowings from the ECB instead of lending to businesses as the ECB intended. Why can’t ordinary mortgage holders do the same?
If Irish people continue to buy property ‘when it’s low’, in order to become notionally richer ‘when it’s high’, and to call this lazy behaviour ‘investment’, then those of us on this blog who have been saying for years and years, on and on, in the teeth of opposition by most of the other posters on this blog, that the crash in Ireland was half regulation and banking behaviour, and half the disgracefully lazy get-rich-quick behaviour of the public, or equally disgracefully cowardly get-on-d’ladder-now lemming/sheep/madness of crowds behaviour, will have been proven right by subsequent history. When this second (mini?)boom… Read more »
As a regular reader of this column, I am always trying to read between the lines and see what your message is. I am still on the fence for buying a “HOME”. I resisted my animal instincts in the first boom/bust and I am still trying to comprehend what is happening right now with house prices. Will the “the economy” of this country ever get fixed – housing, education, healthcare. It’s beyond obvious that the two main political parties are two cheeks of the same ar*e and there is only one thing is ever destined to come out of them.… Read more »
Nice to be in Toulon ignoring the economic farce of the real cause of the boom and bust. That is the central bank policy of continual money expansion. The policy of, the ruin,of eternal inflation of the money supply.
If anybody doubts that there is a government campaign to keep housing high consider this: 1) there are 33,000 BTL landlords in arrears. 2) NAMA is sitting, and to an extent advertising property, which is not available to punters. You can look at their website. Then try and call the receivers. They are selling to large investors only, but at a discount. A discount not included in the property increases. Were this stuff on the market it would show price falls. I mean there are only 3,000 properties on DAFT. Take point 1). Daft shows 3,000 properties available in Dublin.… Read more »
This time around though, it is different I think, and when I say “different”, I mean in the sense that there are so many people in this country, particularly in the capital, who are just about hanging onto a housing solution by their bare fingernails. We are already seeing reports of what would have traditionally been middle class people and families, now ending up in hotels, hostels and B & B’s as a council led housing solution, after their landlord claimed to need the property back “for his son”, only for the same property to end up on daft.ie a… Read more »
David, Were you drinking wine when you got that buzz. On an airplane from the states most would sense a buzz. Not buying this recovery idea. More money out, less money in equals negative spending.
It was what ? The Buzz , the animal instinct , the blood flow , the sex , the wow factor …….in Limerick we until recently never understood what those words really meant because we have no investors , no new jobs , no new industries, no GAA final replays , just no no no nothings . So all these words of expressions of embracing emotions familiar in The Pale are just and void empty in the Mid West . Recently we employed a 25 foot old Granny to walk around the city for a whole week end and paid… Read more »
David is bang on the money as usual though, because there is nothing else going on in this country, not right now and not within the last few years, that is causing growth, apart from another property bubble being inflated, caused by nothing other than a real fear of homelessness or living with your parents into your 30’s. In fact, while wages have remained flat at best for most people, more and more of take home pay has been ransacked to pay for overpaid, underworked and unaccountable public servants, either in local authorities (income raided via property tax and water… Read more »
More obvious collusion to keep prices higher:
Those 1,600 properties are not for sale to Irish potential owner occupiers, and they would probably make a significant addition to the Dublin property market. Nor, I imagine, are these sales at 50c on the euro getting into the official prices, even though that would be a significant sale. So prices are rising, if you ignore the housing taken out of the market.
