They’re back! The creeps, the snake-oil salesmen and spoofers who condemned a generation to negative equity are cheerleading again.
The advertisers are salivating too because the “property porn” industry sees a chance to sell its fantasy again. The papers are once more displaying “dream homes” replete with doctored photographs and Mediterranean blue skies — all at “knock down” prices. It’s time to buy again, or so I’m reliably told by those who were so reliable last time that they gave us NAMA!
I am not saying that property won’t recover ever, of course it will; but not from here. Irish property is still extortionately expensive. It is expensive not just on a comparative basis but, more crucially, it is expensive on the basis of what is happening in the economy. Any government that is urging people to buy houses right now clearly has no intention of learning anything from the mistakes of the past few years and therefore is condemned to repeat them — with catastrophic results.
If you were a Martian economist and were asked to put together a blueprint for how Ireland can learn from this boom/bust travesty, the first point on the list would be that Ireland should try to ‘lock in’ the competitive gain that cheap property gives a country.
We should let property fall to a level that we can all afford and then start again. As well as a labour force that is willing and educated, low taxes and cheap land should be part of our competitive offering. In that way, we can afford to pay our workers more, because we are paying our landlords less.
But that isn’t happening. And worse still, the property hoodlums are back on the street again. To have been ripped off by the property scamsters once is bad enough, to be ripped off twice is a travesty.
Buying a house now makes absolutely no economic, financial or social sense because prices are condemned to fall much further and anyone who buys now will be suckered into the false rally, known as a ‘dead cat bounce’. Given what we now know about the boom, it’s hard to feel sorry for someone who believes the hype-property brigade. But even a cursory glance at the financial numbers today — just a little bit of due diligence — suggests that we have a long, long way to go before house prices reach the bottom. So beware, see through the glossy brochures and don’t say you weren’t warned . . . again.
Here is the nub of the issue. The reason the property merchants are back is because over the past 24 months, Ireland has been turned from a democracy to a ‘bankocracy’. A bankocracy is a country in which every major decision is taken to bolster the interests of the banks.
A democracy was one of those quaint ideas, like the notion that a state would be governed according to the interests of the citizens. In this ‘bankocracy’, because Irish banks can only be saved if the property market rises, the State will do everything in its power to extort cash from the citizen to give it to the banks via the property market one more time.
Everything the State has done so far has been to promote a bankocracy over democracy. It is far from clear why it is doing this. What is obvious is that the politicians who presided over this mess have no intention of learning from it. Initially, the guarantee — which I was a supporter of — was about containing the crisis. If you see a contagious bank crisis as a forest fire, doing nothing in the chaos of September 2008 and allowing the banks to go under would have been like a firefighter letting a forest fire blaze out of control, irrespective of what was burned in its wake. The State had to do something at the time.
However, the initial advice was to limit the guarantee to two years and then let it lapse. In this way, you could contain the crisis, see how bad the banks were and step back, giving the problem back to the banks and their creditors who had (a) caused it in the first place but also (b) are best placed to unravel it.
We are now being told that if we were to take the guarantee away now, the banks would collapse because of their funding difficulties. Well if a bank, as a business, can’t survive without government support, then it ceases to be a proper business and should be given to a liquidator to get the best price for any assets it has. The deposits can be guaranteed, transferred and form the capital base of a new or existing bank and away we go. No old bank, no old problem.
But that is how a capitalist democracy works. However, Ireland is not a capitalist democracy; it is a cronyist bankocracy where the government has tied the interests of the citizen to the interests of the bankers with calamitous results.
The government believed the banks’ hostage-taking stance. The banks claimed that they had a hostage called ‘the economy’ and that if the government didn’t give them the cash they would pull the trigger and sink everything. Now that the hostage-takers have been rewarded with a huge ransom, we face a concerted effort to inflate the property market again. Having given ‘cash for trash’ via NAMA, the only way that the ransom can be validated is through inflating the market again. But it won’t work. Prices will keep falling.
Look at the chart to see why. For the market in Ireland to clear, investors have to take up most of the slack. This means in people’s heads they need to have a profit model, which validates why they are buying property. In the commercial world, the yield — which is how much rent the property makes — is the crucial barometer.
