Property bubble: NYT article on Japan's experience

replytohere2004

David McWilliams has an interesting piece in the SB Post today:

http://www.thepost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp


Irish property pyramid can’t rely on Polish foundations
05 February 2006 By David McWilliams
A few misguided individuals had apparently been suckered into a classic pyramid scheme where the price at the top is dependent on new mugs coming in at the bottom. Thousands of euro were lost.

The logic of a pyramid scheme is simple: as long as more people throw their money in, a select few will get out with enormous returns. These lucky ones will obviously vouch for the ‘‘miracle’’ of a scheme which produces money as if by magic. Their enthusiasm is infectious and others hoping to get rich quick begin to throw money at the scheme. The notional asset in question can be anything; the common denominator in all these schemes is that they are based on hot air.

It is greed which drives people into a market where they can remember the price of something, but not its value. So a pyramid scheme is a fraudulent system of making money which requires an endless stream of recruits for success.

Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money. A pyramid scheme is called a pyramid scheme because of its shape. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, the pyramid would involve everyone on earth in just ten layers of people with one conman on top!

Thus, in no time, ten people recruiting ten more people, and so on, would reach ten billion, well in excess of the earth’s population. If the entire population of earth were five billion and we all got involved in a pyramid scheme, the bottom layer would consist of about 90 per cent of the planet - ie, about 4.5 billion people.

Thus, for 500 million people to be winners, 4.5 billion must be losers. Is the Irish property market displaying characteristics that are akin to a pyramid scheme?

Last week, we heard that house prices in Dublin were increasing by €230 per day at a time when average post-tax wages are rising by just under €5 a day.

Let’s just take that in. Are you getting that queasy feeling? Well, don’t fret: I have been worried about house prices since the turn of the century! So, too, has the Central Bank. Its latest bulletin, issued last week, examines the associated indebtedness, arguing that ‘‘a situation whereby debt is increasing at a rate that is more than three times that of income is clearly unsustainable’’.

But others argue that, while the Jeremiahs have been banging on about the crash for years, not only has the crash not come, but the boom has continued to roar ahead. Moreover, people are getting into more and more debt to finance this.

For example, last year we increased our borrowing by an extraordinary 29 per cent and, thus far, mortgage defaults have not been much of a problem. So is it game, set and match to the cheerleaders? Not exactly, because they don’t have the faintest idea when or how it is all going to end either. For as long as the Jeremiahs have been saying it’s all going to end in tears, the cheerleaders have been confidently asserting that prices will plateau out as soon as supply catches up with demand.

But this has not happened. Supply has far outstripped demand, by most demographic measures. In fact, supply has expanded so massively that the construction industry now constitutes a bloated 14 per cent of the economy.

In recent months, the future of our housing market and our prosperity has been put on the broad shoulders of our immigrants. The new argument is that, even though domestic supply has caught up with our own demand for housing, the 70,000 new immigrants a year will keep demand - and prices - motoring. So, the more immigrants, the higher house prices.

But the problem with this argument is that all studies of immigration show that at a certain stage, the cost of housing affects the choice to come here or not. A recent study by the ESRI - entitled Rising House Prices in an Open Labour Market, and written by David Duffy, John Fitzgerald and Ide Kearney - suggests that, not only will the rise in our house prices have a significant impact on the amount of new people that will come here but, more interestingly, the high cost of houses will drive the immigrants back home when they reach settling-down age. Let us examine the 120,000 or so Polish workers who are here. Will they all stay? Hardly! Again, new economic studies indicate that the decision to move to another country is now a temporary one.

The young Polish workers are emigrating by text. They are being bombarded by texts from friends and moving as a result.

If they don’t like Ireland, they will go home. If you doubt this, check out Ryanair’s website: 40 per cent of its new routes are to Poland, Slovakia and other central European locations. If you ask Polish workers whether they plan to stay here, the vast majority say no. These patterns are typical. They want to settle in Poland, and now they can. They will take the money they’ve earned here and then find value back home. Unless Poland and its economy revert to communist torpor, opportunities will emerge for them back home and they will go.

This happened here. The Irish emigrants of the 1970s,1980s and early 1990s came home in their tens of thousands - close to a quarter of a million Irish emigrants have returned here since the mid1990s.This pattern is likely to be repeated with Poland, and the price of houses will actually accelerate this process.

