Housing Bubble Bursting

Pa ElGrande wrote:

As the bubble unwinds

• Interest rates go up.
• Banks tighten their criteria for lending.
• Unemployment rises and jobs are tougher to find.
• Bad debts start to mount as businesses fold.
• Investors who are undercapitalised rush to sell else they go bankrupt.
• Peoples appetite for extending themselves to get on the ladder evaporates as fears over job security take precedence.
• Government tax revenue nose dives, its costs increase, leading to huge deficits.

My issue is not with your use of data all of which speaks for itself aside from one point. 90,000 units from what I can see just refers to units. What proportion was affordable/social housing? If the government is to believed about
Part V of the Planning Act 2000 Housing Targets we can expect to see nearly 50,000 homes under the scheme over the coming years. How can or would you account for this?

I do however question the conclusions you have come to and whether you have taken everything into account. IMO they are not ineluctable truths.


Interest rates are increasing

Yes this is true and based on the normal effect of such increases it should help cool the market by making money more expensive, though not necessarily make it crash. Jim Power

Banks tighten their criteria for lending

My impression was that this has started and that credit card debt is to be included in loan evaluations. I don't believe that banks here in general will go beyond that 100% threshold and I would hope that people are not stupid enough to do so.


Unemployment Rises

This is questionable and could be affected by any number of other factors such as higher energy costs,wage inflation or lower cost economies.

Notwithstanding that, the proportion of non-nationals per sector is currently not measured and therefore unknown.
Dan O'Brien Irish Times 06/01/07 Link.

data on national/non-national composition of employees at a sectoral level are not gathered

It is believed that there are many EU nationals in the construction industry. Given that many EU migrants are here for economic reasons how increased unemployment might be affect them or what they might do is also unknown. If only Irish nationals were affected then the comment might hold.

IMO it is impossible therefore to adduce that the unemployment rate will rise. More workers could lose their jobs but how can we determine what group it will affect most and more importantly how that will translate itself across the various economic sectors ?

Bad debts start to mount as businesses fold

There does not seem to be much evidence of this particularly as last year was the best year for company liquidations in 20 years
, although it does acknowledge that some newer companies in construction have suffered.

Investors who are undercapitalised rush to sell else they go bankrupt

This assumes first and foremost that the crash will occur and the two elements above will happen as you state.

What types of investors do you mean? If I as a private investor buy a new house and I am VAT registered I can claim that VAT back. This could be used for kit out and possibly reducing some of my 100% exposure. This does not really strike me as a recipe for bankruptcy.


Peoples appetite for extending themselves to get on the ladder evaporates as fears over job security take precedence

When people don't buy they still have to live somewhere. This should then create more demand for rental properties thus negating the previous scenario.

Government tax revenue nose dives, its costs increase, leading to huge deficits

Again the costs here assume we know what way the unemployment will affect the various sectors.
If you look through the economics of the last 15-20 years you will find frugality - Ruari Quinn
common sense - Mac the Knife and The Tallaght Strategy
crystal ball genius Charlie McCreevy and the SSIA
and financial nous 12.5% corporation tax.

Deficits can usually be resolved by swingeing cuts, tax increases and borrowing. The first two are certainly within the instant control of government.

Finally how do you factor in the SSIA? Given that it is valued at €15 billion where does that fit into your analysis?

In conclusion I don't take the view that there will an economic meltdown as the original article suggests. I find it hard to believe that data as presented.

The original article used Arizona as an example. Arizona like Florida is a recreational state and it would be open to wild speculation. The bubble in the US was localised. Massachussets however is a state that is more similar to Ireland in economy and it might be more representative of what could happen. 12-13% correction is not impossible and that would serve as a warning.

Equally his use of The Netherlands is a poor example as it was already in an economic recession after 9/11 so would not have been a healthy position in 2003.

Economists have never really been here before. They are guessing, digging up models to provide answers to something that keeps going on and on and
that "can't possibly continue".

Ultimately I am with George Lee on this . I neither trust nor believe economists at face value and I am dubious about reports at the best of times. The latest US Jobs data has just reinforced this. Yet again they got it spectacularly wrong -50% out.