Let’s say the yield on property has to be 7pc at least to make it worthwhile investing in property, then we can see with some clarity how much prices are still overvalued. The average cost of a house in Ireland is â‚¬250,000. The average rent per month is â‚¬863. This gives a paltry yield of 3.48pc per year. Now to get the yield up to 7pc, either rents have to double — which is not going to happen because wages are falling, taxes rising, unemployment rising and emigration is back — or prices have to fall. So average house prices must fall by another 45pc to reach fair value of â‚¬135,620. Unless prices fall back dramatically, you would be mad to buy because you would simply be paying the banks a subsidy on top of the tax you are going to pay to bail them out!
Another way of looking at how overvalued houses are is to examine the chart. The chart shows how much out-of-whack houses prices still are with respect to the average wage. Up until 1996, house prices and wages moved in tandem. After that, house prices moved out of synch. By 1999/2000 there was a clear bubble emerging and the rest is history. But as you can see, if rises in house prices are to get back to where they bear some relation to rises in wages, house prices have to fall back dramatically. In fact, to get back to a proper yield, house prices must tumble.
Anyone tempted to buy now should try to see through the spin that says: “Now is time to buy”. But this shouldn’t be that difficult. After all, who is saying that now is the time to buy? The sellers! Enough said.
[…] rent-v-buy decision comes into equilibrium. The graphs referred to in David’s articleÂ should become available here. Possibly related posts: (automatically generated)Shared ownership — ways to stop subprime […]
For those who are interested in putting some numbers on their own circumstances, there’s a Rent-or-Buy calculator available here, comparing 25/30 year cashflow of buying or renting-and-saving/investing the difference:
1. we are suppost to be a republic not a democracy, so ruled by law as opposed to 50% +1. There is a BIG difference see http://irishsovereignty.wordpress.com/2010/04/06/irish-sovereignty-party/ 2. David often makes the point that the boom was caused by our ability to borrower the savings of trifty Germans. This is just mildly true as you MAY need savings to create loans however, LOANS create Deposits which create more loans. This is banking and the result is we have in the ECB a 108% per capita inflation of money since 1999 but less than a 50% increase in CPI and wages.… Read more »
Having lots of time for your insights, and agreeing in particular with the argument that we are way over-reliant on property, I am always a little disappointed that you go after your thesis & your targets with such over-blown rhetoric. Isn’t it the journalistic equivalent of the blue skies of property porn? You are over-playing the malevolence of the Government & State, while under-playing the reality of human greed, individual responsibility and freedom of choice. On the one hand, you seem to be advocating State-level controls to be put on the property players to prevent them from tricking the poor,… Read more »
“There’s an old saying in Tennessee – I know it’s in Texas, probably in Tennessee – that says, fool me once, shame on – shame on you. Fool me – you can’t get fooled again.”
To get the housing market moving again the government needs to take the initiative and establish an auction-based floor value for each county. It should find ten middle of the road houses in each county and get each “valued” by three local estate agents. The houses would then be auctioned off to the highest bidder and the vendor of each would receive the auction proceeds plus half the difference between average valuation and realised price. The ratio between realized price at auction and average “valuation” would then establish the true valuation in the public mind. The cost of this exercise… Read more »
Your calculations leave something to be desired, David. Are you using a 10 month occupancy assumption? You’re certainly not using 12, which is fair enough, but if you’re going to do these illustrative calculations it should be made clear what their basis is. An 11 month occupancy might be fairer, which would give a 3.80% yield. I agree wholeheartedly by the way, prices are still way too high. A look at any family home in any average-nice area tells you this. But maybe we need a new device rather than yield, or multiples of annual rent. A country that is… Read more »
David, sadly I made this observation myself. I thought about it, and I have decided that the reason we cannot forgot property is simple. Our nation is not industrial we have no industrial leadership our whole “system” knows only property. There never was a “Celtic Tiger” based on the “smart economy”, all that existed was a few “gombeen Paddies” borrowing money and playing a game of musical chairs. This game is interesting as it’s always the tax payer who is left standing. So why not play it again!
Why do we have an auction system in the first place? Why not calculate the cost price of building a house including land price, and add a percentage profit? An auction system is designed to push prices up as high as someone is willing to pay.
