What got us here?

slave1

As someone who does not frequent this topic that much thought I'd enter your forum to seek advice from the experts.

What do you all reckon was behind our boom and why was it unsustainable?

Even if you can supply links I don't mind reading up myself with a pointer in the right direction, am coming from ground zero but now things have got so bad I want to understand the past before I make up my mind on the future.

thebman

The rate of house building out paced the increase in demand for housing and left houses empty.

No more houses wanted and houses = decline in market value.

Almost all other companies in the country get money from construction somehow so they start to decline too. All these companies then start laying people and it has a knock on effect.

Coupled with increased cost of doing business (mostly the governments fault, their services and wages allowed to get out of control) and you get a fair idea.

Then developers couldn't pay back banks who lent them money as they couldn't sell their houses so they are in trouble.

Then people laid off from jobs can't pay mortgages so the banks get squeezed again.

Now that happening to most of our trading partners at the same time means our over priced exports aren't worth buying in markets with reduced demand and you get an idea of why we are so borked at the moment.

[subject to correction, I ain't no economist]

And the global credit crises had nothing to do with it?

silverharp

http://www.abc.net.au/reslib/200902/r344067_1569005.asx

I posted this interview in the links section with Prof Neil Ferguson , its not a bad primer on some of the global issues

thebman

Deleted User wrote: »

And the global credit crises had nothing to do with it?

It happening to most of our trading partners too would be that part.

All the countries we export too also have banks in trouble because of improper lending practices to developers and on houses particularly our biggest, the UK.

Économiste Monétaire

slave1 wrote: »

As someone who does not frequent this topic that much thought I'd enter your forum to seek advice from the experts.

What do you all reckon was behind our boom and why was it unsustainable?

Even if you can supply links I don't mind reading up myself with a pointer in the right direction, am coming from ground zero but now things have got so bad I want to understand the past before I make up my mind on the future.

Read this for a summary of the 'Celtic Tiger'. It was unsustainable because we reached convergence with other western European countries in a relatively short period of time, and further growth wasn't achievable through a large scale expansion of the labour force. Inflationary pressures from very low unemployment (and poor policy) made us uncompetitive, you're now looking at an economy ~10% over-priced relative to the average of other Euro area members.

johnnyskeleton

One fairly cogent theory is that the emerging markets who exported a lot of raw materials &/or manufactured goods (e.g. Saudi Arabia, China, etc) ran large trade surpluses for many years. This meant they had lots of money from selling goods to the western nations. In an ideal world every country would more or less have a balanced balance of trade, but in this real one, the emerging markets had a surplus and we had a deficit. Effectively, we were buying goods from China and the Chinese were taking our money and putting into banks which would then loan it back to us cheaply so that we could then buy more goods.This lead firstly to the consumer boom in the early 90s, which was followed by the tech boom of the late 90s, and because so much money was put into technology and IT, it overheated and became a bubble. When the bubble burst the money had to go somewhere, so it went into houses. We (the Western World) overpaid for land, labour and materials and built overpriced houses as quickly as possible because of percieved capital gains. Eventually, people realised that they were overpaying for houses, that we were heavily indebted to international institutions and that something had to give. Hence the credit crunch and housing bubble burst. Every action in economics can lead to other reactions, often called a feedback loop. If house prices go up 10% I'm prepared to pay more than 10% to buy a house now because it will go up 10% this year and next. Thus, my expectation of increased wealth is spurred on by itself. This is a positive feedback loop, and negative feedback loops work in the opposite way, whereby if a hosue has dropped by 5% I will only pay -10% to buy it, because I percieve further drops.Essentially, therefore, the boom was nothing more than a mistake caused by excessive optimism and easy credit, and when those two things ran out, we realised, as Warren Buffet would say, that it is only when the tide goes out that we see who is swimming naked. The boom was an illusion and the bust that we are seeing now is the economy righting itself. While things are very bad for individuals in the short term, what is happening is actually (IMO) good for the economy as a whole in the long term. House prices, wages and the price of goods, have to drop in order for our economy to right itself.

AlekSmart

I would suggest Johnnyskeletons

One fairly cogent theory

is a good starting point and perhaps the only one we need.

I`m struck however by the absolute and total domination of EVERY facet of Irelands central and local Governance by the Developer body politic.

We have had for many decades a somewhat unhealthy overdone insistance on "Owning yer own home" and a commensurate distaste for and official neglect of the principle of properly regulated and administered private rental.

I find it reassuring that most of Mainland Europe has managed to exist at a very comfortable level without placing this intolerable financial burden upon the very people who should be kept free of it in order to develop their productive skills.

