Housing Bubble Bursting

johnnyskeleton

faceman wrote: »

What do you define as oversupply?

When there is a surplus of supply. It's not really that difficult a word to define. But as to what I mean by oversupply, it's a term of art, but this link comes close to giving you an idea of what I mean.

faceman wrote: »

Lets look at the word affordable. What may be affordable to one person, may not be affordable to another. Also, not all properties are the same. Id imagine a 5 bed detatched in D4 would be unaffordable to many people including FTB's.

If you must, I never said affordable. Your semantics aside, the asking prices of a lot of properties cannot be met by the people who would be willing to buy that type of property, due to tighter lending controls, higher interest rates, higher cost of living, lower rents, higher unemployment, possibly less people in the country etc. This leads to two possibilities:
1) house prices go down to reflect market forces, or
2) people's expectations of what type of house they get drop so as to keep house prices artificially high.

If you think that a person who could get a mortgage and pay for a 3 bed house in a nice are will, due to harsher economic conditions, buy a cheaper 2 bed apartment in a not so nice area, I think you are very much mistaken.

faceman wrote: »

I dont subscribe to the affordability rule. Afterall during the boom times houses were on the increase, mortgage borrowings were high, yet people were buying like crazy, especially FTB's.

Bully for you, but what is this affordability rule you speak so fondly of. But all I said was that there were people who wanted to buy but were unable to afford current asking prices. This could mean that they either:
1) simply can't raise the funds, or
2) make a prudent choice not to buy as it would be crazy to do so.

In either case they can't afford it

faceman wrote: »

My first home was a huge price (to me at the time) and wasnt affordable to many i imagine at the time, yet i sold it at almost double the price. (To an FTB ironically)

So what's your point? If anything, this rant about affordability supports what I said about supply and demand being out of kilter. But of course you probably saw the word afford, assumed that someone was talking about affordability as a rule to assist them in buying a house, and then completely misconstrued what I said.

johnnyskeleton

BigglesMcGee wrote: »

Yes really.

Oh, right then. So the fact that houses are not selling which might sell if the price was reduced (such that aggregate supply and aggregate demand meet) is an example of the forces of supply and demand at work?

Or is it possible that Irish stubbornness is creating a situation (described notably by JM Keynes) that supply and demand do not intersect in the Irish housing market?

BigglesMcGee wrote: »

I think others here have dealt with your comments on Affordability and oversupply.

What comments on affordability? Why are people attributing estate agent speak to me?

As for oversupply, the only person to comment on that was faceman, and all he did was ask for a definition of oversupply.

So I don't think that the laws of supply and demand are determining asking prices at the moment, and until they do, it is good to have another system of determining value because otherwise the figures are completely abstract.

The_Conductor

http://www.independent.ie/national-news/new-taxcut-plea-as-house-prices-tumble-1416001.html

Friday June 20 2008

THE SCALE of the property meltdown was revealed yesterday as the latest international indicators show Ireland suffered the third biggest drop in house prices last year - leading to renewed calls for tax breaks and stamp duty cuts.

Between the start of 2007 and the beginning of 2008, Irish house prices dropped an average of 13.2pc.

Only Latvia, with a huge slump of 38.2pc, and the US, with an 18pc drop, performed worse.

In comparison, Slovakia recorded a 29pc increase in real terms, followed by Shanghai (28pc) and Hong Kong (26pc).

However, most of the areas measured in the Global Property Guide survey also experienced a drop -- with only 13 countries seeing price rises compared with 21 where prices fell, when adjusted for inflation.

The Construction Industry Federation (CIF) said it was seeking tax relief for first-time buyers to revitalise the market and CIF head Tom Parlon called on the government to temporarily suspend stamp duty.

Mr Parlon claimed that CIF officials were at a "very advanced stage" in discussions with the Department of Finance about a first time buyer's tax break.

"It is in the interest of the revenue to do so," he said.

"There is €1 bn of VAT available in unsold houses that would be freed up if the houses were sold.

"If you look at the previous years, our prices rose as one of the fastest but there has been a massive falloff and we'd ask the government to provide incentives in the short term."

The credit crunch and high inflation is being blamed for the drop in prices worldwide.

But the particularly sharp fall in Irish prices also led to calls for the introduction of 1980s-style community welfare payments to assist people who might suffer from negative equity as a result of the plummeting house prices.

And Labour's housing spokesperson, Ciaran Lynch, said that banks who had engaged in reckless lending had to bear "direct responsibility" for the effect that plummeting prices could have on young homeowners.