I agree we now live in a bankocracy, and as I commented in this site last year, regardless of which political party is in power, it is now in their interest to direct government policy towards inflating property prices to ensure NAMA meets its growth targets. Can we change this, …I’m not sure. Lets just focus on getting the country moving. Maybe the Entrepreneur Show in RDS this weekend will show us some positive ideas for indigenous growth?
History repeating itself – buying back into the property market only to fall further can be compared to that of the 1920’s stock crash…….. Roaring Twenties. It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the power grid were deployed and adopted. Companies who had pioneered these advances, like Radio Corporation of America (RCA) and General Motors, saw their stocks soar. Financial corporations also did well as Wall Street bankers floated mutual fund companies (then known as investment trusts) like the Goldman Sachs Trading Corporation. Investors were infatuated with the returns available in the… Read more »
I notice that RTE might be heading that way as well. Showhouse (RTE1 8:30 last night) seems to be a dipping of the toes to see if there’s audience interest.
Great Article David, We’re back to the kernel of the matter, the root cause for our problems. Expensive Property. It takes great courage to take a stand in this society of ours to say “No, I won’t buy property”. You are still looked down upon, viewed to be a little bit fruity maybe. So, why is there pressure on people to buy property? 1. People who are in negative equity or close to entering negative equity want to suck you into their miserable world because they are bitter and twisted about their experience. 2. We still have the “Renting is… Read more »
Thanks David for this article
I know 1 person who has put a booking deposit on a house and another seriously considering buying.
The “Soap opera” generation .. *roll eyes* They are easy prey
I’ve sent a link to them this morning, hopefully it will help change their minds
Brilliant piece of timing to publish this article the same day as MyHome.ie publish this; http://www.myhome.ie/residential/advice/whats-new/first-time-buyers-intend-to-purchase-in-the-next-year-2630 The astute among you, ie all of you, will note this little comment at the end – Note to Editor Findings based on survey of 539 first time buyers who were surveyed between 8/03/2010 and 15/03/2010. Only 539. Hardly a comprehensive snapshot of the first time buyers market activity in Ireland but it does reveal that of the 539 house hungry souls, only 36% or 194ish actually have mortgage approval. Mortgage approval under what terms we don’t know but presumably sufficient to buy some… Read more »
This is one hell of a f**king article!!!!
Hallelujah!!!! Will be doing the rounds!!
These sick property f**ks and their political asshole buddies are a threat to our economy and our democracy, there will be no recover worth its salt as long as house prices remain inflated. I ain’t touching the market, burn motherf**ker burn!
Sitting Bull G.
The asking price for a 3 bed semi in Clontarf is still 750k, a bowl of soup and 1 dessert in the local alehouse is 9 euro!.Housing cost in Dublin is still double The level of Liverpool and Leeds!.Dan McLoughlins peeped above the parapit to offer some advice-a aman so inept , he couldn’t organise a prayer in a mosque.Will Fingers and Seanie be investing in the Irish property market?.
Hi David, Well, you are right, Ireland is not a democracy. But it is up to the citizens of this republic to make it so. Overall, we talk too much about property still, its last years “party”, we still have the hangover, we need to correct the structural cause of it to prevent it again and move on to other topics. Property is a utility (like clean ash-free air at 30,000 feet). It should be there, there is no ‘magic’ in it nor should there be. And people should not become wealthy because of abusing market shortcomings in its operation.… Read more »
The government needs to stay out of the housing market and let free market economics function. The don’t have the balls to do the right thing because it would collapse the market in the short term. Long term its the best option. We need to take the pain and get this downturn over with asap. Its not going away.
David. We are back to ‘Generation Game’ your book, which by the way ought to be on that list of ‘books of the decade’, a book worth its weight in gold. The Cronyist Bankocracy of Ireland. Defined: A network of interests holding in place a property bubble making economy which pumps the price of property up and up, again and again for loadsa money. ‘Property bubble making’ economy. Defined: A professional class of lawyers, accountants, politicians, bankers and admin under the grip of greed and amorality prepared to put their own selfish interests above all else. Tools of the community… Read more »
This article is going to really p!ss some people off. The usual vested interests I guess. We should try and send to as many people as we can. I asked on this blog not so long ago what people thought would happen with property prices here and those that replied suggested only one way …and that was down. David quite nicely advised someone on Facebook a while back not to buy so this latest article won’t come as a shock to those who follow his posts. On the whole he is right but as MK1 points out we are not… Read more »
Supply and demand will dictate the market , it always has. It is stupid to borrow money and then gamble it as many “investors” have . I would not borrow money from a bank and then “invest” it in the stock market so why do they borrow money and gamble on property. There is an unlimited amount of property on the market but very limited buyers about. Constraints are the availablity of finance and low earnings. Many young people earn about 30k but prices are about 250k, it does not make sense. So Davids point about “investors” is valid ,… Read more »
Great article and agree fully with the notion that the property prices have a long way to fall before they recover.
