Irish Property Market chat II - *read mod note post #1 before posting*

The majority of QE is government debt (which was used to keep people in employment until such time as the economy reopened) and of the corporate bonds a large chunk of this will be industries that would have suffered during the pandemic and were deemed important to the European economy. (Think National airlines that would have gone bankrupt without the aid)

Europe has not increased its purchase of real estate assets to any significant extend unlike the US that purchased a ton of Mortgage backed securities as part of its QE during the pandemic.

Without this QE we would have seen one of the worst recession in history with mass unemployment.

Yes but their spending is the same as before or in a lot of cases less..... As they no longer have a salary coming in.... This does not generate inflation. If anything this would be deflationary as the no of people working has decreased and seeing as you believe that the deflationary impact of technology is likely to level off this would mean a fall in productivity.

Well if they all pull out of the stock market at the same time like you suggested earlier there performance may take a hit.

They average person retiring would need at least 1 million if they were to have the same cash flow as when they were working and a lot more if you take into account inflation. (1m divide by 20 years = 50k a year)

The one economy that has experienced the situation that you describe is Japan and they have seen no inflation in the past 20 years. But as you say it may be different this time....

Would the increasing age demographic of wealthy nations change that dynamic

Edit:Sorry was raised by schmittel before I read the remainder of thread.

What if we have a situation where retirees pension funds are subsequently invested in housing to generate income.

We have people with no housing unable to afford and people with housing buying more.

Does that create the mother of all bubbles?

Rents go through the roof in a completely unsustainable manner and one way or the other they must crash. Are we there already? This is why I've been saying we are in a bubble for some time

Is it a giant ponzi scheme propped up by cental banks and poor government policy

just reading a columnist in the Indo yesterday that shows how much of a one trick pony Ireland really is. Now that our corporation tax rate is no longer our big selling point we really have to regain competitiveness pronto. The first place the government should focus on is the fact that Dublin is the sixth most expensive for rentals in the world. The numbers below fairly show our reliance on MNCs-

Multinationals such as Google accounted for almost half of all income tax, USC and PRSI paid by companies in 2019, as well as more than 40 per cent of VAT

Sunk cost fallacy but the sooner medicine is taken and we "build back better" the more sustainable and equitable society will be.

How is it a sunk cost fallacy? They avoided one of the biggest recession In history. Once the economy is strong enough they will start to taper purchases. (I.e. buy less bonds) once they have finished tapering they will let bonds mature. This will take years.

how is it more sustainable and equitable to crash the economy just to lower house prices…. It doesn’t Sounds very sustainable and equitable to create mass unemployment, have higher taxes, pension funds wiped out.

I know someone who recently retired in their early 50s. They had €900k between them in pension funds.

They sold the house in Ireland and bought a house in Portugal by the beach in a nice tourist area that we've all been to many times over the years, and also bought an apartment in Dublin for whenever they come back to Ireland for a holiday. And are left with €150k in the bank plush cash savings they already had built up.

So far they havent been back yet :)

They havent drawn down the pensions yet, but reckon they will be living on €30k+ a year if they were to draw down today (plus lump sums) and if they ever have cashflow problems then they have the apartment to sell. They would have rented it while they were away, but the legislation ever changing situation put the kibosh on that.

They are coming home for Christmas, so i'll get the lowdown from them on it then.

But that couple won’t be spending more on goods and services than when they were working.

I imagine they will be spending a big fat zero in Ireland for the most part.

Can you explain that further please. I don't understand why QE continues when clearly it's part of the problem in driving up assets to valuations that make little sense. Can a targeted approach be used as opposed to helicopter money.

How come QE still exists when asset values are well beyond their valuations prior to the last crash.

If a CB is propping up assets that may be worth 50c in the euro. Do other assets rise pro rata

Just trying to fully understand what's happening. Iceland said no to this bull, and I don't hear of chaos there. A small sample but relevant none the less

The purpose of QE is to encourage more lending (which is money creation) so that companies will expand and create jobs etc.... it is no different to interest rate cuts that we have seen for the past 40 years but as a rates are below or close to zero the central banks undertake QE.

The QE itself is just a swap of one cash item (Gov Bonds) for another cash item (Bank Reserves). Overall the amount of Cash/cash equivalents in the system remains the same and there is no extra cash generated. QE is not money printing as the cash never leaves the financial sector and as a result you do not see inflation in the wider economy. The only time it ever acts like printing money is when it gets to the wider economy and generates inflation, is when fiscal spending is accompanied by the QE.