We on the other hand managed to entice (force,coerce) huge numbers of young people into entering this lock-in position at a very early stage in their personal development.
This is immediately noticeable when meeting European folks of similar age who still are living a single,adventureous life full of the sort of stuff we suddenly develop a grà for when it`s far too late.

Do we ever stop to consider how Germany,France,Italy and many other Countries all managed to somehow develop socially and economically without EVERYBODY needing to "Own" their little piece of some far flung suburbia?

Of course somebody will be along shortly to blame the Imperialist British Empire and its doings etc....But I think that`s the lazy way of explaination.

I suspect we have simply been duped by a coterie of well developed thinkers who spotted an opportunity for unimagined wealth generation and took it.

Crikey,if we pause for thought what ACTUALLY do the hundreds of thousands of Ordinary Resedential Mortgage holders possess...It`s not much is it...In my case a postage stamp semi-d on a Gallagher built estate of the 1970`s....now requiring all sorts of remedial and maintenance work which I can ill afford.

Why could we not have paused for thought before we bought into this NECESSITY to own the house..??

This is not even touching the reality of the Thatcher Years in the UK which took the entire bloody theory of home-"Ownership" to new and totally more bizzarre heights......Toxic Loans......U Betcha !!

thebman

Speaking to my little brother and my own opinion and their friends and my friends etc..., there has been a massive shift due to this bubble (before the crash even) that young people who currently rent in college etc... feel that buying is not an option for them as they want the ease of movement to their jobs to eliminate a lengthy commute.

My housemate describes it as a leash around your neck.

I wouldn't buy a house in a mad fit unless I had about 40% of the money myself and a very secure job and could get it at a competitive rate and knew I'd be able to pay it off quickly. The whole, everyone should own their home period in this country is over IMO.

Could be wrong as some of my friends still think owning their home is the only option but most of the people my age I talk to think that owning your own home is crazy talk. I imagine it might change when they have families though.

nesf

AlekSmart wrote: »

I would suggest Johnnyskeletons is a good starting point and perhaps the only one we need.

I`m struck however by the absolute and total domination of EVERY facet of Irelands central and local Governance by the Developer body politic.

We have had for many decades a somewhat unhealthy overdone insistance on "Owning yer own home" and a commensurate distaste for and official neglect of the principle of properly regulated and administered private rental.

I find it reassuring that most of Mainland Europe has managed to exist at a very comfortable level without placing this intolerable financial burden upon the very people who should be kept free of it in order to develop their productive skills.

We on the other hand managed to entice (force,coerce) huge numbers of young people into entering this lock-in position at a very early stage in their personal development.
This is immediately noticeable when meeting European folks of similar age who still are living a single,adventureous life full of the sort of stuff we suddenly develop a grà for when it`s far too late.

Do we ever stop to consider how Germany,France,Italy and many other Countries all managed to somehow develop socially and economically without EVERYBODY needing to "Own" their little piece of some far flung suburbia?

Of course somebody will be along shortly to blame the Imperialist British Empire and its doings etc....But I think that`s the lazy way of explaination.

I suspect we have simply been duped by a coterie of well developed thinkers who spotted an opportunity for unimagined wealth generation and took it.

Crikey,if we pause for thought what ACTUALLY do the hundreds of thousands of Ordinary Resedential Mortgage holders possess...It`s not much is it...In my case a postage stamp semi-d on a Gallagher built estate of the 1970`s....now requiring all sorts of remedial and maintenance work which I can ill afford.

Why could we not have paused for thought before we bought into this NECESSITY to own the house..??

This is not even touching the reality of the Thatcher Years in the UK which took the entire bloody theory of home-"Ownership" to new and totally more bizzarre heights......Toxic Loans......U Betcha !!

We have been the worst for doing it but it's been a factor in pretty much all of the English speaking countries in the developed world. Much of the economic growth of the US, UK and Ireland has been driven by selling each other property. It sprang from the US rather than UK post Great Depression if my memory of economic history is serving me correctly. Though we've taken it to levels undreamed of in those countries. I put it down to an "Anglo-Saxon-Celtic" obsession with owning land because our Government systems of old (19th century ish) granted many of the "perks" of citizenship fully only to the landed classes. The last bit is only idle speculation on my part though.

Sea Sharp

A simplified way of looking at it.
It reached the stage where houses were being built so that Polish builders could come over to live in Ireland so as to build more houses.

The housing boom was bound to end eventually. At the rate houses were going up in price, an average house would be a few million in 20 years time. That aont gonna happen. And this bubble burst is just the reality kicking in.