"Twelve months ago, the banks were ringing people up offering people money and now we're at a situation where they won't answer the phone," Mr Lynch said.

"Community welfare service can issue discretionary payments for hard-pressed families in danger of losing their house."

The_Conductor

http://www.independent.ie/national-news/cowens-euro2bn-tax-blow-as-builders-hold-off-1235118.html



BUILDERS are significantly adding to Finance Minister Brian Cowen's Budget woes by planning to complete 20,000 fewer homes next year than his department expects.

Mr Cowen is now facing a potential €2bn tax shortfall because of this slump in the construction sector.

New figures obtained by the Irish Independent show a 42pc drop in the number of new houses to be completed next year.

Provisional figures from the Department of the Environment show that builders notified the authorities that they plan to construct only 34,417 houses, a drop of 41.5pc. the figures were compiled in the first 10 months of this year.

That could mean more trouble for Mr Cowen in framing Wednesday's Budget, as his department has projected that 60,000 houses will be built in 2008.

Each 10,000 fall in house construction takes almost €1bn off tax revenues.

The figures suggest builders are holding back on next year because of the sluggish market.

The figures come just days after Government estimates for tax revenues next year suggested the Department of Finance may also be revising down the outlook for 2008.

The Department of Environment figures reveal:

l Registrations for houses to be built next year are down 49.2pc in Dublin alone

l A total of 46.8pc fewer homes will be built in the greater Dublin area

l New homes registrations are down 40.8pc in Kildare, 41.8pc in Meath, and 42.6pc in Wicklow.

The builders' own organisation, the Construction Industry Federation, has warned construction next year could be more than 40pc down, with less than 45,000 completions.

Buyers are not snapping up properties because of uncertainty over stamp duty and fears over rising interest rates. Even though prices are falling, they are still too expensive for most first-time buyers.

The prospect of 42pc fewer homes coming on to the market for next year, at a time when buyers are not prepared to take the plunge, is bound to spark fears of further rent hikes.

Rents are already rising by 12pc a year, as many potential buyers either cannot afford the asking prices or sit it out in the hope of bargains next year.

For property owners, there are fears that prices will have to fall further to get the market moving, with predictions of a drop of 5pc to 10pc next year.

Ironically, the severe cutback by builders could mean an earlier recovery in prices as houses become scarce, especially in major urban areas. Already this year the number of houses completed is down 15 pc.

There is speculation that builders are hoping to maintain prices by cuting the supply.

Work got under way on 31pc fewer houses in Dublin and the rest of the country during the year.

In the greater Dublin commuter belt area work started on only 12,702 houses and apartments, a drop of 31.9oc on last year.

In the capital the drop was even sharper, down 39pc to just 7,801 properties in the first 10 months this year.

- Treacy Hogan Environment Correspondent

ionapaul

More subjective stuff from the Indo...rents are on the way DOWN, not up (check out the supply of rental properties on Daft!!! the trend will continue downward, that 12% figure has been de-bunked elsewhere), the lowered output from the construction industry might have been able to put a floor under the price declines if there weren't tens of thousands of unsold and unoccupied properties (both in Dublin and outside the capital) AND if buyers were able to borrow as much as they could in previous years (they can't and this situation is also getting worse rather than getting better).

The Indo is such a rag...

beeno67

smccarrick wrote: »

http://www.independent.ie/national-news/cowens-euro2bn-tax-blow-as-builders-hold-off-1235118.html



BUILDERS are significantly adding to Finance Minister Brian Cowen's Budget woes by planning to complete 20,000 fewer homes next year than his department expects.

Mr Cowen is now facing a potential €2bn tax shortfall because of this slump in the construction sector.

New figures obtained by the Irish Independent show a 42pc drop in the number of new houses to be completed next year.

Provisional figures from the Department of the Environment show that builders notified the authorities that they plan to construct only 34,417 houses, a drop of 41.5pc. the figures were compiled in the first 10 months of this year.

That could mean more trouble for Mr Cowen in framing Wednesday's Budget, as his department has projected that 60,000 houses will be built in 2008.

Each 10,000 fall in house construction takes almost €1bn off tax revenues.

The figures suggest builders are holding back on next year because of the sluggish market.

The figures come just days after Government estimates for tax revenues next year suggested the Department of Finance may also be revising down the outlook for 2008.

The Department of Environment figures reveal:

l Registrations for houses to be built next year are down 49.2pc in Dublin alone

l A total of 46.8pc fewer homes will be built in the greater Dublin area

l New homes registrations are down 40.8pc in Kildare, 41.8pc in Meath, and 42.6pc in Wicklow.

