Irish property bubble

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Houses prices in Ireland (2000–2010)
  Nationwide
  Dublin

The Irish property bubble was an extreme increase in the price of real estate from the late 1990s to 2007 in a period known as the Celtic Tiger. As occurred in other Western European states, the property bubble peaked in 2006, with a combination of increased speculative construction and rapidly rising prices, stabilised in 2007 and then 'burst', coming to end in 2008. By the second quarter of 2010, house prices in Ireland had fallen by 35% compared with the second quarter of 2007, and the number of housing loans approved fell by 73%.[1][2]

The fall in domestic and commercial property prices contributed to the Irish banking crisis and as of February 2013, prices continue to fall. House prices in Dublin are now down 56% from peak and apartment prices down over 62%.[3]

House prices have so far returned to 20th century levels. Mortgage approvals have dropped to 1971 levels.[4] As of December 2012, more than 28% of Irish mortgages are in arrears or have been restructured and commercial and buy-to-let arrears are at 18%.[5] As of the end of March 2013, arrears have continued to increase.[6]

The bubble years[edit]

Background[edit]

From 1991 to 2001, Ireland's real gross domestic product(GDP) growth averaged above 7% and there was a large expansion in the workforce. From 1990 to 2000 Irish gross national product (GNP) per capita rose 58%, bringing it above the European Union average.[7] The pace of expansion in lending to households from 2003–2007 was among the highest in the Eurozone[8] with German banks having US$208.3 billion in total exposure to Ireland.[9] These factors led to house prices increasing by 17% between May 2000 to May 2001 alone.[10] In August 2000 an International Monetary Fund (IMF) report contended that Irish property prices were almost certainly heading for a collapse in the medium term, since "no industrial country in the last 20 years had experienced price increases on the scale of Ireland without suffering a subsequent fall".[11] From 2000, approximately 75,000 housing units were built every year as detailed by the Department of the Environment, Community and Local Government[12] with sufficient planning permission being granted so that by 2005, there was enough zoned land to accommodate 460,000 new homes as housing density figures continued to rise each year.[13] House prices went on to more than double between 2000 and 2006 with tax incentives being a key driver of this price rise.[14] The Fianna Fáil-Progressive Democrat government received much criticism for these policies.[15] In 2004 the independently produced Review of the Construction Industry, commissioned by the Department for Environment, estimates that 12% of the workforce were employed directly in the construction industry.[16]

Interest rates set by the European Central Bank (ECB) are only guided by low inflation targets in the Eurozone. Some[17] felt this was and is too narrow an objective, leading to decisions on interest rates that are inappropriate, e.g. for states with record levels of employment, rising house prices and consumer spending.

Contributing factors[edit]

Increased prosperity[edit]

Since 1994, the Irish economy saw considerable investment from multinational corporations. Irish education standards were perceived as high relative to those existing in other English-speaking countries.[citation needed] Improvements in the technical education area also played a key role in upskilling the Irish workforce.[18] The combination of high education standards, and high capitalisation ratios in the investment projects resulted in considerable improvements in labour productivity in the economy as a whole. This resulted in increased wage levels in the traded sector of the economy.

Eurozone membership and ECB interest rate policy[edit]

Ireland joined the initial launch of the euro on 1 January 1999 in accordance with the 1992 Maastricht Treaty and gave control of its monetary policy to the European Central Bank in Frankfurt, Germany in accordance with the 1998 Treaty of Amsterdam. The euro contributed to the post-1998 investment rate in countries that previously had a weak currency[19] through the creation of a more integrated financial markets[20] although there seemed little or no evidence that the introduction of the euro increased the efficiency of capital allocation.[21] The introduction of the single currency, with European Central Bank interest rates being lower than what national interest rates would have been had Ireland not joined the Euro, meant that those buying property were encouraged to borrow larger amounts of money. As prices continued upward financial institutions offered 100% loans. Newspapers carried advertising for properties urging people to get onto the "property ladder" as property was seen as a guaranteed bet. Over time, the scale of residential mortgage debt reached proportions that was of concern to the Irish government, because of its effects on the Republic's economy. The increasing cost of property and the need to borrow money to acquire property in Ireland has resulted in substantial increases in the total level of private sector debt. This became of increasing concern to the Irish Central Bank, which had issued many warnings, in an effort to affect consumer behaviour.[22] Inflation was higher in Ireland than elsewhere in the Eurozone.[23]

Impact of rising prices[edit]

A side-effect of high urban housing valuations was a drift into rural hinterlands to live in lower cost housing. This happened on a substantial scale in the Greater Dublin area, in counties Wicklow, Kildare, Meath, Louth, and Carlow. This resulted in infrastructural pressure being placed on rural villages and provincial towns as residential developments exceeded the pace of both infrastructural development and provision of services for the growing population.