You critize the government for supporting the banks saying that they should have been liquitated.
‘No old bank, no old problem.’
I’m not a fan of Nama either but what else could the government do? With most of the banks liquitated how could the economy work?
[…] April 21, 2010 tags: competitiveness, house prices by John P. Muldoon David McWilliams has a truly depressing column today about the government and its banks approach to the property market. I was surprised, too, to […]
Posters. This is comment by Dr. Constantin Gurdgiev is worth a mention… ‘The reason for this is that our lending model allowed for that anomaly: banks were literally sucking out tens of billions of Euro area cheap interbank loans and hosing down a tiny economy with cash. As long as the boom went on, it didn’t matter whether the bankers actually had any idea why and to whom they were lending. Now, the tide has gone out, and guess who’s been swimming naked?’ http://trueeconomics.blogspot.com/ Now this is interesting for a number of reasons primarily it beefs up my comment above… Read more »
David I dont think this is a “dead cat bounce” as it has all the hallmarks of an “echo bubble” http://www.investopedia.com/terms/e/echobubble.asp It also appears to be well orchestrated, given that FF has all their new faces in place at the Banks and elsewhere. My take on this for what its worth is to create a buffer zone between the uber-rich in Ireland and all the rest by inflating an echo property bubble which will be supported and protected by a delusional middle class ably assisted by professionals who will be thankfull to restore some sense of privilige just as the… Read more »
I fear that Irish property’s Vested Interests are too powerful on this little island. Everything that can be done will be done in order to help NAMA work. Too many powerful reputations are at stake to allow it to fail. So yes! property will now be reflated by luring in those pent up buyers that have accumulated in the last 2 years and Yes! here we go again. FFS! the bleein Tea Shock is up to his jowls in Birmingham apartment deals. He’s hardly gonna stand by and watch the value of his poxy little dog boxes go down the… Read more »
So the question…concerning the intellectual state of the society…considering all the scams that have been revealed….will the lemmings be whipped into a state of euphoria again over property ?? …..you just never know….
Folks, Max Keiser just tweeted this, about the Government of the Netherlands protecting its people from under-handed bankers:
Netherlands gov’t to ban Goldman. Kamer: wij kunnen wel zonder Goldman Sachs http://bit.ly/cY0ure
Will our crew EVER protect us from Peter Sutherland and his gang?
Ferguson – Safe As Houses (Ascent of Money)
David, Great article and the charts were a nice touch for non economists like myself who only want a high level snapshot of the current state of affairs. The opening sentence was a blinder and it is good to see a high profile man of smarts using such language to describe these property psychopaths. Keep up the good work and don’t ever let the buggers off the hook. The Irish people can’t claim they have not been warned about the folly of emotional attachment to property. It will take decades for this programming to be removed from the national psyche,… Read more »
Look at this unfortunate typo in this pic of a Florida TV news bulletin:
People involved in selling property are sales people . Estate agents to newspapers to vested interests who hold worthless bank shares etc . They are not involved in a ‘ porn ‘ like industry . People should really grow up and realise that EA’s are in the business of selling houses and that newspapers make big money from their property supplements . That is their business . What kind of a sales person have you ever met that has told you ” to hold off for a while , prices will drop further ? ” I am surprised that somebody… Read more »
A Time to Break Silence
For some reason I have a feeling that we’ve gone through this discussion before. Unless there is a new generation suddenly coming up in this forum. I don’t think so somehow. I think by now everybody should be well informed unless they have been living on another planet in the last 3 years, were in coma or stoned. So for those who have been away or asleep and have no idea what has happened in the last three years, they should really try and pick up the pieces of what has happened. The media will help them a bit. For… Read more »
David, You choose the title “The great property scam is back to rip us off again” When did this property scam ever left us alone. The GOV talked about the come back of the property market since it started talking about NAMA. Anybody vested interest in the property game talks about a come back or bottoming out”. There is no such a thing as “bottoming out”. My understanding is that “Bottoming out” means that it will go up again. Rising up from the bottom. So this is another delusional idea that Irish people have. When it will reaches the bottom… Read more »