By buying the government bonds or bonds issued by large corporates that would be deemed to be as safe as a gov bond. The central bank takes these bonds out of circulation which makes the remaining pool of bonds smaller which pushes the price of the bond higher and the yield lower. This gets you to exactly the same place as an interest rate cut (i.e. Bond prices go higher and yield lower when interest rates are cut).

The only difference is that the Bank Reserves have swelled massively and as the Base rate is negative and the return on gov debt negative it costs the banks to hold onto these reserves. This in turn leads them to increase lending and to try and discourage customers from keeping funds on deposit in an effort to reduce there excess liquidity which is costing them. The increase in lending is finding it's way to funds rather than the consumer on the street and anyone with a large deposit are all pushed to the wealth management arm of the bank who in turn encourage to invest the deposit rather than leave it in the bank account. (This is why banks started to buy back parts of the businesses they sold 10/15 years ago) The combination of this leads to a inflow of funds into the asset markets which pushes prices higher.

As prices go higher more people join as they see their friends making money while they are making no money by leaving the funds on deposit in the bank so they join in and you gradually get a snowball effect with more and more retail investors pumping money into assets whether it is the stock market, bitcon or some investment fund sold by a bank or insurance company.

Then Greed takes over and investors look for a bigger better return and discount the risk of their investments because they are comparing it to yield on government bonds which is at an all time low and as a result doesn't provide a good indication of risk. This is the search for yield where investors accept more risk for a higher return. The longer the economy is in a low interest rate environment the more risk that is accepted because yields are being pushed lower by higher asset prices. A good example is in the stock market where investors accept 50 times P/E instead of 30 times P/E.

Central banks are concerned about this risk taking and it has lead to speeches such as the financial system is deviating away from the real economy. All though they are concerned about the risk taking they are more concerned about generating growth in the economy and creating employment. If they start to tapper (i.e. purchase less bonds when the bonds come to maturity and are rolled over with new purchases) this will have the same effect as an interest rate rise and will slow down the economy. To much taper or doing it to early will put the economy into recession which will mean job losses and lower tax take for governments..... Doing it to late may result in a inflation spiral.... Europe has yet to see the wage inflation or secondary inflation and this accompanied by the fact that most economies in the EU are still not as strong as the pre covid economy is why they are holding off tapering their QE programs.

The reason that the QE programs continue to present day is that when a bond matures and is rolled over with a new bond issued. The central bank needs to buy the new bonds issued to maintain the yield. If they buy more they are undertaking more QE which will drive yields lower if the Buy less they are tapering their QE which will drive yields higher.... If they buy the same amount as matured they maintain the status quo.

That is happening all the time it is not adding any extra money to the economy. The retiring person has no longer a wage, the pension or share.money they are spending bis less than there previous income. If anything they may spend a higher proportion abroad. On the other end of the scale retired people either enter nursing homes and retired people die. There is no extra benefit to the economy.

This is similar to people on about housing becoming available due to death and probate. There is no extra housing created as such as this is happening all the time.

It would be more deflationary than inflationary

Adults are taking on borrowing obligations in the hundreds of thousands to buy a home, the largest purchase of their life, but all that cash put into property doesn't circulate around the economy as much as would be optimal to ensure a greater likelihood of the cash being spread around more equitably. The idea that our housing market correcting would indicate wider economic problems shouldn't be prevalent anymore, but a conscious effort was made post-08 for the State to socialise assets including housing and markets which means that the cause of risks in the system leading to 08 have not been fundamentally changed.

The kicker for me as to why there is an almighty correction possible is the huge gap in rents versus mortgage repayment costs. This is essentially a free lunch which of course there is no such thing as, but people thinking that the gap between a mortgage and renting can be sustainable is just false; either rents will fall significantly, mortgage repayments will rise significantly or a combination of both will occur. I see commentators make the claim that it is quite normal to rent goods for more than they cost (eg a car or TV) and I am a bit gobsmacked that that is used to compare to the situation with property, an asset that doesn't depreciate like a car or electronic device does, so effectively the currnrt situation involves a house being bought once and is paid for twice. Ludicrous and tipsy turvy land.