Role of the media[edit]

In July 2007, Irish Independent journalist/comedian Brendan O'Connor urged people to buy property, even as the bubble was clearly bursting.[24] In April 2011 journalist Vincent Browne admitted that the Irish media had played an important role in adding to the frenzy of the Irish property bubble.[25]

Crash predictions[edit]

  • In February 2000, William Slattery (then former Deputy Head of Banking Supervision in the Central Bank of Ireland) predicted a property price fall of 30%–50% possible if credit growth not curbed.[26]
  • The International Monetary Fund in 2000 stated that no industrial country in the last 20 years had experienced price increases on the scale of Ireland without suffering a subsequent fall.[27]
  • The International Monetary Fund in 2003 stated that residential property in Ireland was overvalued.[28]
  • The Economist news magazine suggested in June 2005 that a large bubble exists in the Irish market.[29]
  • The Economic and Social Research Institute in Ireland said that a bubble probably existed.[30]
  • The OECD and certain senior Irish officials[who?] of the Central Bank of Ireland agreed in November 2005 that Irish Property is overvalued by 15%. However this was only released to the public by The Irish Times shortly afterwards.[31] The Central Bank denied that they had deliberately withheld this information to avoid triggering a crash, and in April 2006 said the housing boom may be "unsustainable" and poses a "significant risk" to the economy.
  • Most economists think that property prices are unsustainable because rental yields have fallen below the risk free rate of over 3.5% offered by Government bonds.[32]
  • The Economic and Social Research Institute issued a statement on 18 April 2007 in light of the RTÉ documentary on 16 April 2007 stating that the only activities there is economic certainty in is cigarette manufacturing and undertaking.
An advertisement for 100% mortgages seen outside Dublin (17 July 2007).
  • Many estate agents and banks continued to offer and promote 100% mortgages in the market until recently.

Downturn[edit]

Eventually, demand for residential property fell in early 2007, resulting in price decreases for March 2007 of 0.6%, and for April 2007 of 0.8%. This led to an expectation of a drop in house prices on a quarterly basis for the first time since 1994. Houses in the commuter belt in Greater Dublin fell earlier, due to a combination of increased supply in the Dublin urban area, increasing interest rates and continuing infrastructural deficiencies in rural communities. Prices in large urban areas were static, though demand dropped noticeably. However, a significant proportion of these new builds are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes.[33] Figures exist for completions because the Electricity Supply Board 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 Central Statistics Office. Newspaper articles provided anecdotal evidence of declining valuations with respect to the guide prices, and the agreed prices for Irish residential property, since October 2006. The decline in property prices was tracked by the ESRI House Price Index,[34] which reported prices starting to fall in the second quarter of 2007. Construction employment dropped according to Live Register statistics for May 2007.[35]

There had also been reported cases of mortgage fraud where borrowers overestimated their income to enable them to borrow more. There was a worry that these people "could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s".[36] This experience has resulted in the "sub-prime residential mortgage fallout" in the United States. In December 2006, the Irish state-owned broadcasting organisation, RTÉ, broadcast an investigation in a Prime Time documentary which unearthed evidence of financial details of prospective customers were being sold by mortgage brokers to auctioneers. Such information would enable auctioneers to maximise the price attained from prospective buyers. This issue, and further allegations in this area, are currently being investigated by the Office for Data Protection.

In the summer of 2007, the Economic and Social Research Institute(ESRI) issued its Quarterly Economic Commentary predicting that Irish public finances would fall into deficit in 2007, and house prices would fall by 3%.[37] A research paper by UCD Professor Morgan Kelly, published by the ESRI alongside the Quarterly Economic Commentary, suggested that the "same people who told us we would have a soft landing are saying we will crawl out ... we have bottomed out. We have not. We are very far from the bottom of the property market." Up to 60 per cent could be wiped off the real value of houses over the following eight years to 2015 if the Republic's housing market followed the same pattern as those in other countries.[38][39]

These reports were met with hostility by the political establishment; on 4 July 2007 Taoiseach Bertie Ahern stated at a conference in Donegal that he did not understand why people sitting on the sidelines, "cribbing and moaning" about the economy, did not commit suicide.[40][41] Many bank economists, media commentators, estate agents, property developers and business leaders went on the record to state their belief that the Irish property market was healthy,[42] and that any decrease in house prices was indicative was a soft landing only.