The builders' own organisation, the Construction Industry Federation, has warned construction next year could be more than 40pc down, with less than 45,000 completions.

Buyers are not snapping up properties because of uncertainty over stamp duty and fears over rising interest rates. Even though prices are falling, they are still too expensive for most first-time buyers.

The prospect of 42pc fewer homes coming on to the market for next year, at a time when buyers are not prepared to take the plunge, is bound to spark fears of further rent hikes.

Rents are already rising by 12pc a year, as many potential buyers either cannot afford the asking prices or sit it out in the hope of bargains next year.

For property owners, there are fears that prices will have to fall further to get the market moving, with predictions of a drop of 5pc to 10pc next year.

Ironically, the severe cutback by builders could mean an earlier recovery in prices as houses become scarce, especially in major urban areas. Already this year the number of houses completed is down 15 pc.

There is speculation that builders are hoping to maintain prices by cuting the supply.

Work got under way on 31pc fewer houses in Dublin and the rest of the country during the year.

In the greater Dublin commuter belt area work started on only 12,702 houses and apartments, a drop of 31.9oc on last year.

In the capital the drop was even sharper, down 39pc to just 7,801 properties in the first 10 months this year.

- Treacy Hogan Environment Correspondent

Took me a few mins to work out that this article is 6 months old

ionapaul

beeno67 wrote: »

Took me a few mins to work out that this article is 6 months old

Good catch! Ahh, it's fun to look back the rubbish that was printed, rents to go up and prices to stabilise indeed! What a surprise they were wrong on both counts...

SimpleSam06

Welfare for those in negative equity? Tax cuts that enable builders to keep the exact same profits but impact everyone else's bottom line? Sorry for your troubles, lads, but if you were foolish enough to invest heavily in Irish property over the last few years at whatever level, you can go bankrupt and rent for all I care. What a complete waste of precious resources.

faceman

SimpleSam06 wrote: »

Tax cuts that enable builders to keep the exact same profits but impact everyone else's bottom line?

I dont think people are aware of how big an impact on the economy it will have if one of the major construction companies were to go under.

It wouldnt just affect those working in the construction industry

beeno67

faceman wrote: »

I dont think people are aware of how big an impact on the economy it will have if one of the major construction companies were to go under.

It wouldnt just affect those working in the construction industry

What effect would it have? I understand the effect of a slowdown in construction but what is the problem if one of these companies goes bust?

beeno67

beeno67 wrote: »

What effect would it have? I understand the effect of a slowdown in construction but what is the problem if one of these companies goes bust?

A load of unemployed building worker stop spending in the cafe down the road for starters, their families stop going out in the evenings, etc.

The loss of a major employer can impoverage (SP?) an entire town.

faceman

beeno67 wrote: »

What effect would it have? I understand the effect of a slowdown in construction but what is the problem if one of these companies goes bust?

Lets take a worse case scenario and say its a large construction company called company X

* company X goes bust leave debts of millions with the banks
* jobs are lost in company
* depending on how much credit banks extended credit and how poor their credit management is, they will be stung with the bad debt.

* Creditors of the construction company will also be stung with bad debts putting strains on their business (depending on what level of business they do with said company X)
* could result in job losses in creditor's companies
* Some creditors go into liquidation, debts left unpaid with other credits and the banks.

* Ancilliary companies suffers. (e.g. machinery, material suppliers)

The worry though is the bank. If a big enough company was to go bust, depending on how much is outstanding with the bank, it could cause a similar scenario as what happened to Northern Rock...

It would be a snowball effect. Now while my scenario is extreme, think of who the major construction firms are in ireland. Thing of the money they spent on construction in recent years, developments not selling now, picture the loans they might have for the developments that are now not selling. When you think about it, its very possible that this scenario could unfold. I hope im wrong tho.

beeno67

Deleted User wrote: »

A load of unemployed building worker stop spending in the cafe down the road for starters, their families stop going out in the evenings, etc.

The loss of a major employer can impoverage (SP?) an entire town.

Yes unfortunate for those involved obviously but Faceman implied a big effect on whole economy not just a town.

SimpleSam06

faceman wrote: »

I dont think people are aware of how big an impact on the economy it will have if one of the major construction companies were to go under.

If your business model depends on handouts from the taxpayers to maintain profitability, your business shouldn't exist anyway, and we're better off without it in the long run.

