A Complete Explanation Of Everything

I recently volunteered to lead off a discussion on the Irish Property Bubble / Boom / Crisis. What's behind it and where it will it lead...

That was last night, given the evening in question (Halloween), I couldn't resist titling it: "A Nightmare On Your Street"

And that's true in oh so many ways.

All roads lead to the home, as my friend: "Open Window", over on thepropertypin said once. It's a universal issue, everybody needs accommodation of some kind or other and though all stories will vary and be unique and personal and all that wonderfull stuff, there are commonalities.

Right now of course, there's a huge disconnect in the Irish market, where property values have been increasing at the rate of €30,000 (the average working wage) per annum since 1996. Last year, the Organisation for Economic Co-operation and Development pointed out we'd had 55 straight quarters of property value growth in this country (make that 57 or so now) and that this was the longest boom it had ever recorded.

Prices have now topped out and land in Dublin is as or even more expensive as New York or premium sites in London, etc.

What facilitated this?

Well, some people say the Celtic Tiger economy and all that jazz but here's the real deal.

German pensioners.

And their pension funds.

When Ireland became part of the common market, alot of German pension fund cash was sloshing around with all good investment opportunities on the continent to their mind, looking unappetising, so they lent it out.

To us.

Now, that tragically combined with ten years of the lowest interest rates ever seen in this economy.

The driver?

Tragically, Europe again.

With high levels of unemployment and inflation in both Germany and France, the European Central Bank stepped in and decided to give the old European Motor Economy a leg up. Now, that's worked out fine for the big boys, now by the same logic, the ECB is stepping in with rates increases in order to keep expansion of the German and French economies on an even keel, what has that meant in Ireland these past ten years?

It's meant record amounts of cash borrowed (we are the mostly highly indebted nation in terms of personal credit to GDP according to Fitch, leading credit risk analysts) at historically low interest rates, where to quote 80s pop group "Yazz", the only way is up.

Now, if I might quote the foppish one, David McWilliams, as he said borrowing money when interest rates are low is fool's gold. Because of the bubble effect, increasingly people have been over extending and embracing mortgage fraud to try and buy overpriced and increasingly bad value houses on the premise that property values only ever go one way.

Now, to buy on the prospect that your asset always increases (Japanese property values have not recovered to their 1988 value in this year of 2006) is crazy enough, but to buy on the belief that interest rates are always going to stay as low as 2-2.5% is enough to get you committed. You'd want to be smoking some good shit.

And that brings us to our friends, speculate to accumulate bastards, who decided to ride the wave and couldn't resist and ended up buying 2,3,4,10, etc., houses, interest only. No money down. There were figures released a while back, that showed that four out of every ten new mortgages (so that doesn't include the parents leveraging the existing value in their homes to ramp the bubble up further) is interest only. Couple that with yesterday's relevation that in Ireland, existing residential mortgage debt has doubled (yes, doubled) in the last three years (yes, three years only!) to a whopping (hold on to yer hats) €117 billion.

According to the last census, there's a quarter of a million vacant homes in Ireland right now. Half (conservative estimate) are reckoned to be holiday homes and the remaining pure speculation. These buggers couldn't even be bothered renting and when you consider that the price to earnings ratio has jumped from 13x about ten years ago to somewhere around 40x (and 100x in some parts of Dublin) then you can see their point.

Talk about your over-exposure. And now that house prices are starting to stagnate, those speculate to accumulate bastards are about to get their comeuppance.

And they can all go and meet my new friend, say hello to Casey!

So, where does all this leave the poor tragic first time buyer you might ask?

Typical profile according to a TSB survey from last year, 30 years old, in receipt of a gift of €15,000 from their parents and oh yeah, in partnership with their spouse / partner 65% of the time buying a shitty semi detached gaff for around €250,000.

Neverminding the fact, that they've bought on the edge of the commuter belt and are staring a three hour commute (if lucky) back and forth to work, all this exacerbated by criminal policies over decades by the government in relation to regional policy, industrial development, public transport and infrastructure planning???

Up the shitter, that's where...

So when those for sales signs start going up and we start getting a real and clear indication of the likely over valuation of Irish property (OECD says 20%, Central Bank has said anything up to 60%), we're going to be facing into people with mortgages based on over-valued assets, at interest rates they can't possibly afford with real wages stagnation and with those liabilities carrying on well into their late 60s and 70s in some cases. Thank you very much, dynamic lending institutions.

Yeah, the Fitch lads say, we're in for some "macro prudential stress"... Come on in, the "macro prudential stress" is lovely, when is a price correction, "moderation"???

I'll tell ya one thing, "structural adjustment" is going to be painful for the average joe.

And for all those over-exposed bastards who fed this whole bubble, I say feck ye and good luck.

The frenzy on the way up will only be matched by the frenzy on the way down.

You can't kid the market.

For every buyer there must be a seller.

And for every buyer who thinks he just got a bargain, there's a seller saying thank feck, I just walked away from that car crash.

Coming in 2007, for sale signs up and down the land.

They were posting keys back through letterboxs in the UK in the eighties.

Coming soon, A Nightmare On Your Street.