The current market instability could create lucrative chances for those willing to take a risk.
Because of the panic that has gripped the markets, the next few months will probably be the most profitable opportunity to make money in this generation. But you’d hardly think so by listening to the mainstream commentary in Ireland.
Sometimes it’s difficult not to laugh at the type of advice that is being thrown around Dublin by so-called financial experts. For example, the same lads who were telling you last year that Irish property was ‘‘fundamentally’’ sound and would experience, at worst, a ‘‘soft landing’’ are now telling you that the world is ending.
Last year, these heads were telling you that AIB shares were a buy at €20.Today they are suggesting that AIB at €3.7 is a sell. God knows who pays these lads, or why. Nobody is suggesting that the background noise has not changed dramatically. Nor is anyone underestimating the risk involved in trying to stop the bottom of any market, but if we stand back a wee bit, we might gain that most valuable of insights – perspective.
The key thing to appreciate, is that all financial crises are temporary. They tend to blow over. People with debts and companies going into the crisis get hammered and those with cash prosper. The rout in asset prices becomes self-correcting.
Either markets exhaust themselves in a selling frenzy or they get pushed back by the heavy artillery of government intervention. Either way, the system rights itself at a different price and we start again.
We are now seeing huge falls, mainly because hedge funds are selling everything to meet their financial obligations. Their clients are demanding cash and, as a result, the funds have to sell everything they have.
At times like this, the selling becomes indiscriminate, which is why certain blue-chip companies – ones that will almost certainly survive the recession – are offering double-digit yields. Given that global interest rates are headed downwards rapidly, such companies must be a screaming buy.
But like everything in investing, you have to be diligent and, most of all, patient in your research. A crucial dynamic in all these episodes is that markets overshoot. In good times, as we’ve seen to our regret in the Irish property market, markets overshoot on the upside, bringing prices up to ludicrous levels.
In bad times, like now, the same process occurs and asset prices overshoot on the downside, bringing prices down to levels where the assets are at bargain basement prices. We are seeing this now in stock markets.
Unfortunately, this is not happening in the Irish housing market which, on any rational basis, is still wildly overvalued. Last year, this column ran a simple financial model for where fair value might be in the Irish housing market. This is back-of-the-envelope stuff, but bear with me. The price of any asset must be related to the amount of money the asset generates each year.
In the US, analysts claim that, in the long run, house prices should be equal to between 12 and 14 times earnings. This means that if a house is generating a rent of $10,000 a year, it must be worth between $120,000 and $140,000 a year.
Apply this test to Ireland. A quick search of Daft.ie will reveal, for example, that a three-bedroom house in Co Wicklow – advertised as an investment property – is on sale for €289,000.
The same website tells us that the average rent for a three-bed in Arklow is €850. So let us say that, in the best possible case, this place is rented for 11 profitable months a year – the final month’s rent goes on various costs. The implication from the American model is that the house is worth about €122,000.
The implication from this, compared to the advertised price of €289,000, is that the house is still wildly overvalued. The Irish calculation means that the house is trading at 31 times its annual yield. This clearly needs to fall dramatically by close to 60 per cent for it to make any financial sense to buy.
So one of the factors impinging on Ireland’s recovery is that we have to see house prices fall dramatically for any investor in their right mind to get back into the market. As long as estate agents, banks and builders are in denial about where prices need to go, we will not have a platform for any recovery.
So property investment is out, but let’s go back to the stock markets. The question is whether we are near the bottom? In Ireland, the bottom might take a few more months to materialise because we are caught in a bad debt brace.
Going into the crisis we were the most indebted population in the world. More worrying, practically all of that personal debt had been taken on since 2000, so not only were we indebted but we were newly indebted. Finally, practically all of that debt was property-related.
At this stage – for heavily indebted players – it hardly matters now what happens to interest rates. Sure, a few decreases will help, but the employment situation is of much more consequence for mortgage holders. Unfortunately, unemployment in this country is likely to rise substantially in the coming months and years because so much of our recent job increases were generated by the domestic service sector and the construction sector.
Rising unemployment will prompt industrial-scale mortgage defaults in Ireland and the defaulting process will follow the same pattern we have seen in the US. We are likely to experience what could be described as ‘‘shunting defaults’’, as people’s defaults shunt on from one loan to another. This means that we will also witness large-scale credit card default, many thousands of car loans will never be paid and home loans will similarly be reneged on.
This will lead to house prices tumbling in a delayed reaction. However, this is probably the point at which the Irish stock market will begin to rally.
