Friday, July 13, 2007

Irish Property Prices and the Dot Com Bubble...

From the Irish Independent, 9-Jul-07:

WARNINGS about the dangers of over-borrowing are nothing new. This newspaper has for several years been among the many voices calling for restraint and prudence. But the risks have become greater with the inexorable increases in interest rates and the change in the medium-term prospect of the economy to a lower level of growth.

It is necessary to emphasise that the forecasts are still optimistic and there is no need for alarm. Although we have to accept that the dazzling Celtic Tigers years have ended, we remain on course for the famous 'soft landing'.

'Restraint'? 'Prudence?' Are they smoking something? For years the Indo has been a cheerleader for the property industry, with the Irish Times not far behind. But then when you see the pages of industry paid Property Porn that both of them churn out each week it's hardly surprising that they have been tiptoeing around the very real prospect of a housing crash and accompanying massive negative equity that now faces the country, when they could avoid upsetting their readers by running more uncritical stories about novice Irish investors buying apartments in China. For the past few years every time someone such as the Economist or OECD produced a report warning that the Irish market was no longer connected to economic fundamentals they were poo-pood by the press and 'experts' from the property industry were called in to explain why 'things are different' in Ireland, the 'fundamentals are strong', etc etc.

All this reminds me of the mood in the days just before the dot com crash in San Francisco- Everyone was convinced The Rules' had changed:

The laws of economics just aren't relevant to us. We're different. And even if it does calm down a bit it won't turn into a slump.....

Even after the crash had started in San Francisco people who were right at ground zero simply didn't understand what was going on, as they had never seen an economic downturn before and either didn't know or (more likely) didn't want to accept what was happening. But then if you were a 23 year old wunderkind (no, not me!) on his second job outside college who was earning US$110K/Year you wouldn't want to either. At the time I was working for Organic Online, a boutique e commerce web site builder whose managers had spent 6 months picking out carpets and Aeron chairs for their prestigious HQ in the Baker Hamilton building when they should have been finding new business and preparing contingency plans for a downturn. Organic was run by Jonathon Nelson. Jonathon's Bio has this to say about the dot-com crash:

In 1999, at age 33, Jonathan took two companies public in less than a year: Accrue Software, Inc., a web measurement and analysis company that he founded in 1995, and Organic. Later, he guided Organic through its subsequent re-privatization.

'subsequent re-privatization'? What actually happened was that the company went from a capitalization of over a billion US$ to pretty much zero and vanished through the cracks in the floor of the stock exchange. When Organic had gone public Jonathon started showing up at the office in a stretch limo. By the time the stock price had halved from the flotation price it was a Lincoln town car and the day I decided to get the hell out of dodge he was showing up in a taxi (seriously). But even after we'd had three all hands meeting's in a row where the only good news was that we had x million remaining in the bank and two rounds of 25% layoffs people were still volunteering to be laid off because they 'needed a vacation and I can easily pick up a new job when I come back'.

Much of the same irrational enthusiasm has been present in Ireland ever since I moved back. I've spent the last 4 years hearing the exact same phrases uttered and have encountered the same blind faith that the future could hold no darkness. People have been paying prices that are completely out of touch with market fundamentals. I used to live in Walnut Creek, outside San Francisco. Property prices were high but then you were living in a region which if it had suddenly become independent would have become the 9th largest economy in the world. Serious wealth was being generated, even after the bubble, which to some extent justified the high property prices. Ireland simply isn't in the same league as the Bay Area. While there are a lot of multinationals around a lot of their operations exist because of tolerance of Ireland's favorable tax laws by GAAP and the US Internal Revenue Service. Were a radical tax shakeup to take place in the US or an isolationist 'America First' president to be elected the Irish economy could find multinationals shutting up shop overnight.

Ireland also has other peculiar factors that have allowed the run up in property prices to continue far longer than anyone thought possible -