FlutterinBantam

Exactly, even more simplified.. Govt. blowing up a balloon of housing and developement.When the balloon was reaching bursting point,instead of letting some air out,they reckoned, no, we'll squeeze in some more ,she'll hold a few more ounces,keep blowing we can let out a bit nex......BANG!!

RedPlanet

thebman wrote: »

The whole, everyone should own their home period in this country is over IMO.

I would love it if that were the case as I am of a similar opinion.
However, i fear the reality is that the present government do not concur and are basically seeking to re-inflate the property bubble. Indeed I heard some fella from the CIF on the radio basically saying it was their priority to make sure the government oversee that banks allocate unspecified percent of "recapitalisation" money to "First Time Buyers" to re-start the property market. He was making the case that "only Construction" could quickly reduce the numbers of jobless, and that is necessary to save us.
And I bet that Cowen and Co believe it and they'll back that horse.

Time Magazine

slave1 wrote: »

As someone who does not frequent this topic that much thought I'd enter your forum to seek advice from the experts.

GaNjaHaN wrote: »

A simplified way of looking at it.
It reached the stage where houses were being built so that Polish builders could come over to live in Ireland so as to build more houses.

FlutterinBantam wrote: »

Exactly, even more simplified.. Govt. blowing up a balloon of housing and developement.When the balloon was reaching bursting point,instead of letting some air out,they reckoned, no, we'll squeeze in some more ,she'll hold a few more ounces,keep blowing we can let out a bit nex......BANG!!

Lads, the OP didn't request overly-simplified stories. Thanks

Clare_Guy

It IS pretty simple...

The Irish, and indeed the world's, financial crisis was caused by ONE thing and ONE THING ONLY... banks lending money too easily.

cavedave

Clare_Guy

The Irish, and indeed the world's, financial crisis was caused by ONE thing and ONE THING ONLY... banks lending money too easily.

and where did they get this money? johnnyskeleton described one theory (it ignores excess leveraging which does play a role).

On an unrelated not the ISEQ is now at around the same level as the start of the boom around 1995

ifconfig

For the bigger picture - I found yesterdays OpEd contribution by Paul Krugman to give a very concise explanation for the root of the global downturn

http://www.nytimes.com/2009/03/02/opinion/02krugman.html?_r=1

The BBC Business/Economy online section is also informative and gives good layman background to the roots and timelines of the global financial crisis :

http://news.bbc.co.uk/2/hi/business/7521250.stm

-ifc

genericgoon

Clare_Guy wrote: »

It IS pretty simple...

The Irish, and indeed the world's, financial crisis was caused by ONE thing and ONE THING ONLY... banks lending money too easily.

Banks were only able to lend money too easily due to the huge trade imbalances in the world economy today between the debtor countries (ourselves, US, UK etc) and the creditor countries (China, Gulf states etc). We had a huge asset inflation due to a flood of foreign money into the Western economies. Becuase their was only a limited number of good investment oppurtunities this flood of money was eventually sunk into spurious investments such as subprime or reckless public consumption. Our profligacy could only have been facilitated by the West spending the excess capital generated by the increased productivity (which was disproportionately turned into savings or sovreign wealth) of foreign people (or sometimes access to an easy source of wealth such as oil). The problem is that the whole world economy is based around the developed countries consuming like mad with borrowed money which was unsustainable (you can't borrow forever) in light of the lack of any increase in productivity from the debtor countries with which to pay back that debt. The apparent increase in wealth in recent years would seem to have been illusory since it was built on debt which is just the spending of future wealth. The tab is now in and the party is over and Ireland like many other countries is going to have to adjust to its much diminshed economic status in the years ahead. The fact our bubble was so inflated relative to most countries just means our situation will probably be particularly violent and painful.

Clare_Guy

genericgoon wrote: »

Banks were only able to lend money too easily due to the huge trade imbalances in the world economy today between the debtor countries (ourselves, US, UK etc) and the creditor countries (China, Gulf states etc). We had a huge asset inflation due to a flood of foreign money into the Western economies. Becuase their was only a limited number of good investment oppurtunities this flood of money was eventually sunk into spurious investments such as subprime or reckless public consumption. Our profligacy could only have been facilitated by the West spending the excess capital generated by the increased productivity (which was disproportionately turned into savings or sovreign wealth) of foreign people (or sometimes access to an easy source of wealth such as oil). The problem is that the whole world economy is based around the developed countries consuming like mad with borrowed money which was unsustainable (you can't borrow forever) in light of the lack of any increase in productivity from the debtor countries with which to pay back that debt. The apparent increase in wealth in recent years would seem to have been illusory since it was built on debt which is just the spending of future wealth. The tab is now in and the party is over and Ireland like many other countries is going to have to adjust to its much diminshed economic status in the years ahead. The fact our bubble was so inflated relative to most countries just means our situation will probably be particularly violent and painful.