For the brave, for those who understand the dynamic of markets, this week’s panic should be the signal to begin the process of thinking about investing again. The lessons from history are that turbulent times pass and also present the buying opportunity of a generation.
I’m in agreement with the thrust of this article, but the American formula is dependent on the historically low interest rates the globe has experienced over the last 10 years. Should interest rates rise (which will probably not happen – but it might) then this mutiple would be reduced – to something more like 6 – 8 times. For a long time, DmCW has been advising people not to invest in property, and he’s been proved right (although it took a long time). If you’re thinking of buying a place, wait – property has a long way to fall in… Read more »
I’m a cletic tiger cub. I’m 32 years of age, dont rember the 80’s & i’m still full of the confidence me & my buddies grew up with. I’m not loaded but I got a bit of spare cash every month. 3 years ago i wanted to buy a 2nd house & jump on the property band waggon. My girlfriend works in property rental & listening to her, in decided to go for it. I was approved for almost €300,000 and we had a chat. I could get a house for that money and take about €950 in rent a… Read more »
“The current market instability could create lucrative chances for those willing to take a risk.”
What compnanes on the Irish stock exchnge look like value taking a medium to long term view ?
Most of the major stocks are dependent on financial servcies, property or local consumer spend !
How about C&C group down at €1.19 from €5.75 less than a year ago with a P/E of 4 – lot’s of great brands – others ?
Warren Buffett has called The Bottom in the USA. Antony Bolton has called it in the UK, but given that the Nikkei is trading in a position it was last in 20 years ago, it’s hard not to pause and reflect. It this a V, U or L shaped downturn? Is it deflation, disinflation or the prelude to hyperinflation? I dunno. There are so many conflicting and contrasting theories from the ‘experts’ that it makes the head spin. Some people say you should only put money in shares that you can afford to lose. If you’re in that fortunate position… Read more »
David yourself, George Lee, Morgan Kelly, Colm McCarthy, Robbie Kelliher, Shane Ross, Alan Ahearne, and Sean Barrett – have all provided careful, cautious predictions with respect to economics over the last five years. You have critiqued and laid bare the fact that the Celtic Tiger was an aberration behind an giant magnigifying glass. Most of the the economics profession that we seen on television on the news bulletins, have made commentary that has proven to be costly, excessively optimistic and factually incorrect. So now we are witnessing them all trying to rebuild their credibility. The fundamental difference is that the… Read more »
ok, the message in todays article was certainly on my mind. However, what shares would be a buy? Certainly not financial shares, other shares are holding steady while others continue to fall. What criteria should be used. To CD. I am 38 and I do remember the 80s, your summary of how smart a buy property can be not matter what the state of the economy or the location of the property is exactly what got the Irish economy into the current mess. It is a pity that people like yourself and others don’t take example from our European neighbours… Read more »
@CD I dont know where you got houses in Ireland at those prices in Ireland in 2005 but I find it hard to believe those prices were near any sort of real urban area at those prices in 2005 Ireland. Maybe Limerick? (Moyross?) If you managed it and it is paying off then fair play. As regard rents holding, that is going to be unreliable down the line as more and more rental property comes online with the emigration of many of the eastern european workers over the next few years along with all the empty newbuilds out there. Personally… Read more »
Buying a house at €289 000 and getting €850 x 12 months =10200/289000 = 3.5% return on my investment before tax is paid. How could people think that a 3.5 % return per annum is a good investment when the bank is charging them 3% per year interest on that 289,000 every year for 40 years!!!!!!…………..hello……….I think people got more emotional about owning their own home (which they don’t own, the mortgage is on the banks Balance sheet as an ASSET) than thinking things through and comparing themselves to the rest of the world instead of thinking that IRISH IS… Read more »
When I say buy to hold I mean buy to hold. If you buy good companies and hold them long enough then you may be able to retire on the back of those holdings. I will give you an example. I was living in LA when the ’94 quake hit. The guy next door had a beautiful house, new cars, pool, decent neighbourhood, wife at home all day. I figured he was some sort of professional. The morning of the quake he showed up at his house at 5AM (just after the quake) driving an MTA (equivalent of CIE) bus.… Read more »
@JuicyLucy What you are talking about is being a slumlord. It is certainly a legitimate business it is profitable to some degree. However will come under increasing pressure over time as the financial constraints on the Irish Government become ever tighter over the next few years nad the pressure on social welfare budgets (who, I assume, administer rent allowance, not being familiar with the process in Ireland) becomes ever tighter with the increase in the number of social welfare recipients over the next few years. Expect “cuts” to rent allowance in the near futire given the fact that private rents… Read more »
are Juicylucy and CD one and the same….. hmmmmmm
Hahaha. CD you are a riot! You had a chat with your bird and decided just when it all went to shit to become a property magnete. Woo hoo! Good for you. Hope the bird sticks around because she is obviously the brains of the operation. JuicyLucy is what we all know as a bottom feeder. They do well because everyone needs somewhere to live. The banks are not to be trusted. They are holding out and prices are in a state of stasis. When this whole mess winds itself up we will know where we are. At this time… Read more »
David, good positive insight and advice.
