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...