By late 2011, house prices in Dublin were down 51% from peak and apartment prices down over 60%.[43] Residential property prices nationally fell by a further 13.6% in 2012 from the beginning of the year 2012 to July 2012.[44]

The crash in 2009[edit]

As predicted in earlier reports dating from 2006 and 2007, a property price crash hit Ireland by the first half of 2009. It coincided with the 2009 recession, and both had started to develop in late 2008 following the global economic slowdown and credit control tightening. By June 2009, it was reported that around 40% of the price escalation that had occurred during the property bubble years ("Celtic Tiger Part 2") of 2001–2007 had been lost. As of 2012, house prices are below the 2001 prices and more than the entire gain during the Celtic Tiger years has been erased.[45]

There were several groups and organisations that were blamed and that also accused others of causing the crash. Some of the more notable ones were:

  • The Construction Industry Federation: blamed part-time builders for the bubble [46]
  • The Financial Services Consultative Consumer Panel, which was tasked with monitoring the performance of the Central Bank of Ireland, said that most consumers have lost "significant amounts of money" due to the inadequacies of the financial regulatory structure. It also criticised the "deficient" response of the regulator to threats to consumers, including the property bubble.[47] In response they said "It is clear that the actions we took were insufficient and were not taken early enough,"[48][49][50] Following the failure of existing regulatory structures to prevent excessive lending to the property sector,[51] consultants which were brought in to review their operations said that "regulatory expertise was lacking in some areas."[52] Former Taoiseach, Bertie Ahern said his decision in 2001 to create the Financial Regulator was one of the main reasons for the collapse of the Irish banking sector and "if I had a chance again I wouldn't do it".[53]
  • The Central Bank of Ireland admitted in November 2005 that they had estimates of overvaluation of 0% to 60% in the Irish residential property market. The Irish Times has revealed minutes of a meeting with the OECD where they indicated that property was overvalued but was fearful of precipitating a crash by "putting a number on it". Their 2009 Annual Report had virtually nothing to say about how and why the Irish banking system was brought to the brink of collapse.There were four Central Bank directors on the board of the Financial Regulator, yet the Central Bank maintains it had no powers to intervene in the market.[54] The Central Bank had the power to issue directives to the Financial Regulator if it thought it was conducting its business in a way that was contrary to overall Central Bank policy aims.None was issued.[55] The Central Bank told the Oireachtas Enterprise Committee that shareholders who lost their money in the banking collapse are to blame for their fate and got what was coming to them for not keeping bank chiefs in check, but did admit that the Central Bank had failed to give sufficient warning about reckless lending to property developers.[56]
  • The banks: were accused of too loose lending practices, contributing not just to property prices spiralling out of control but also increasing the debt burden of the average citizen as they were to be later bailed out [57]

In general, it was assumed to be a combination of factors that were both external and internal that affected the country. Further revelations of the corruption within the banking sector, particularly Anglo Irish Bank, have continued to affect the credibility of Ireland's presence within the international finance and business community.[58]

During the property bubble, a disproportionate number of people were employed in the construction industry. As that has contracted and other manufacturing moved offshore, unemployment by May 2009 was at 11.4%,[59] and had reached 14.3% by September 2011.[60] The Ireland-based ESRI (Economic and Social Research Institute) estimates it will reach around 17%.[61]

Impacts[edit]

  • Approximately 31 per cent of mortgaged properties, or 47 per cent of the value of outstanding loans, are found to be in negative equity at the end of 2010.[62]
  • As of September 2011, Central Bank figures show that 8.1% of private residential mortgage accounts are in arrears for more than 90 days – up from 7.2% at the end of June 2011.[63]
    • As of August 2012, more than 22% of Irish mortgages are in arrears or have been restructured.[64]
  • In the first 10 months of 2011 8,692 houses were completed. This compares to 76,954 in 2004, 80,957 in 2005, 93,419 in 2006, 78,027 in 2007, 51,724 in 2008, 26,420 in 2009 and 14,602 in 2010.[65]
  • The Irish National Debt has significantly increased: Ireland's ratio of General Government Debt to GDP at end-2009 is estimated to have been 65.2%. The revised estimate for General Government Debt to GDP ratio at end-2010 is estimated to have been 92.5%. The forecast for General Government Debt to GDP ratio at end-2011 is estimated to be 105.5%.[65]

Facts and figures[edit]