Something Else is Pushed House Prices are NOT being pushed .This is an illusion .What you see is not what is there .What the banks want you to see is what you can only see . There is a trick . The eye is a simple sense that is our weakest and the art of banking abuses it more that you can care. Light plays on the eye and any wily fox knows how to disappear .Looking at the same place at different times of the day you should see changes but you don’t because our eyes become weak .… Read more »
People get that “buzz” from money in circulation (not savings) It does not start with Psychology. Look David (internal credit creation here remains negative) That means we have structured our economy to look for outside credit with cathastrophic impacts on our real purchasing power. If you were in Sneem (south Kerry) this year you would have noticed a increase in bus trade. The current stats indicate more tourists coming into this place then going out. What is happening goes something like this. Some Yank flies into Dublin (burning a vast amount of capital called kerosene) He rents a 14D car… Read more »
We are into a very interesting area in respect to David’s article IMO. Anyone who has been following the thread over the years knows the property markets are rigged. Rigged by an embedded power which runs the show. We are now observing the outcome the blanket guarantee, NAMA, the bank bailout bonds and the levies and new income streams fixed up ALL of which coming into play. D’s article above shapes out of it a narrative the ordinary person can grasp. This is good. The more people are informed on the machinations of ‘the power’ the increased chance the stranglehold… Read more »
>Most folks drive a car that indicates their income / wealth.
Nonsense. People drive cars that indicate how shallow and insecure they are. In many cases an expensive car indicates debt, not wealth.
Also, what possible relationship could there be between the cost of mass-produced imported consumer machinery and residential land in Ireland?
Annual Property Tax will be some craic under this latest bubble…
…thank’s David – with my book project finally shaped into something presentable article above its energy demanded a comment IMO! :)
Quote from David [ In order for the balance sheet – on paper at least – to improve, the value of assets has to go up, or the debt has to be forgiven. Since debt forgiveness has not been contemplated, the only way the conditions for a take-off in local economic confidence can be engineered is for a rise in house prices to be encouraged. This changes the “paper” value of assets in the economy and triggers confidence. This process is highly controversial because higher house prices encourage banks to lend against property – which, added to the savings that… Read more »
Time was when the housing market was used and rigged to form the basis of massive profits in the banking and development sectors.
Now it is being used to prop up an unaccountable, wasteful, and un-reformable institutional state.
For most people the effects will remain the same. The people will get scelped in an extreme manner.
The immorality that exists in the Irish housing market remains constant. The beneficiaries have changed. The EU is itself a beneficiary, as it is given powers.
Re-leveraging is just an illusion. It solves nothing.
The EU does not want de-leveraging. The EU’s policy framework, and the policies of the ECB are now positively Thatcherite.
The whole economy is to be pushed towards ponzi-fication.
“the only new money in the economy comes from savings that are now being drawn down after six years of zero consumption. Sure there are exports, but as they are primarily multinational-driven, the extra income coming into the economy is from wages in the multinational sector and that is only 6 per cent of the workforce.” David McWilliams. “Ireland shows struggling Europe the way ahead. Strong growth demonstrates that tough choices do pay off” “The hangover from years of heedless expansion has left Ireland with no choice but to seek growth in other ways rather than starting the party all… Read more »
E.C. Riegel predicted this global fiasco 80 years ago, indeed it was inevitable, it all comes back to the money, the flawed monetary model of private money creators issuing private money for profit to the masses. Riegel saw that the increasing volume of unnecessary money issued will inevitably impoverish the masses through money debasement and its side effects of spectacular bubbles and busts. The money creators and their cronies will by the very method of their monetary model create a neo-feudal system of super-rich and universal poverty, and then finally the system will collapse under the weight of its own… Read more »
Mike I think you’re looking at life from the business end of a toll-booth. 1. My dentist cycles from his practice to his home in leafy south Dublin. 2. I remember someone pointing out the car of a solicitor who made millions from the beef tribunal. The Car? A battered old volvo estate. The real status symbol was the beef tribunal sticker which gave him free access to the car park in the four courts. 3. A major landowner who owns some key pieces of the monopoly board in D4 drives an old VW. 4. People living in the nicer… Read more »
“Riegel saw that the increasing volume of unnecessary money issued will inevitably impoverish the masses through money debasement and its side effects of spectacular bubbles and busts. ”
There you go David.It is called the money system and it operates as a classic Ponzi scheme. We all would like this debated and exposed for what it is.