As regards those posters looking to jump into the market , it might be best to see what the 1st quarter numbers offer.

miju wrote:

sorry cant resist , is this the same Jim Power who thinks interest rates are "done and dusted" when the rest of the financial world reckons otherwise

No. That was Austin Hughes

Last night IIB economist Austin Hughes told the Irish Independent: "The ECB (European Central Bank) simply doesn't have to rise rates any further." He said the current 3.5pc bank rate (which means at least a 4.5pc rate for borrowers) is sufficient.

"We've been guaranteed another one in December but that will be it, done and dusted," he said.

Here are some of Jim Powers predictions from July 2005,I'm sure we could do the same with Austin Hughes and all.
Note his predictions on interest rates.



http://archives.tcm.ie/irishexaminer/2005/07/07/story455344776.asp

is_that_so wrote:

My issue is not with your use of data all of which speaks for itself aside from one point. 90,000 units from what I can see just refers to units. What proportion was affordable/social housing? If the government is to believed about
Part V of the Planning Act 2000 Housing Targets we can expect to see nearly 50,000 homes under the scheme over the coming years. How can or would you account for this?

Why haven't the government, councils and developers deliverd these to date? After 5 years in power the social housing program has been reduced to a lottery for those people judged eligible. Even if you win its difficult to get loan approval from the bank. The social housing scheme to date has failed to meet the goals set out for it represents a major public policy failure of the present government. The get out clause inserted for the developers goes substantially towards the running of the county councils. The amount spent on rent supplement has increased dramatically since 2000, and has effectively puts a floor on the rental market.
If I may speculate in event of a crash its possible the government may tap into the excess inventory under the guise of social housing program, thereby bailing out the developers.

is_that_so wrote:

I do however question the conclusions you have come to and whether you have taken everything into account. IMO they are not ineluctable truths.

Thank you for taking the time to reply. This is correct I cannot be certain I have taken into account all factors affecting house price inflation. The ineluctable truths I have listed are all well established behaviours when a credit bubble deflates and are unavoidable as the invalid apocryphal beliefs supporting the inflated prices for houses (stocks or commodities) are discarded so prices correct and return to the mean.

is_that_so wrote:

Interest rates are increasing

Yes this is true and based on the normal effect of such increases it should help cool the market by making money more expensive, though not necessarily make it crash. Jim Power

Interest rates are still quite low by historical standards in Ireland, however we pushed the affordability boat to the limits when ECB interest rates were lowest and even if ECB interest rates hit 4% people should in theory be able to cope, however we have the highest cost of living rises presently in the EU and wage inflation is not keeping pace. There are already over 86,000 people with judgements against them in this country, and even the banks recognise another 40,000 of their customers at least who are in a marginal position, As Austin Hughes said earlier this year "Yes, we are the most indebted in the euro-zone, but we were under-borrowed for a long time. Remember that the home-buying population (between 25 and 34) has been growing at under 6pc a year."
This will also affect mortgage equity withdrawal, so existing house owners will have less money to borrow for property in Borneo or Bulgaria, cars or home improvement, so ending the ability to subsidise their lifestyle. There is a higher chance these people will also find themsleves with negative equity should they try to sell in a declining market.

is_that_so wrote:

Banks tighten their criteria for lending

My impression was that this has started and that credit card debt is to be included in loan evaluations. I don't believe that banks here in general will go beyond that 100% threshold and I would hope that people are not stupid enough to do so.

I agree they are tightening. EBS recently announced they would only consider certain public sector professions for 100% mortgages and Sean Fitzpatrick, chairman Anglo Irish Bank advised "Banks need to be mature, and not overreact to exacerbate the problem - 5 per cent of non-performing loans is no big deal". 78% of the big three banks profits stems from property. Anecdotal evidence from December suggests sales are already falling through since first time buyers are not being extended the same terms as they were in Spring 2006. 20% of mortages to June last year were 100% loans, also subprime lenders have been growing here using securitisation to fund loans at a premium to riskier clients. Even the main banks are using securitisation to raise funds. The Irish Independent recently warned that some IO mortage holders have no way to pay back the capital.
Against that background the banks risk premium increases and it becomes more expensive to raise capital, so the costs are passed on to the mortgagee. The Fitch report should serve as a red flag in that regard.

is_that_so wrote:

Unemployment Rises

This is questionable and could be affected by any number of other factors such as higher energy costs,wage inflation or lower cost economies.

Notwithstanding that, the proportion of non-nationals per sector is currently not measured and therefore unknown.
Dan O'Brien Irish Times 06/01/07 Link.

