Irish Property Bubble
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As of 2006 the current state of the property market in the Republic of Ireland is described by some as the Irish Property Bubble. This analysis is controversial, not least with the Government of the country (the Taoiseach addressed the issue as recently as April 2006).
Current situation
What is not disputed is the astonishing rate of new home building in Ireland. Since the turn of the millennium, approximately 75,000 housing units have been built every year as detailed by the Ministry For Housing [[link]Here ] . Surprisingly a significant proportion of these new homes are unoccupied, which raises the question, why should this be the case?, Some of these empty properties holiday homes mainly for the owner's use while many of these new homes are speculative purchases either waiting to be sold or waiting to be occupied by tenants?
Figures exist for completions because the ESB provides information on the number of properties newly connected to the electricity network and from data supplied by Local Authorities and from The Dept of the Environment and the CSO
Currently (2005) there is enough zoned land to accommodate 330,000 new homes, (CSO Ireland 2005) the plentiful supply of land has stopped the bubble reaching critical mass with a short sharp shock, instead drawn out inflation has allowed socio economic coping strategies to emerge such as intergenerational lending and mortgage fraud. [Sunday Business Post]
The Irish Property Bubble is notable as homeowners have enjoyed the greatest growth when compared to other nation's economies during the current world property boom.
Background to the boom
Interest rates set by the ECB to accommodate a German economy with record post war unemployment, falling house prices and consumer spending, apply in a country with record levels of employment, rising house prices and consumer spending. The Irish economy has fallen down the global competitiveness table from fourth to thirtieth in the past three years due to the rising costs of doing business.
The housing boom is responsible for the employment of approximately 20-30% of the working population. The Irish Central Bank estimates that 15% of the workforce is employed directly in the construction industry [[Citing sources citation needed]].
Agricultural land has been affected by the residential property market. The decoupling of farm payments has meant that most agricultural land cannot "pay for itself" with a future stream of income [[Citing sources citation needed]]. The option of forestry is currently providing a floor of €3000 per cleared acre [[Citing sources citation needed]]. Land unsuitable for forestry has no floor anymore and its price is unsupported. Land with forestry already planted (pre-premium in 1989 for example) is being offered at €2800 or less per acre [[Citing sources citation needed]]. Wheat has been sold in 2005 for €75/ton with one acre yielding a loss-making 2 tons or so this year and 4 tons or more in a good year [[Citing sources citation needed]].
It appears that the only way for agricultural land to pay for itself at current market values is if it can be: -
- Used for residential development
- Developed as a golf course or other leisure use
- Compulsorily purchased for use in national infrastructural projects, especially road-building
Property Bulls are those who believe in house price stagnation or inflation in nominal terms.
Property Bears are those who believe in house price deflation in nominal terms.
Irish Property Bears
- The Economist newspaper maintains that a large bubble exists in the Irish market.[[Citing sources citation needed]]
- The Economic and Social Research Institute in Ireland said in April 2006 that rising property prices and higher interest rates have probably created a bubble for Ireland's housing market. This warning came two weeks after Ireland's central bank said the housing boom may be unsustainable and poses a "significant risk" to the economy.
- The IMF also says that residential property in Ireland is overvalued. [[Citing sources citation needed]]
- Eddie Hobbs argues against buying Irish property: "It's only going one way..." and has directed investors overseas instead. He also argues against the Jumbo Mortgages needed for most purchasers of Irish property today.[[Citing sources citation needed]]
- The Central Bank and Financial Services Authority of Ireland admitted on 7 November 2005 that various models show between a 0% and 60% overvaluation of Irish Property. The news was broken by The Irish Times who saw a document from an OECD meeting with their estimate of an overvaluation of 15%. Minutes of the meeting indicate that senior Irish officials agreed with the estimate but couldn't announce a figure to the public in case they would be blamed for triggering the crash. The Central Bank now denies this. [[Citing sources citation needed]]
- Following the outing of the Central Bank's estimate, economists have rushed to agree, making their opinions on the morning radio shows that the ratio of rent to property price is absolutely unsustainable and that any downturn in construction would start a spiral that would depress growth by 3-4%. They further state that the market is driven by the 20% of sales to buy-to-let owners, which again is unsustainable as it appears impossible to make a profit at current prices and rents. [[Citing sources citation needed]]
Irish Property Bulls
- The mortgage banks.
- Some stock brokers owned by mortgage banks.
- The estage agents.
- The media in general, taking advertising revenue from the estate agents.
- The government.
- Many property owners, when asked their opinion in surveys etc.
Bearish arguments
- A record 12% of the Irish workforce is employed by the construction industry: any slowdown in construction would lead to a spiral of unemployment and less construction.
- Values have deviated too far from long-term trends.[[Citing sources citation needed]]
- There is no true shortage of land, only a shortage of planning permission. Even in Dublin, Cork, Limerick etc. there is no shortage of land.
- There is effectively no price floor for rural/agricultural land.
- The p/e (Total Price divided by annual earnings) ratio for private housing is at an all time high. Even with the bulls predicting stagnation, these ratios are extremely high, and only justifiable by a Survivor Investing strategy.
- ECB interest rates are (Mar. 2006) are at an accommodating 2.5%, with many Jumbo mortgages taken out in Ireland. If interest rates return to normal, holders of these mortgages would be forced to default. As the market price for housing is set on the margins, the forced repossession sales which follow would lower house prices.
- Consumer behaviour in Japan is really not so different from Ireland or indeed any other capitalist society. If house prices decreased there for 14 years, then the same is possible in Ireland.
- A very high proportion of new houses in Ireland remain unoccupied. Investors are relying on capital gains rather than rental income.[[Citing sources citation needed]]
- A resurgence in the international stock markets, combined with more profitable property investments abroad will substantially reduce the number of domestic property investors.
Bullish arguments
The property bulls have dismissed the calculations of the IMF as not taking into account Ireland's unique conditions. They have further dismissed the crash predictions of The Economist by stating that anyone who listened to that advice a year ago (and not bought property) would have missed out on the capital appreciation since then.
- Demographics: A net 50,000 immigrants per year who must live somewhere, also more people are buying second homes
- House prices have never really gone down much before, only fallen a little and sat there (stagnated) for a period
- The number of houses per thousand of population is still low (~391), compared to the EU average (~428).
Bubble End-game indicators
Some transactions have taken place which are seen by the property bears as indicative that the "end is nigh" for the property bubble. Generally the fact that mortgage banks or estate agents are seen to be cashing-in is seized upon by the bears, although these type of transactions in fact take place all of the time.
- AIB selling their headquaters in Ballsbridge to lease back (for €600,000,000??)
- Estate agents Gunne selling up
- myhome.ie selling up
- Various mortgage banks, including Bank of Ireland and AIB planning to sell off most of their branch offices.
The argument of the bears is that these organizations know the property market better than anyone, and if they are selling, then there must be little scope for price appreciation.However, the bulls say that the value of the banks' property assets could be better utilized in the business. And that the estate agents are not leaving the business, only consolidating extraordinary gains in value - which is a common business practice.
See also
- Real estate bubble
- *United States housing bubble
- *British property bubble
- *Japanese asset price bubble
- *Spanish property bubble
- *Chinese property bubble
- *Indian property bubble
External links
- [The Property Pin - Making a point on the top of the bubble!] - Irish Forum dedicated to discussing the Boom / Crisis!
- [End of the housing boom?] - Dec's Ramblings
- [Eye of the Storm] - Every Second Paycheck
- [Impending doom in Ireland] - Irish Property Commentator
- [PropertyCrash.net] - Blog devoted to the Irish housing market
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