So, far from being the underpinning of further price rises, dependency on the ‘‘immigrant factor’’ contains the seeds of its own destruction. When our immigrants tire of living three to a room, ten to a house, they will reassess the Emerald Goldmine. Magda from Krakow will wake up one day after five years here and think: ‘‘Hold on a second, I’m 30, in a serious relationship with a lad from Gdansk and I’ve no prospect of ever affording a house in Mullingar for my family - time to go.” This lifestyle choice will be repeated by thousands all over the country.

But what might pull them home apart from lifestyle choices? There is no reason to believe that the Polish economy will remain in the doldrums forever, tied as it is to the German economy. It seems likely that, as Germany emerges from its post-unification coma, Poland will recover too. If these economies do turn around, Poles will return home. Euro interest rates in Europe will rise in tandem.

Where might that leave us, with our enormous mortgages, investment properties and our massive housing overhang the product of today’s building splurge?

As we have seen with Australia over the past 12months, interest rates do not have to rise enormously to hurt an excessively borrowed population - particularly those at the bottom layer of the pyramid.

Pa ElGrande

Humourous take on our situation....
http://www.rousselle.com/allan/archives/000415.html

replytohere2004

McWilliams visted this issue again in yesterdays Indo.

http://www.davidmcwilliams.ie/Articles/view.asp?CategoryID=-1&CategoryName=&ArticleID=337

and replies to his Sunday article:
http://www.davidmcwilliams.ie/Articles/view.asp?CategoryID=-1&CategoryName=&ArticleID=336

Pa ElGrande

I found this while looking for the latest OECD report on Ireland.
Some of the findings in this report point to overvaluation in the United Kingdom, Ireland and Spain.

http://www.olis.oecd.org/olis/2006doc.nsf/linkto/ECO-WKP(2006)3

gearoidmm

ronbyrne2005 wrote:

the madness continues,houseprices up 22% from an already very high price in a year!! sheer lunacy ,totally unsustainable and detached from economic reality.

article from rte news today
Dublin house prices up 22% in 2005

January 30, 2006 12:06
Figures from estate agent Douglas Newman Good (DNG) show that house prices in Dublin rose by an average of nearly 22% last year, the first time since 2002 growth has been above 20%.

DNG's house price gauge showed that prices of second-hand homes in Dublin rose by 4.3% in the final three months of 2005, double the rate for the same period in 2004.

DNG economist Paul Murgatroyd said the second half of 2005 was stronger than the traditionally busier period before the summer.

Important to remember how DNG calculates its house price index. Like Sherry Fitzgerald, they use the extremely dubious technoque of selecting a basket of 50-100 properties that aren't even necessarily on the market and ask their estate agents how much they think they would go for from year to year. Absolutely invalid froma statistical point of view. Of course the media outlets report it as fact with the same weighting they give to more respected indices like the ESRI house price index which showed a much smaller (although still substantial) rise in house prices.

Similar problem in UK. Although everyone else is saying that house prices are falling or static all over the UK, Rightmove, a property website, reported a 2.5% rise in property prices in January. This was reprted as fact and as a cause for celebration by many media outlets including the Irish Times today. It was said to be a sign that the property market had turned again in England and now is the time to be getting back on board. The thing is, Rightmove calculates asking prices as advertised on the website which bears no relation to the final price agreed. All these indices have to be taken with a pinch of salt

TripleB

Japan's Banks still have up to 25% on average of assets in debts that will never be collected aka Bad Debts....They still havn't recovered.

Sponge Bob

It seems that the US is now slowing down . While prices have not corrected yet the time it takes to shift a house has gone way up and the speculators are pulling out of the new homes market as there is no more automatic price rise and automatic profit factor .

From the latter of those links :

Experts believe that the home buyer intending to live in a home is reluctant to cancel an order, even if the market seems to have softened. But an investor-buyer who more closely follows the local real estate market is more likely to cancel an order, even if they lose some deposit money, if they believe that the local market prices have fallen enough that walking away is more cost effective than buying and selling the home.

The flight of investor-buyers from the housing market and the increased cancellations could therefore push real estate prices lower in different markets.

"If you've overbuilt the market and sales get cancelled, you have to do something with the homes," said Seiders. "The incentives we're seeing builders offering are clearly designed to support prices and stop cancellations

In plain terms , do not buy a gaff in an estate where lots of investors are buying and watch out for the allowances starting to increase (ie incentives) as the builders try to shift them units. You will be safer if most of the neighbours are owner occupiers.

We may also see booking deposits rise very suddenly , watch out for that one too.

And we build a lot more units per capita than the Americans do . !!!!