  • Up to 12.6% of the Irish workforce was employed by the construction industry.[66]
  • Up to 9.4% of Irish GNP was dependent on construction. Of this new residential housing construction made up nearly 7% of GNP.[67]
  • The P/E ratio (Total Price divided by annual earnings) for private housing reached an all-time high when, in March 2006, a Davy Stockbrokers report suggested that for prosperous Dublin suburbs the ratio could be approaching 100 times. Davy stated that these ratios can only be justified if investors were extremely bullish about rental growth. Given the plentiful supply of rental properties in these areas however, Davy suggested that it would be an adjustment in property prices, rather than rents, that would eventually bring valuations down to more realistic levels.[68]
  • A very high proportion of new houses in Ireland remain unoccupied.[69]
  • Although housing indicators like price to income ratio and rental yields were worse in many other countries, high price per square meter and unsustainable Irish economy indicated a bubble.[70]

See also[edit]

References[edit]

  1. ^ Quarterly House Prices Bulletin Quarter 2 2010, Department of the Environment, Community and Local Government 
  2. ^ Planning applications data, Department of the Environment, Community and Local Government 
  3. ^ Residential Property Price Index, An Phríomh-Oifig Staidrimh/Central Statistics Office 
  4. ^ Irish mortgage approvals at 1971 level, Finfacts Team, 22 November 2011 
  5. ^ Mortgage Arrears and Repossession StatisticsQ3 2012, Central Bank of Ireland 
  6. ^ http://www.centralbank.ie/polstats/stats/mortgagearrears/Documents/2013q1_ie_mortgage_arrears_statistics.pdf
  7. ^ Irish Economy: Sustainable growth dependent on foreign firms since 1990 – website article, 22 December 2012
  8. ^ "Financial Statistics Summary Chart Pack" (PDF). Central Bank of Ireland. 12 March 2013. 
  9. ^ "Dublin's debt burden reflects bad policy at the euro-zone level too.". The Wall Street Journal. 21 January 2013. 
  10. ^ "IMF Staff Country Report No. 02/170" (PDF). International Monetary Fund. 
  11. ^ "IMF Staff Country Report No. 00/97" (PDF). International Monetary Fund. 
  12. ^ "Housing Statistics". Department of Environment, Heritage and Local Government. Archived from the original on 6 February 2007. 
  13. ^ "Construction and Housing in Ireland?" (PDF). An Phríomh-Oifig Staidrimh/Central Statistics Office. 
  14. ^ Charlie McCreevy TD Minister for Finance. "Tax Reliefs for Owner-Occupied and Rented Residential Accommodation". Department of the Environment and Local Government/An Roinn Comhshaoil agus Rialtais Aitiuil. 
  15. ^ Creaton, Siobhan (24 February 2011). "FF-PD policy to blame for economic ills, claims report". Irish Independent. 
  16. ^ "Review of the Construction Industry 2004 and Outlook 2005–2007" (PDF). Department of the Environment. Archived from the original on 28 September 2006. 
  17. ^ "Rates in the eurozone countries at their lowest levels in half a century". 8 June 2003. Retrieved 28 March 2013. 
  18. ^ "SUMMARY OF EDUCATION STATISTICS – IRELAND 1991/1992 to 2001/2002". AN ROINN OIDEACHAIS AGUS EOLAÍOCHTA/DEPARTMENT OF EDUCATION AND SCIENCE. 
  19. ^ "The Real Effects of the Euro: Evidence from Corporate Investments" (PDF). Retrieved 26 March 2013. 
  20. ^ "The Euro and Financial Integration" (PDF). May 2006. Retrieved 2 October 2009. 
  21. ^ "The Impact of the Euro on Investment: Sectoral Evidence" (PDF). October 2005. Retrieved 26 March 2013. 
  22. ^ releases/Pages/ALoanIsNotJustforChristmas.aspx "A Loan Is Not Just for Christmas". 5 December 2006. Retrieved 26 March 2013. 
  23. ^ http://epp.eurostat.ec.europa.eu/portal/page/portal/hicp/data/database
  24. ^ O'Connor, Brendan (29 July 2007). "The smart, ballsy guys are buying up property right now". Irish Independent. 
  25. ^ "Let's own up to our part in the burst bubble". The Irish Times. 6 April 2011. 