AndrewGMooney Just a quick thought on Warren Buffett. He didn’t call bottom of the US market, he’s always quite clear about that sort of thing. He calls ‘Good value investment’, which really isn’t the same thing at all. It’s probably also worth noting the deals that the guy pulls off – the Goldman’s deal was just spectacular, but not available to us mere mortals. Many stocks look good today, according to their p/e ratios, but it’s worth bearing in mind that the financial/credit slowdown is only just hitting the real world, so many of those earnings figures are likely to… Read more »
Confederated Slaveholdings, Transatlantic Zeppelin, Amalgamated Spats, Congreve’s Inflammable Powder, U.S. Hay and the Baltimore Opera Hat Company are all worth a look.
CD – You comment <> Have you learnt anything from the events of the last ten years ? Confidence is a liability. Confidence created the debt level that is going to cripple this country for a generation. It is the idea of ‘confidence in confidence’ that has created a mess of a sound economy. Confidence has prevented rational intelligent thinking. Confidence put Bertie Ahern into the Taoiseach’s chair three times. Confidence built up massive debt levels and resulted in developers conceiving even more stupid plans. Confidence sent Irish people to buy overvalued property in Budapest, Costa del Sol, Bulgaria, Berlin,… Read more »
“this week’s panic should be the signal to begin the process of thinking about investing again”
1 more selloff could very well see a strong bounce!
As for ISEQ! It’s scary knowing what I know about Market’s and seeing it relative; Globally! (historically)
Deco, well said. We need good business practice, companies to grow, products to be created, ideas to flourish. Not more bloody property mogels.
Now that I think about it a bit more CD and JuicyLucy you are both smoking crack. This thing is gigantic and its not jus a few skangers getting their gaff in Blanch repossesed and maybe taking one less holday in 2009. This is a major structural failure. The wheels are coming off big style. I took a look today at businesses in the local area. Its in Co. Meath and in the “baby belt” and the sheer amount of people that will be totally and utterly screwed by the collapsing housing market is enormous. Giant shopping malls that are… Read more »
AndrewGMooney > It this a V, U or L shaped downturn? The shape of the downturn will only become clear with the benifit of hindsight, the most important thing for the longer term investor is finding the bottom and getting in as close to it as possible. So, where is it? and more importantly, are we there yet? My answers are I don’t know, and I don’t think so. I think indicators point to a longer term economic contraction. My backround is in mining, one of the first industries to be hit in a downturn, and things are not pretty… Read more »
Leaving Cert Economics Question Part 1 Summer 2008 Lets say then that by Mid-November confidence in the Government has evaporated and a vote of no confidence is carried before Christmas with an election in the late Spring. In the meantime the Germans come looking for their 250bn and a couple of banks fail. The Government can’t raise sufficient loans from anywhere and all we can lay our hands on is a couple of billion from the IMF for essential services, a la Iceland. Meanwhile, young president Obama creates an internal market in Nebraska or Wyoming and all the MNC’s skeddaddle… Read more »
Interesting looking at bank or irelands share price today. It’s standing at €1.38. That’s a P/E of 0.862. I’m not saying it’s a buy – far from it, but in any other context, it would be a free share. Does the stock market have further to go? The companies now part of the S&P500 (a much better indicator than the dow jones) traded at seven times earnings in the 1970s crisis. They are now, despite all the GMFO trading, at eleven times earnings. Room for more downward movement. 2009 will be messy. For stock-markets the motto is ‘early is the… Read more »
Looks like the Aussie one way tickets might have been a tad premature?