I think the question here is degrees of profitability. After years of tearing the arse off it, construction companies are now facing the possibility of having to reduce their margins. So to avoid that, they are trying to two-step their way into getting the government to subsidise them. Tediously predictable.

faceman

faceman wrote: »

The worry though is the bank. If a big enough company was to go bust, depending on how much is outstanding with the bank, it could cause a similar scenario as what happened to Northern Bank...

Forgot to explain this a bit more. Banks only hold a certain amount of money on deposit. If an certain industry was for example to collapse, i wouldnt be surprised of the amount outstanding to be written off as bad debt started to get closer and closer to the amount held on deposit.

beeno67

faceman wrote: »

Lets take a worse case scenario and say its a large construction company called company X

* company X goes bust leave debts of millions with the banks
* jobs are lost in company
* depending on how much credit banks extended credit and how poor their credit management is, they will be stung with the bad debt.

* Creditors of the construction company will also be stung with bad debts putting strains on their business (depending on what level of business they do with said company X)
* could result in job losses in creditor's companies
* Some creditors go into liquidation, debts left unpaid with other credits and the banks.

* Ancilliary companies suffers. (e.g. machinery, material suppliers)

The worry though is the bank. If a big enough company was to go bust, depending on how much is outstanding with the bank, it could cause a similar scenario as what happened to Northern Bank...

It would be a snowball effect. Now while my scenario is extreme, think of who the major construction firms are in ireland. Thing of the money they spent on construction in recent years, developments not selling now, picture the loans they might have for the developments that are now not selling. When you think about it, its very possible that this scenario could unfold. I hope im wrong tho.

I think this is very much a worst case senario. It implies the company is so large it has billions of debt but only with one bank and is completely exposed to house construction in Ireland.

gurramok

Which all points to how exposed our economy is to the bubble. (that 22% of GNP related to construction activity figure comes to mind)

If only it was not allowed to grow so huge in the first place, we wouldn't be discussing problems with national finances, tax reliefs, huge potential unemployment etc

Anyone can have a look at the biggest companies listed on the ISEQ. All bar maybe Ryanair and another are dependent on construction related activity(banking lending is two thirds mortgages), their shares are way down for a reason and it ain't all related to the credit crunch.

Lets pray that the Irish banks are not hugely exposed to prompt bank runs for all our sakes.

beeno67

beeno67 wrote: »

Yes unfortunate for those involved obviously but Faceman implied a big effect on whole economy not just a town.

One company, one town; several major companies will have a knock on effect as unrelated businesses suffer a downturn in trade, followed by further staff cuts and so on.

johnnyskeleton

faceman wrote: »

Lets take a worse case scenario and say its a large construction company called company X

* company X goes bust leave debts of millions with the banks
* jobs are lost in company
* depending on how much credit banks extended credit and how poor their credit management is, they will be stung with the bad debt.

* Creditors of the construction company will also be stung with bad debts putting strains on their business (depending on what level of business they do with said company X)
* could result in job losses in creditor's companies
* Some creditors go into liquidation, debts left unpaid with other credits and the banks.

* Ancilliary companies suffers. (e.g. machinery, material suppliers)

Capitalism requires unsuccessful businesses to go bust so that the employees can try to go on to more suitable employement, the capital is freed up to be spent elsewhere (i.e. assets liquidated) and the economic lesson is learned that developing land is not such a good idea. While I understand your point that a large developer going under will have negative consequences for the economy, it would be worse if the government intervened to prop up an unviable business.

The worry though is the bank. If a big enough company was to go bust, depending on how much is outstanding with the bank, it could cause a similar scenario as what happened to Northern Bank...

It'll be robbed? Or do you mean Northern Rock...

It would be a snowball effect. Now while my scenario is extreme, think of who the major construction firms are in ireland. Thing of the money they
spent on construction in recent years, developments not selling now, picture the loans they might have for the developments that are now not selling. When you think about it, its very possible that this scenario could unfold. I hope im wrong tho.

Assets will be liquidated and sold undervalue, the banks will take the hit and recover, tax take will be increased in the short term, and while the short term consequences for a lot of people will be very bad, the long term consequences for the economy are that it continues to trundle on. The alternative is spending more money to delay the inevitable thus not only costing more money but increasing the negative impact when propping the company up is completely unsustainable.

johnnyskeleton

faceman wrote: »

Forgot to explain this a bit more. Banks only hold a certain amount of money on deposit. If an certain industry was for example to collapse, i wouldnt be surprised of the amount outstanding to be written off as bad debt started to get closer and closer to the amount held on deposit.

