The Irish economy is not overheating, because the Irish economy isn’t really a distinct economy in its own right. It is a number of smaller economies, some of which compete in the global trading system and some of which are protected and compete within the local or national system. Bits can overheat at different times.
One area of the economy that displays the most significant signs of overheating is the property market, where overheating is evident in Dublin, particularly in the area between the Grand and Royal Canals, in the centre of the city. Elsewhere there is some recent evidence that properties are not selling near as quickly as vendors were led to believe they would.
Between the canals is where new employees of largely foreign service companies want to live. These workers are competing against both the local workforce and the local, dysfunctional planning system. The result is that rents are being driven up as supply lags well behind demand. The average rent in the south of Dublin city is €1,992, a rise of 11.5 per cent this year.
Because the multinational workers, many of them highly educated foreigners, are better paid than those Irish workers operating in the domestic economy, they are outbidding the locals, leading to worries about overheating.
But just because a place is expensive doesn’t mean that it is overheating or that a crash is inevitable. Switzerland in general and Zurich in particular are very expensive, but this doesn’t mean that their prices or economies are about to slump.
In addition, just because Ireland had a credit, housing and banking boom-to-bust cycle in recent memory doesn’t mean that it will happen again in the same or even a similar way.
The expensive property market is displaying profoundly different characteristics from the market 10 or 15 years ago. Back then the pressure on prices came from the bottom up. A debt bubble built at the bottom as banks threw money at people. This buying power pushed up prices and rents. Hundreds of thousands of people were involved, indebted and ultimately enfeebled.
In addition, the domestic punter was on the hook to the domestic banks, and the domestic banks were on the hook to their foreign lenders. This dynamic pushed up rents, and indeed the higher rents and prices had the effect of making all the borrowing look legitimate. There was a circular flow not only of money but also of logic and solvency. One depended on the other.
This time around it’s different.
Rather than being pushed up, rents and prices are being dragged up. By dragged up I mean that the market is now characterised by competition not among very many indebted small players but among a few, leveraged, extremely large players.
Private-equity funds and now insurance funds are buying up large developments in Dublin, leading to the professionalisation of landlordism here. They are buying up large tracts of property – mainly apartments – because they can derive a steady stream of income from rents.
It’s now creeping out to the suburbs too.
Irish Life Investment Managers recently bought 262 apartments in south Dublin that were due to be put up for sale, but the asset manager plans to rent them. In nearby Cherrywood, a joint venture has been formed between the US real-estate firm Hines and the Dutch pension investor APG Asset Management to develop a €450 million build-to-rent scheme of more than 1,220 apartments.
Residential investments by these big companies are now showing the same characteristics as commercial developments.
Thus the overheating is in the competition for big deals from leveraged (or not-so-leveraged) funds that borrow on the international money markets and are part of a movement in the past decade of private-equity funds into urban property – not just here but all over the world.
In this way the Dublin property market has become internationalised. It is part of a global business.
In addition, most of the Irish developers who are back on the scene now are there not as principals but as mere frontmen for the foreign money that is building these developments. The Irish developers are simply taking a wage and, if the development is profitable, a bonus.
This is because of the way Nama has sold its loans and land banks. Nama sold at a huge discount to the vulture funds, but the vulture funds, before they bought the property, had an undertaking from a rejuvenated Irish developer to buy the property from the vulture fund at a small premium. You, the taxpayer, paid the difference between the original price and the final, discounted price.
The Irish developer, who couldn’t get money from the Irish banks, secured what is called mezzanine finance from yet another foreign financier. Therefore the developer who is back in the game is merely working for another foreign financier for a wage and a cut of the upside. Although reported in the press to be back in business, many of the old Irish developers are, in effect, employees of foreign funds. And these funds own large chunks of Ireland.
The overheating followed by slump will materialise only if something major happens in the world economy to suddenly make capital very expensive – something like a shock in the guise of a dramatic increase in American interest rates. But this is unlikely to happen, and in any case US long-term interest rates have risen quite significantly over the past six months.
Another shock could be that those large service-based multinationals pull out of Ireland. This would definitely send the property market into an overheating/slump/crash trajectory.
This doesn’t look like happening – and even if it did, the crash wouldn’t spill over to Irish balance sheets, because we Irish are not really involved in either the financing or the developing part of this property market.
If you are the Irish person looking for a place to live none of this really matters, because it feels as if you are being priced out of your own city by a combination of foreign tenants who are elbowing you out and foreign funds that you are paying the high rent to if you do get a place. Rarely has such a transfer of wealth to so few been underwritten by so many.
However, an overheating market followed by a crash (still unlikely) would actually benefit Irish people and the Irish balance sheet, because these days we are only tenants in our own country.