http://www.abc.net.au/news/stories/2008/10/28/2403163.htm?section=justin
I notice the whole fear of derivatives (a real symptom on confidence in confidence is ever there was one) seems to have gone away. If all the hedge funds are looking for cash to meet their obligations, are we not about to see another dip. Let’s face it, there is no guarantee that the current bailouts going on for banks worldwide are going to work. If anything, given the stall in credit lines and consequential impact in supply chains world wide (Lorcan you mention boats being moored rather than sailed at a loss), I see further downward pressure and lots… Read more »
“For the brave, for those who understand the dynamic of markets, this week’s panic should be the signal to begin the process of thinking about investing again.” Quite frankly I find this whole system and debate disgusting. Markets rise and fall, business men make losses some huge profits. Does anyone care about the people? Do any of these economists/investors/speculators factor in the social impact of their decisions. Is the human ‘externality’ ever considered or is it just profit? Can people not see the insanity of this, the drive for the bottom line? People who lose their jobs, have negative equity… Read more »
I’m normally in tune with DmcWs articles but I demur on this one.. There have been many forum comments recently that the boom and bust were due to one cause only- avarice. Complete blind rapacious Vampire greed, in which all values were thrown out for the sake of profit. But the boom saw Irish peoples pockets expand while their standard of living contracted…now the smoke has cleared from the crumbled edifice- people face terrible losses- and thus far there is just a gaping incredulity as the roof caves in. How did we lose everything? we were advised we were going… Read more »
In relation to the so-called ‘credit crunch’…
People on this blog might be interested in contributing to a creative commons hosted problem exploration event hosted at: http://www.debategraph.org/
This is an experimental means of tapping into ‘crowd wistom’ using a ‘knowledge cartography’ tool. As Ireland’s record of good governance over the last number of years demonstrates the executive branch of public service and professional advice companies has nowhere near a monopoly on management skill.
Making a practical contribution in this way might be a more positive activity than rubbishing the character of our political leaders, however therapeutic that might feel!
People don’t learn. We will do this all again.
The true effects of the collapse are yet to be seen and yes there is money to be made off the corpse. Death, war and bust are all big businesses.
@ger and Ire-in-Exile, Boom and bust cycles are fine in a competitive environment as it weeds out bad practice and obsolence and encourages diligence. What’s been happening over the last 20 or so years is that money was printed (i.e. credit) backed by the fradulent valuation of assets and fraudulent assessment of the ability of people to pay back – all for the sake of collecting commission. This disease spread all over the place. The boom and bust cycles were never allowed to to do the clensing needed to effect a better cycle of events the next time around. We… Read more »
If letters of credit fail we won’t have any imports.
We are an island. So we better learn how to row a boat to get supplies.
The banks have never and will never give a flying sh1te about real humans. They are only interested in their own survival. We can all go and starve for all they care.
“People said i was ‘mad’ to buy the 2 houses in the ‘rough’ estate but Dunnes Stores recently invested around the corner and its a 5 min walk to an Institute of Technology.”
Sounds like CD bought in Muirhevnamore in Dundalk (the equivalent of Moyross!)
Regarding bail outs, currencies, and markets…..
‘Right now I feel like the guy who was told, “Cheer up – things could be worse!” So he cheered up, and sure enough, things got worse.” – Prof. Paul Krugman
If we were so comprehensivly lied to why has nobody been arrested and jailed for this scam? There is a former taoiseach with a broken leg who should be first to be picked up.
The ENTIRE capitalist model has been utterly destroyed and yet we let the same fruitcakes ‘sort it out”.
“…if a house is generating a rent of $10,000 a year, it must be worth between $120,000 and $140,000 a year”
David – I love the maths – do you not proof read this?
I do appreciate the article though. It would be great to see a comparison of P/E ratios for the late 80’s
Bob, David is exaggerating – it was only 10 to 1 in the 80’s. – well in line with average earnings. In those days,Banks were the only lenders for commercial property – this was pre- demutualisation of the Building Societies.
in the 80’s you couldn’t give land away. Premier Dairies sat on 20 acres in Monkstown for years unable to sell it to anyone.