[…] The great property scam is back to rip us off again | David McWilliams Possibly related posts: (automatically generated)Dummies Guide to exposing NAMA […]
Hi David, During the property bubble, estate agents were indulging in all sorts of manipulation, such as fake bids at auctions to pressure buyers to pay a higher price. Other shenanigans such as colluding with mortgage brokers to fish out the buyers upper price limit. The whole estate agent auction process will need to be reformed so that all bids are public and verified; all of this will be needed before investors can trust again. Even so, some forget that Ireland’s “Celtic Tiger” started with a real boom in the economy; based on a change in corporation tax and an… Read more »
First-time comment – great piece, David. Do I detect a lot of comment and criticism and, on the other hand, a distinct lack of constructive suggestion ? Honesty is a good starting point – we all had our fingers in the till; from minor fiddles of small cash and pulling ‘sickies’ all the way up to the ‘NAMA Top Ten’. Only when honesty again prevails, with zero tolerance all round, will we actively begin our recovery process; otherwise we can wait, passively, for someone else’s process, over which we’ll have no control, to arrive at some stage in the distant… Read more »
Paul Krugman coins a phrase here;
We’ve got too many Low Information Voters in Ireland, either unwilling or unable to learn. How do we turn the country into a questioning society full of Long Term Educated Voters?
Thanks for all the comments. I was distracted yesterday by Greek bonds going to 8.17% . This is clear default territory as we have noted here over the las few weeks. The question is whether there is any way to prevent contagion or is contagion exactly what we need to put a rapid end to this episode and look to the future?
David – another very good article by you as usual.Might I suggest that some date in the future that you include – the fine difference between risk taking and recklessness by bank management etc .I believe this important and might reduce the blurr of confusion by the public in general.
Moon Wobble – it has been a while since I made any celestial comments . Just to say now the following: 1 The Icelandic Volcano was disrupted from its sleep during the Wobble and Blue Moon at Christmas and from Jan there were a series of small earthquakes in Iceland prior to the disruption on 20 March ; and 2 Full Moon is on the 28 th April so as of today until 29 th it is a very dangerous period and the PULL of the MOON will magnify greatly during this time .So expect anything in these moments .We… Read more »
…fwiw, continuing my thoughts on a new emerging fascism in Europe and the US from Davids last article…. The month of March was somewhat good for the far right throughout Europe in deed. I can only warn people to keep a close eye on these clear tendencies. This is not about stereoype comparison of Weimar and today, we live in a a different world, however, we need to be alert to what is happening in this new post Lisbon Europe. In France the National Front won 11% in regional elections, 20% ex Sarkozy voters contributed to this gain. In Italy… Read more »
News in – apparently in papers today a drop in the price on affordable housing in Spencer Dock, under 200k for two bed and no claw back restrictions. Sounds like marketing boys are back with sells pitch.
“Negotiations with the IMF, the EU Commission and the European Central Bank on a loan from the proposed rescue fund are due to start today. Greek finance minister George Papaconstantinou said that if his country did activate the rescue package of up to â‚¬30bn from its eurozone partners, the loans would start arriving within one to three weeks.” Seems to me there’s a tipping point being approached this week. On the one hand, SEC (Securities Exchange Committee) investigation into Goldman Sachs http://bit.ly/ay3Wrx is showing up DIRT. There’s mounting opposition in American Senate to the proposals for new regulatory powers in… Read more »
WORLDBANK opens data pool
The World Bank Group said today it will offer free access to more than 2,000 financial, business, health, economic and human development statistics that had mostly been available only to paying subscribers.
[…] here to read the full text of advice on this subject given by economist and broadcaster David […]
This is especially for you.
Just to say, I might not agree with everything you say, but I thank you for the site and for pushing the envelope and making your presence felt!
I hope you enjoy it……… :-)