yeah... that's what i meant!

but seriously that's all very well but it doesn't factor in the reckless lending that fuelled the madness and, i believe, was the main cause of most, if not all, the current problems...

slave1

wow, didn't think I'd generate such response, interesting that most are commenting on the burst rather than the rationale behind the build up, I would have thought that FF low tax policy, subsidies to mainly US multinationals, EU funding and our young English speaking workforce was a root cause but not a mention, maybe I'm being too simplistic

johnnyskeleton

slave1 wrote: »

wow, didn't think I'd generate such response, interesting that most are commenting on the burst rather than the rationale behind the build up, I would have thought that FF low tax policy, subsidies to mainly US multinationals, EU funding and our young English speaking workforce was a root cause but not a mention, maybe I'm being too simplistic

You forgot "the knowledge economy". You see, all these things were not real economic prosperity, they were in fact a sham. As regards the knowledge economy:

http://www.thepropertypin.com/viewtopic.php?f=19&t=13049&p=121732&hilit=de+knowledge+economy#p121732

http://www.thepropertypin.com/viewtopic.php?f=19&t=2840&hilit=de+knowledge+economy

http://www.thepropertypin.com/viewtopic.php?f=4&t=2528&p=18467&hilit=de+knowledge+economy#p18467

Some people divide the "boom" into two parts, the first from ~1997-2001 was driven by US investment and increased domestic economic activity which came with that. The second part from 2001-2006 was driven mainly by cheap easy credit and almost half of our economy based on construction and the public service, which is unsustainable.

Essentially, we had 3 things going for us which attracted US investment:
1) EU membership;
2) Tax breaks &
3) low cost, apparently well educated, english speaking workforce.

However, we were doing two things:
1) attracting really high tech industries (we attracted science-ish companies who wanted the tax breaks)
2) building up a domestic industrial base separate from the FDI.

Since 2001, partly due to the .com burst and partly due to our own increasing costs, Ireland has become less attractive to multinational companies, and we are seeing that the ones who haven't already left are cutting down their workforces. We have nothing to replace this with. So yes, while the FDI did play a part, it became marginalised very quickly. I think there was only ever in the region of ~100k people working in multinationals in Ireland at its height, compared to ~250k in construction.

Looking to the future, what we need to do is cut our cost base down and rather than use tax incentives to attract FDI, we need to concentrate on domestic start ups in Ireland. But that's a big ask.

TGPS

slave1 wrote: »

As someone who does not frequent this topic that much thought I'd enter your forum to seek advice from the experts.

What do you all reckon was behind our boom and why was it unsustainable?

Even if you can supply links I don't mind reading up myself with a pointer in the right direction, am coming from ground zero but now things have got so bad I want to understand the past before I make up my mind on the future.

In a word - greed!!! An exuberance of it!!!

AlekSmart

Indeed I heard some fella from the CIF on the radio basically saying it was their priority to make sure the government oversee that banks allocate unspecified percent of "recapitalisation" money to "First Time Buyers" to re-start the property market.

This I presume was from Tom Parlon who has been wafting in and out of various elements of the Building and Development Bust debate for a few months now.

Like RedPlanet,I find it somewhat crazy that ANY logical person would actually want to RE-Start the property market in anything like the way it was.

One of THE lessons we need to take from the current state of things is the unreality of and lack of necessity for this "Own your own Home" pahlavah at all costs.

I notice BoI getting all Promotional with its new "Mortgages Available" campaign which is aimed directly at this peculiarly Irish deity...The First Time Buyer.
From my perception we should be discouraging this practice as it applies to persons less than 25 years old and instead pressurising the Banking Sector into coming up with new Financial products aimed at older,greyer more level headed purchasers.

However,even more important IMO is a requirement for the Banking sector to robustly support native entreprenurial risk in a meaningful way.
Yes it should be about Risk Taking,but not in the way that has shamed the entire country.
The Irish Banking sector has made a speciality out of ignoring and even deriding the small,sole trading business in favour of the Multi National or Politically Connected Jinnet,dare I say it typified by Mr Parlon.