It is believed that there are many EU nationals in the construction industry. Given that many EU migrants are here for economic reasons how increased unemployment might be affect them or what they might do is also unknown. If only Irish nationals were affected then the comment might hold.

A report for the AIB released in February 2006 throws some light on this, the majority of non-national (UK, Continental Europe, Asia) immigrants do not work in construction. According to a recent Irish Independent article "Of a total workforce of just over two million people, one in eight - or 277,800 people - were employed in the industry, of which 35,300 were non-nationals." We should get more information during the year from the CSO census results. Since 2000, the principal areas of employment for native Irish people have been in construction and the public sector, George Lee referred to this in his recent documentary Boom - The Time of Our Lives. I recommend watching this program.

is_that_so wrote:

IMO it is impossible therefore to adduce that the unemployment rate will rise. More workers could lose their jobs but how can we determine what group it will affect most and more importantly how that will translate itself across the various economic sectors ?

There are broadly two economies here in Ireland, the domestic economy that mostly revolves around debt financed construction and the public sector for employment and the multinational sector that revolves around financial services (IFSC), and technology sector (Microsoft, Dell, Intel, HP, Xerox) both with attendent spinoffs in services and retail.

The end of the housing boom, will see a downturn in construction employment and is already on the cards as the number of planning permissions granted has decreased 15% in Q3 2006. It is hoped that infrastructure projects will make up the shortfall in employment, but these projects are not as labour intensive as residential building. The multinational sector is largely governed by events elsewhere, however cost pressures, skills shortages and infrastructure deficits in this country are impacting our global competetive position. Future wage inflation cannot be counted on as the trend is towards a global levelling of wages. Dell are already preparing to move some production to Poland, to benefit from government grants, lower labour costs and a central location for distribution in Europe. They will be scaling back production in their Limerick plant. Dell is 4% of expenditure in the Irish economy.

is_that_so wrote:

Bad debts start to mount as businesses fold

There does not seem to be much evidence of this particularly as last year was the best year for company liquidations in 20 years
, although it does acknowledge that some newer companies in construction have suffered.

Not surprising as 2006 was the top of the housing market, and overall the global economy is doing well and there is a tidal wave of borrowed money flooding the Irish economy and as Sean Lemass once said "A rising tide lifts all boats", but as Warren Buffet would say "We think that as the tide goes out you're going to find out who's not wearing clothes. That's when we are going find out which companies have been per forming well and which ones haven't."

is_that_so wrote:

Investors who are undercapitalised rush to sell else they go bankrupt

This assumes first and foremost that the crash will occur and the two elements above will happen as you state.

What types of investors do you mean? If I as a private investor buy a new house and I am VAT registered I can claim that VAT back. This could be used for kit out and possibly reducing some of my 100% exposure. This does not really strike me as a recipe for bankruptcy.

Investors who are undercapitalised won't have the funds to continue servicing a property and as capital appreciation has halted, they will be incentivised to sell in order to preserve what's left of their capital and avail of other investment options. Only those with sufficient capital will invest in property and then only if they are getting an adequate rental yield. I'm guessing that most 'property investors' in recent years have a high gearing ratio making them very vulnerable to a market downturn, especially if the income from renting the property does not cover maintenence and mortgage and insurance costs.

is_that_so wrote:

Peoples appetite for extending themselves to get on the ladder evaporates as fears over job security take precedence

When people don't buy they still have to live somewhere. This should then create more demand for rental properties thus negating the previous scenario.

True to an extent. Rents are increasing already and finding rental accomodation is becoming more competetive, this is expected as the investors in the market for capital appreciation all try to exit at the same time. Some renters who have been priced out of the market will find it cheaper to buy as the supply increase means the sellers have to drop their prices if they must sell.
Tenants are generally price sensitive and will find ways to reduce costs by moving back with parents or sharing with someone else, mortgage payers will be more willing to accept lodgers to defray the increased costs of servicing a mortgage. Also people will hold off buying in the expectation of further price falls in another few months, they will also face less competition as the 'specuvestor' exits the market.

is_that_so wrote:

Government tax revenue nose dives, its costs increase, leading to huge deficits

Again the costs here assume we know what way the unemployment will affect the various sectors.
If you look through the economics of the last 15-20 years you will find frugality - Ruari Quinn
common sense - Mac the Knife and The Tallaght Strategy
crystal ball genius Charlie McCreevy and the SSIA
and financial nous 12.5% corporation tax.