But bad debts do not need to be paid out in cash. They are simply imaginary money (i.e. loans) that will no longer be paid back to the bank. What would really impact the banks is when their costs exceed their earnings, their deposit holders lose confidence in them and at the same time they have to write off bad debts which cumulatively creates a run on the bank. That's when they're in trouble.

Gurgle

gurramok wrote: »

If only it was not allowed to grow so huge in the first place

Surely the contstruction industry got so big due to the unprecedented demand for housing?

(Same reason for the increase in house prices btw)

Treehouse72

If anyone involved in the great property pyramid scheme (buyers, BTLers, developers, whoever) gets bailed out with my tax money I will go absolutely ****ing berserk.

RuggieBear

http://www.rte.ie/business/2008/0620/lisney.html



The managing director of the estate agent Lisney has confirmed that staff have been asked to take a 10% pay cut.

Peter Stapleton said that with the downturn in the property market it was obvious that firms were having issues with overheads.

He said that he had spoken to the company's 150 staff directly, and that the pay cut would apply to all of the employees 'from top to bottom' without exception.

The President of the Institute of Professional Auctioneers and Valuers, Alan Redmond, has said that estate agents have been cutting costs by letting staff go for the past six months as a result of the slump in the property market.

Mr Redmond said that Lisney's decision to ask its 150 staff to take a 10% pay cut was not the first instance of such belt-tightening in the industry, and warned that it would not be the last.

He added that the property market remains quite depressed, and that properties were selling at a much slower rate.

He said that the banks curtailing lending had been a major factor in the slowdown.

The_Conductor

In Hooke & McDonald commercial staff have been offered two choices-

a) 3 months off totally unpaid or
b) go back down to 2006 salaries for the time being.

Hooke and McDonald Residential staff have been offered a different two choices.

a) 6 months off totally unpaid or
b) go back down to 2005 wages

In addition, those hired for the graduate recruitment programme for September have been contacted and informed their job offers have been rescinded.

Although most of us have feelings of schadenfreude when we hear what happening in the industry- it is depressing, and very very worrying......

Afuera

Gurgle wrote: »

Surely the contstruction industry got so big due to the unprecedented demand for housing?

(Same reason for the increase in house prices btw)

There was plenty of demand out there alright, but the fact that 40% of new homes were being bought by *speculators was a clear warning on the underlying weakness. This was not healthy, sustainable demand. This was the type of demand that can disappear overnight.

The truth is that plenty of different parties helped turn the Irish construction industry into the monstor that it has become. The government's tax policies are far too builder and investor orientated. The banks were far two lax in their lending policies and the financial regulators were not assertive enough to step in and take action against this spiralling risk taking. A few years of those kinds of policies and of course you're going to end up with a dangerously skewed economy.


*We can't call these people "investors" since that would assume they had some kind of business plan in mind. Yields were so low that it's obvious they were simply making a bet on the direction of house prices.

orbital83

I don't want to hear any more sob stories about what will happen if construction companies go bust.
We live in a capitalist economy, and a pretty rampant one at that. We cannot begin socialising losses unless we are prepared to adopt a communist model.

When these guys were stacking up huge profits during the boom, they didn't donate them to the taxpayer to build some soviet socialist nation.
So they can't come crying to the taxpayer for a bailout now that things have turned bad.

The well-managed construction companies will have been building up reserves to allow for the fact that their industry is cyclical and losses will materialise at some point.
The reality is, many companies creamed off the profits. They enjoyed the good times and they will now go bust. Tough luck and lessons learned.

It is unfortunate that ancillary industries will suffer, but again this is a consequence of equilibrium being restored to the market. Without an unsustainable property boom, that sandwich roll shop is unviable. So it goes bust. Tough luck. That's capitalism. The resources are used elsewhere, for something more productive. In the end, we win.

SimpleSam06

Afuera wrote: »

There was plenty of demand out there alright, but the fact that 40% of new homes were being bought by *speculators was a clear warning on the underlying weakness.

I think it might be fair to say there was surplus demand for houses, rather than housing...

Firetrap

Yeah, I'd agree with that. Houses suddenly ceased to be something that you live in but something you could sell on to someone else for a profit. That's what it was all about - a game of pass the parcel with houses. Only problem is, now lots of people are left holding the parcels.

Gurgle

SimpleSam06 wrote: »

I think it might be fair to say there was surplus demand for houses, rather than housing...

That makes no sense.

DublinDilbert

Gurgle wrote: »

That makes no sense.

It kinda does...

Housing = Amount of properties required for people to live in
Houses = Amount of properties required to full fill the demands of investers, FTB etc..