If I were a bank I would run as fast as my legs could carry me from any of these so called developers......They got us into this,please do not allow them to get us out !

thebman

IMO, it is obviously the government on behalf of the development lobbyists that pushed this first time buyer promotion you see from the banks in the media.

If I remember correctly they even said they wanted something ridiculous like 80% of the recapitalisation money to go to FTB and the rest for small business which is criminal TBH.

It is also only supposed to be available for buying new homes in an effort to clear the developers back log to help them out of debt.

The housing market is dead and nobody wants to buy because the future is uncertain in the country at the moment. To steer money away from businesses making people feel unsecure in their jobs to try to get them mortgages is insane policy making IMO.

You can see the banks don't really want people to buy into this because the disclaimers telling people they will lose their homes are now taking up almost half the screen.

nesf

AlekSmart wrote: »

If I were a bank I would run as fast as my legs could carry me from any of these so called developers......They got us into this,please do not allow them to get us out !

Except the banks now notionally own vast tracts of land in this country which used to be (or currently is) security against developer loans. So the banks are tied to the property market whether they'd like to be or not.

From the outside it's quite clear that the banks got the timing and the rate of fall of prices very wrong. They obviously thought they'd have time to unwind their positions and get out of it (AIB's CEO said pretty much this). The banks have found themselves in a distasteful position where they're stuck with land instead of cash and development land isn't exactly easy to sell at the moment.

A toxic bank which could take this land off the banks at a steep discount would simultaneously untie the banks from the development side of the property market (which is the core problem at the moment) and allow the land to be wound down over the medium to long term where good returns on the prices paid to the banks could be realised.

gurramok

To add what other posters said, construction related activity grew over 3 times to what it should be like in a balanced economy in contrast to other modernised countries with that sustainable industry.(8% of GNP)

Thats the homegrown recession right there with or without a global credit crunch.
http://www.finfacts.com/irelandbusinessnews/publish/article_1011255.shtml

Irish Construction output at 23% of GNP in 2007; 416,000 employed in construction related activity - 19% of workforce

Then add the amount of consumers who 'released equity' via rising house prices to fund purchases especially in retail and you get the idea of easy credit which has destroyed us.

thebman

You forgot to add the retail jobs in selling the sofa's, beds, tables etc... in those homes to the count of jobs dependant on the construction sector. All these will end up going.

Construction industry was responsible for a lot more than 19% of the workforce unfortunately in real terms when you consider the shops and services that sprung up that were completely dependant on it.

K-9

johnnyskeleton wrote: »

One fairly cogent theory is that the emerging markets who exported a lot of raw materials &/or manufactured goods (e.g. Saudi Arabia, China, etc) ran large trade surpluses for many years. This meant they had lots of money from selling goods to the western nations. In an ideal world every country would more or less have a balanced balance of trade, but in this real one, the emerging markets had a surplus and we had a deficit. Effectively, we were buying goods from China and the Chinese were taking our money and putting into banks which would then loan it back to us cheaply so that we could then buy more goods.

I remember seeing the balance of trade regularly on the RTE News in the 80's and early 90's as a main news item. Was a very good way of explaining very simply a problem in the economy.

Haven't seen it on the news in years. A very simple (I'm sure too simplistic) way of informing the masses of the economy.

Zynks

slave1 wrote: »

What do you all reckon was behind our boom and why was it unsustainable?

In one sentence: Scandinavian expenditure patterns with Mediterranean productivity levels (David McWilliams)

Zynks

nesf wrote: »

From the outside it's quite clear that the banks got the timing and the rate of fall of prices very wrong. They obviously thought they'd have time to unwind their positions and get out of it (AIB's CEO said pretty much this).

That is questionable. Their timing was perfect selling their headoffice in 2006.

AIB group is to sell its existing bankcentre property in Ballsbridge for €377.7m cash, in a sale and leaseback deal.

The Dublin 4 property has been sold in two lots to property developer Sean Dunne and Hibernian Life and Pensions and will be leased back to AIB over twenty years.

AIB said the initial rent per annum would be €11.6m, subject to five year reviews. AIB said it expected the cost to be more than offset by savings and by the benefits derived from the use of the capital.

AIB said that the purchasers were selected following an open market tender process.AIB expect the profit after tax of this transaction to be around €230m.
source: rte 26/4/2006

How could they be so efficient there, and get the rest so wrong?

ardmacha

AIB said it expected the cost to be more than offset by savings and by the benefits derived from the use of the capital.

The odd thing is that had they kept the office it would have declined in value, but not by anywhere near as much as their shares. They essentially took the profit from the sale of the office and lent it to property developers.