Some of the comments on here are crazy. To say the Entire capitalist system has been destroyed is incorrect. Capitalism has not failed. What has failed is the regulation of it. As Marx(I think it was) said, Capitalism will eventually eat itself. And if you take pure capitalism to the nth degree, he is correct because unregulated capitalism leads to cartels and monopolies. Why do we have regulation laws and competition authorities? Many are asking the same questions now. The bottom line is the banks and current system have failed due to a complete lack of regulation and proper application… Read more »
Jose Antonio <> Correct. The Irish elite go to school to mix with each other. And to avoid mixing with the lower 85% of the population, urban riff-raff, provincials, country bumpkins, etc..Then they join competing political parties, run competing banks, try their hand in different professions. They offer us ‘choice’. The rest of the population actually do the work and sustain the entire thing. The best example I can give you of how much of a joke it has become is Gormless sobbing when Bertie Ahern stood down. The same Gormless attacked McDowell in Ranelagh about what we are not… Read more »
Folks, In relation to earlier comments regarding house prices..etc, one person made a relevant reference with respect to the 18 year property cycle. I suggest anyone with property interests reads. “Boom, Bust: House Prices, Banking and the Depression of 2010” by Fred Harrison, r.r.p. £18. This books focusses mainly on property cycles of Anglo-Saxon democrocies over the last 300 to 400 years, and concludes the 18 year property cycle (cycle mechanisms starting from recession – property price undershoot when bank lending tightens & unemployment rises – at which stage cash is king & only people with money can buy property… Read more »
Supply/Demand….08. We have lots of empty houses We don’t need any more houses We cant get credit to buy houses anyway So, we have a population of say four million….figure in that there was say 400,000 houses built over the past ten years……previous to that houses were being built as well. I think that we’re beyond saturation point re houses imo, our population will decline over the next few years. I honestly think that house completions are going to cease being spoken about because there wont be any need for house completions over the next decade other than one off… Read more »
David,once again an excellent article. There are two things I would like to ask you. Firstly,do you really believe the TSB/ERSI statistics that prices this year have dropped only 6.6%? Where can one get accurate statistics? Secondly ,while I think your predictions have been pretty accurate , your articles don’t seem to note the real suffering a lot of people are going through. Don’t get me wrong-most economists don’t, but you are not most economists . You write in a very accessible style and also seem to have a sense of Humor. Please show you have a heart. I wouldn’t… Read more »
see Jose above
Barry, concerning the TSB house price official statistics bulletin…the entire media and official coverage of the current Irish ecnomic crisis is understated severly….As they used to say in the old Soviet Union….”when you hear the official denial…then you know with absolute certainty…that the rumours are true”
Where have you been the last ten years…look at all the bank economists talking up the economy…then when a crisis occurs….it is dramatised and emotionalised in case we might do something rational and fix the problem…
Barry The BBC website has an interesting approach to the current situation. The BBC are very clear that they do not see it as their role to ‘unsettle’ people, and to that end, there is little useful coverage of the financial situation, and what there is, is, rather strangely, in a blog. Deco I think you’re quite right. It’s interesting, as you could view it as being the great malaise of recent decades: Optimism. Nothing wrong with optimism, in general, but there’s a lot wrong with mindless optimism. People remind us that financial markets are ‘all about optimism’, which of… Read more »
Stephen, great post. Oscar Wilde once said ” The basis of optimism is sheer terror” Unfortunatly, many here now see the opposite of optimism being realism rather than pessimism. The tone of David’s article is, for him, optimistic. But, obviously, this doesn’t mean anything has changed. So perhaps the question we should be asking is where do we go from here? To answer that question we have to try to define where here is for us. ‘Us’ is an important word. We exist as a society and in any society there will always be those who do well and those… Read more »
Optimist – somebody with insufficient information. We were informed by the Irish establishment, and we became optimists as a result. The lesson is clear – find out the truth for yourself – don’t be a fool who believes everything that is peddled as fact by society. The collective group think created by all the official statements for the last ten years created optimism. The RippOff Republic phenomenon in 2004 alerted many that there was something amiss in Ireland. That a lot of the assumptions were absolute rubbish. And nowwe see this to be true. But at the time it was… Read more »
Misinformation was the source of much of the unfounded optimism.Washed down with alcohol, it became a lethal influence on the collective judgement of many in our society. The naive always get punished. Time for the naive to wake up.
Opportunity knocks alright if you are an active investor. getting in and out again within a few days, There will be wild gyrations in certain stocks caused by technical factors rather than fundamentals. Superimposed on these gyrations is another factor caused by the American election. People are optimistic that the election of a new president will bring in a new era of prosperity on the basis that nothing could be worse than what Bush achieved. The DOW & S&P will rise until the new prezi completes his 100 days. Then they will plumb new depths forming the second leg of… Read more »
I found that by not listening to the radio and not buying a newspaper I found that I could make my own decisions. If I never hear 98FM or FM104 again it will be too soon. I also found that by not watching other peoples lives on Soaps and going outside and doing things was far healthier. Interacting with real people with real lives rather than every night watching some loo la drama and then the following day at work talk about it as if it was real. My point is that the media decides what is news and Irish… Read more »
The same issue of attitude towards to the old isle has been prevalent through several emigrant generations. I experience the same in the USA and England from those who had emigrated in the 50s.