  26. ^ "Property price fall of 30–50 p.c. possible if credit growth not curbed.". financedublin.com. 
  27. ^ "IMF Staff Country Report No. 00/97". International Monetary Fund. 
  28. ^ "IMF warns house prices may have risen too high". Irish Times. 8 August 2003. 
  29. ^ "The global housing boom". The Economist. 16 June 2005. 
  30. ^ "Quarterly Economic Commentary Spring 2006 – 25/04/2006". ESRI Press Releases. Archived from the original on 1 October 2006. 
  31. ^ "OECD believes Irish property market overvalued by 15%". Irish Times. 11 November 2005. 
  32. ^ "Dublin house prices heading for 100 times rent earned – 29 March 2006" (PDF). Davy Stockbrokers. 
  33. ^ "How many houses do we need to build?" (PDF). Davy Stockbrokers. 
  34. ^ "permanent tsb/ESRI House Price Index 1996 – 2011". ESRI. 
  35. ^ "An Phríomh-Oifig Staidrimh/Central Statistics Office Principal Statistics". An Phríomh-Oifig Staidrimh/Central Statistics Office. 
  36. ^ "Mortgage brokers feel the heat from regulator". Sunday Business Post. 
  37. ^ "Quarterly Economic Commentary, Summer 2007". ESRI. 
  38. ^ Lisa O'Carroll (8 August 2011). "Morgan Kelly warns of new middle-class debt default". The Guardian. 
  39. ^ Morgan Kelly. "On the Likely Extent of Falls in Irish House Prices" (PDF). ESRI. 
  40. ^ Ahern sorry over suicide remarksBBC News website article, 4 July 2007.
  41. ^ Ahern apologises for suicide remark RTE News website article, 4 July 2007 "Ahern apologises for suicide remark"]. RTE News. 
  42. ^ "Quotes from the irish property bubble". Quotes from the irish property bubble. 
  43. ^ "Irish house price decline slows sharply". Global Property Guide. 15 February 2013. Retrieved 28 March 2013. 
  44. ^ "Property prices fall by 13.6%". The Irish Times. 
  45. ^ Elliott, Larry (28 May 2009). "The Guardian.co.uk (28 May, 2009)". London. Retrieved 5 May 2010. 
  46. ^ "Sunday Business Post, 31 May 2009". 
  47. ^ "Regulator 'added to slump' by failing to curb property bubble". The Irish Times. 5 May 2009. 
  48. ^ Guider, Ian (21 July 2009). "Banks regulator says response to crisis was 'insufficient'". Irish Independent. 
  49. ^ "FinFacts.ie Business & Finance Portal, 26 May 2009". 
  50. ^ [1][dead link]
  51. ^ [2][dead link]
  52. ^ Brennan, Joe (27 June 2009). "Top watchdog job to be split three ways in regulatory overhaul". Irish Independent. 
  53. ^ Murray, John (2009-10-15). "Ahern admits to part in Irish crisis". FT.com. Retrieved 2014-04-02. 
  54. ^ Keenan, Brendan (23 July 2009). "Fixing the Government is now more important than fixing our banks". Irish Independent. 
  55. ^ "The Sunday Business Post". Sbpost.ie. Retrieved 2014-04-02. 
  56. ^ 30 July 2009 08:31 AM (2009-07-30). "Top official says shareholders to blame for the banking crisis". Herald.ie. Retrieved 2014-04-02. 
  57. ^ "Sunday Business Post, 19 October 2008". 
  58. ^ "Banking Business Review, 31 May 2009: Anglo-Irish posts massive loss of €4.1 billion". 
  59. ^ "Irish National Organisation for the Unemployed (INOU.ie)". 
  60. ^ "EuroStat data, via Google.". 
  61. ^ "Irish Times, 29 April 2009". The Irish Times. 4 April 2009. 
  62. ^ "The Irish Mortgage Market: Stylised Facts, Negative Equity and Arrears". Irish Central Bank. 
  63. ^ "Central Bank Press release". Irish Central Bank. 
  64. ^ "More than 22% of Irish mortgages are in arrears or have been restructured | NAMA Wine Lake". Namawinelake.wordpress.com. 2012-08-24. Retrieved 2014-04-02. 
  65. ^ a b "Monthly Economic Bulletin, December 2011". Irish Ministry of Finance. 
  66. ^ "Vol. 13 No. 3, July 2006". Migration News. 
  67. ^ "CSO-Quarterly National Accounts" (PDF). Central Statistics Office. 
  68. ^ "Dublin house prices heading for 100 times rent earned" (PDF). Davy Stockbrokers. 
  69. ^ "How may houses do we need to build?" (PDF). Davy Stockbrokers. 
  70. ^ "Property Investment Index By Country". Numbeo. 

External links[edit]