  • A Cultural obsession with property ownership. This dates back to the Penal Laws which prevented the Roman Catholic majority from owning valuable property and the famine, which created an unwritten rule that you couldn't get married and start a family if you didn't own enough land to feed your wife and kids.
  • An expectation that the 'Average Joe' should be able to buy their own home.
  • A lack of manufacturing/engineering tradition. Because he Irish Republic never had much in the way of industry it's almost unheard of for someone who comes into money to invest it in anything other than property.
  • A history of economic underdevelopment. Ireland started off near the bottom of the European League. A period of economic growth was to be expected, and as a result the elite and media have been able to use the 'we're catching up' excuse instead of asking hard questions about sustainability.
  • No consumer credit system by US standards. As a result consumers may or may not be horribly over extended when it comes to debt. Nobody knows for sure - not even the people who lent them the money.
  • A government with an economic interest in high property prices. Up to 30% of the sale price of a house goes in tax.
  • No property ownership taxes. Which means that people have no incentive to size their house according to their needs and instead go for the biggest mansion they can afford.
  • An insistence on rearing ones family in a house with a garden as opposed to a large apartment. The vast majority of apartments are 1 and two bedroom. It's unusual for anyone with two or more kids to live in an apartment. But houses with gardens take up a hell of a lot more space, which means commutes get longer and it's harder to provide services.
  • A nation with a very poor track record of managing large infrastructure projects. We can't even organize a Barbra Streisand concert, let alone the construction of a couple of hundred thousand houses.

A pessimist would say that we've created a 'Perfect Storm' and that all hell is about to break loose. In fact David McWilliams has been warning of this for years, which I suspect has led to a drastic reduction in the number of dinner parties he gets invited to...

1 comment:

Truthman30 said...

Great social commentary , personally I think the Irish economy is an illusion , and I feel sorry for people who have bought houses recently in the overpriced suburban commuter belts. The Majority of these folks would be completely naive to economics and the reality of a pending global recession.

What will they do if a crash hits , will there be breadlines at the local spar? Will they eventually have to eat the M50?

Ireland's current workforce , The "Celtic cubs" include myself and my age group (25 to 35's) . Most of this group would be accustomed to a certain standard of living which if turned on its head, would not only be damaging monetarily, but would also have huge a huge psychological impact.

The cracks are already beginning to show, with the huge surge in cocaine use in Ireland over the past decade. These neo-yuppies of my generation either don't remember what its like to go without or they have never experienced it.

There is a blind ignorance and arrogance amongst the Celtic cubs who have grown up in this new "me fein" culture.

Ireland is not San Francisco , or Monaco, yet in some of the more fashionable areas of Dublin people are behaving with a ridiculous sense of economic immortality. There is a pseudo - americanized parade of mobile phone holding ego maniacs , who wouldn't know the meaning of the word "struggle" if it bit them on their Tommy Hilfiger branded back sides.

Although I am sure they could text the word "hardship" if really pushed.

I find Ireland's current socio-economic climate both tragic and hilarious.
My whole generation is in debt up to their necks. They all want the good wages and the good jobs that they are used to.They all want to drive and they are all used to their expected luxuries. Everything has been taken for granted.

Of course it is not our fault that for the past ten years we have been spoon fed this economic propaganda by our right wing, pro business government and media, while at the same time been pushed, forced and panicked into paying extortionate prices for accommodation and goods. And like brain dead , complacent robots we just accept all this without question.

As for my situation,being a mature student I am struggling to find a place even to rent in this godforsaken capital of ours. Having missed the celtic property bubble boat, the most difficulty I have at the moment is finding a landlord who will take rent allowance.

Because , it seems that along with this new wealth and arrogance in Ireland, has also come the scourge of socio economic discrimination.

If you are not a "professional" (what ever the hell that is?) in Dublin nowadays then you can bet your granny's knickers that a landlord will view you as the scum of society.

When a landlord or letting agent in Dublin states on an ad "professionals only" or "rent allowance not accepted " what they are really saying is... if you are not middle class or at least have a job in the IFSC then please take your insignificant little life and kindly Feck off.

I have been looking for basic accommodation in Dublin for 3 months now, and if i don't find somewhere soon that takes rent allowance, i can kiss my degree goodbye in September.

Rent allowance is given by the health board as a rent supplement to those who are in need of assistance. It is not just "scroungers" and layabouts who receive rent allowance, (although that is certainly the impression which seems to be evoked amongst landlords). There are many students like myself who have no choice but to apply for it. We need to survive just as much as anyone else. There are also many lone parents, disabled people, pensioners, widowers etc who rely on rent allowance for basic survival. Heat and shelter .

What has become of A country and society when people are blatantly allowed to discriminate against an already vulnerable sub group of society ?

Rent allowance discrimination is bigotry and prejudice. It is unjustified, unfair and it is in breech of equality policy.

Please check out my blog about rent allowance discrimination in Ireland for further information.

Thanks ( and great blog you have by the way)