Deficits can usually be resolved by swingeing cuts, tax increases and borrowing. The first two are certainly within the instant control of government.

The government only pursues sensible economic policies when its back is against the wall, even France and Germany are coming round to the low corporate tax idea, as have the eastern European states. McCreevy only issued the SSIA because the EU was on his back over an inflationary budget. The SSIA was a scam (political materstroke nonetheless), all they did was give our own money back to us, any taxpayer that did not take out an SSIA, effectively subsidised my and others savings. (I thank you)
Wages in the public sector are now on average higher than the private sector And yet members of that sector are priced out of most of the main cities. When revenue falls they will have to cut in order to stay within ECB stability pact guidelines, they will not be able to inflate their way out of the problem like previous governments have before the Euro. The housing boom is already having a destabilising effect on the Government's revenue, albeit a positive one in 2006.

is_that_so wrote:

Finally how do you factor in the SSIA? Given that it is valued at €15 billion where does that fit into your analysis?

The SSIA in inflationary if its released into the economy at once, hard to say whats its effects are going to be on the housing market, but I think its effects are overestimated that most of the money has already been spent or will continue to be saved.

is_that_so wrote:

In conclusion I don't take the view that there will an economic meltdown as the original article suggests. I find it hard to believe that data as presented.

The original article used Arizona as an example. Arizona like Florida is a recreational state and it would be open to wild speculation. The bubble in the US was localised. Massachussets however is a state that is more similar to Ireland in economy and it might be more representative of what could happen. 12-13% correction is not impossible and that would serve as a warning.

Equally his use of The Netherlands is a poor example as it was already in an economic recession after 9/11 so would not have been a healthy position in 2003.

Economists have never really been here before. They are guessing, digging up models to provide answers to something that keeps going on and on and
that "can't possibly continue".

Ultimately I am with George Lee on this . I neither trust nor believe economists at face value and I am dubious about reports at the best of times. The latest US Jobs data has just reinforced this. Yet again they got it spectacularly wrong -50% out.

As regards those posters looking to jump into the market , it might be best to see what the 1st quarter numbers offer.

You might read Alan Ahearne's article in todays Sunday Independent, he gives a one handed view of the after effects of the credit boom. He produced a study of these episodes when he worked at the US Federal reserve and can name no fewer than 44 episodes of house price booms that ended in busts in industrial countries since 1970.
The real problem in the United States which will hit their economy this year is the emerging ARM (Adjustable rate mortgages) scandal, as these mortgages reset to higher rates, the lenders will foreclose. Sub prime lenders in the US are also starting to go bust, with more expected to follow. I expect the US Federal Reserve to try and cut interest rates this year as this crisis develops. Contrary to being a localised phenonomen this is widespread as millions of American's used mortgage equity withdrawal to subsidise their standard of living. They have a negative personal savings i.e. they are living beyond their means. Even prices in Manhatten are starting to come down.No doubt some canny Irish investors at todays property expo in the RDS will be buying up the excess inventory on offer. :rolleyes:

I agree with you never trust economists, make up your own mind based on the data available to you.

All the best,
Pa ElGrande.

I used to be extremely bearish on property and convinced that the bubble would burst for certain. Now though, I'm more convinced that things will stay the same for the short to medium term. My reasons for thinking this?

• There is an Irish obsession with property, renting is simply not an option in the long term for the vast majority of us. With this attitude ingrained into us, people will stretch all they can for the sake of owning their own home.
• ECB rates are still historically low, by the looks of things, we would need another 2% at least to dampen enthusiasm for home ownership.
• We still have close to full employment, I think we would need a fairly severe shock to the economy to cause house prices to decrease.

Pa ElGrande wrote:

Based on the IBF data there are about 39,000 First Time Buyers in the market over a year, 29,000 buying an investment property, and 48,000 people trading up.
On that basis the demand for new properties is roughly 68,000 units. Note we have completed approximately 90,000 units in 2006 & 80,957 in 2005.

Don't forget pent up demand and other factors like people dieing and freeing up units.

Sponge Bob wrote:

Don't forget FREE units either Victor. This graph of mine causes some outrage in the autumn

Whoa, thats a really bad graph, because you can't see the top point. And the dates should be along the X-axis.