Ireland: the Britney Spears economy? The Daft Report (2008 in review)

This is an unabridged version of my commentary on the latest daft.ie report (2008 in review), which is available at daft.ie/report.

When we look back at 2008 in a few years time, I think it’s fair to say we will regard it as the annus horribilis for Ireland’s property market. In late 2006, we issued a report which was the first to spot a slowdown in the property market. At the time, it was our view – unpopular though it was – that rising interest rates and high levels of supply would lead to a levelling off in house prices. This turns out to only have been the start of the story.

Ireland has become a bit of  Britney Spears economy. Bursting onto the world stage at the end of the 1990s, Ireland was heralded as an economic phenomenon and rapidly became a global superstar and poster-child for economic development. But recently it looks like it’s all just falling apart. Nowhere is this more evident than in Ireland’s housing market – until recently the engine of Ireland’s economic growth. House prices have fallen significantly from their 2007 peak, with trends in Ireland’s property market driven by the ongoing effects of overproduction of housing, combined with extraordinary international economic developments.

As the daft.ie review of Ireland’s property market in 2008 shows, asking prices for Irish property fell on average 15% during the last year. That makes 2008, in many ways, the opposite of 2006. While asking prices were static throughout 2007, the 12 months of 2008 have seen the typical home lose just over €50,000 in value, almost the exact amount gained in 2006. Ireland’s average asking price of €295,000 in December 2008 is almost exactly the same as that in January 2006. Even the property market’s quarterly trends were like 2006 in reverse.

The early part of the year was marked by uncertainty about growth in developed economies, as ongoing financial turmoil took its toll on share prices and the dollar. There was still a widespread belief, however, that emerging markets would take up the slack and that we were experiencing a blip rather than a derailment. Asking prices therefore eased back just 1.4% in the first three months of the year. As summer came along, though, it seemed that we were entering a new economic era, one of $200 oil and inflation. As this sank in, confidence took a further hit. Asking prices fell twice as fast between April and June as they had done in the first quarter, with the outer commuter counties of West Leinster, more dependent on petrol prices than elsewhere, particularly badly hit.

As autumn descended, the full extent of the financial crisis was revealed. Long-standing banks and investment houses were wiped out or nationalised on a weekly, if not daily, basis. House prices fell almost 4% in the three months between July and September as a result. There was still a feeling, however, that the financial and real economies, or Wall Street and Main Street as they were dubbed, worked in somewhat separate spheres. As the year came to a close, however, the full impact of the financial crisis on the real economy was becoming apparent, with job losses in retail, catering and manufacturing. The largest fall in asking prices, almost 6%, has come about in the final months of the year (just as the largest rise occurred in the first part of 2006).

South County Dublin has been in many ways the flagship of Ireland’s property market. Average asking prices in the area rose from €530,000 in early 2006 to over €680,000 by mid-2007. They have fallen steadily since then and in late 2008 fell over €50,000 to stand very close to their early 2006 levels. Elsewhere around Dublin, the fall from the peak has been in the region of €70,000 to €80,000. Outside the capital, falls in asking prices of between €40,000 and €50,000 from peak values in mid-2007 are more typical.

A range of global economic developments has made it necessary for countries around the world to revise down their growth estimates over the coming years. Russia, which earlier in the year had been expecting growth in 2009 of perhaps 7%, is now fighting talk that it is already in recession. The US may experience its first two-year recession for some time, while the IMF believes that the world as a whole will be in recession next year, according to its definition of global growth of less than 3%.
Ireland was delicately poised atop recent global economic trends. Its two major currency exposures are to the dollar and to sterling, so recent depreciations of both are having a major impact for Ireland’s exporters.

In the midst of all these external developments, Ireland’s domestic sector – so heavily reliant on construction for employment, wages, tax revenues, and general sentiment – has contracted sharply. The government budget shortfall for the year totalled €8bn, with likely implications for public sector pay and employment in 2009 and 2010. It is likely that net migration will change from large inflows in 2007 to outflows in 2009, particularly as unemployment looks likely to reach double digits at some point in the next few months.

What do all of these local and global trends mean for homeowners and prospective first-time buyers? To see where the property market will go next – and when it is likely to recover – it is necessary to look to the past as well as to the future. Over the past few years, Ireland has built perhaps twice as many houses as it needed, due in large part to tax incentives. Between 2005 and 2007, a quarter of a million new homes were built in a country that only had 1.4 million households in 2005. Worse still, due to the nature of the tax incentives, many of these properties were built in areas that did not need them. It stands to reason that if you build twice as many houses as you need for three years, you’ll need to build half as many as you need for six years to get back to equilibrium.

So should we write off Ireland’s property market until 2015? Not necessarily. It’s likely that prospects will vary from region to region. As outlined above, areas like South County Dublin are certainly feeling the pinch now, falling almost €150,000 on average from peak values. In such areas, prices are determined less by wages and interest rates, and more by expected future value and confidence. Therefore, whenever sentiment eventually reverts to a more optimistic outlook, those areas are likely to rebound faster. With the government seemingly tied into a pro-cyclical trap and not able to implement an economic stimulus package, due to large increases in public expenditure in the good times, it is of course an entirely different question whether lower interest rates will be enough to kick-start sentiment in Ireland.

In other regions, the long-term prognosis is very different. For properties close to centres of employment, four elements – employment, wages, interest rates and access to finance – will be crucial. Other areas, suffering from a glut of properties, may need a longer or a larger adjustment. Ballpark figures, based on the 2006 Census and daft.ie listings, suggest that as much as 10% of properties are for sale in counties like Roscommon, Cavan and Leitrim, compared to less than 5% elsewhere. It won’t be impossible to sell properties in these counties in coming years, but sellers must be realistic about the value of their property in a flooded market.

As I mentioned at the start, Ireland has been in many senses the Britney Spears of the world economy over the past ten years. Bursting on to the scene in the late 1990s, we earned worldwide recognition for how much we achieved so fast from such humble beginnings. With all this fame, it was perhaps to be expected that we lost our way in the early years of this decade. Recently, things have got a lot worse. With bank bailouts, budget debacles, job losses and public sector cuts, we’ve been through it all. Nonetheless, like Britney, while a lot of damage has been done, with good management, we can look ahead and spot elements of a brighter future – just look at the cost of petrol, mortgages, food or clothing now compared to a year ago. Ultimately, with the resolve to put right what needs to be fixed, and with a far better starting point than we had in the mid-1980s, we have to be confident about our prospects for the future.

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11 Responses

  1. Whilst it is clear that the boom in housing supply has created a glut of unaffordable homes, I think it would be wise to compare Ireland’s bubble with the UK phantom boom. In reality, demand for new and second-hand housing was fuelled by easy credit and asset speculation in both markets. Let’s be clear that probably the single advantage of the Irish housing bubble has been the massive improvement in the stock of housing in the Republic that has occured.
    The problem with economic models of supply and demand is that textbook economists forget that demand is simply the willingness of consumers to purchase at a given price. The turning point at the end of 2006 in housing sales may be reasonably interpreted as the realisation by lenders and borrowers that private sector credit and house prices was becoming unsustainable.
    The real problem of the housing boom has never been the production of too many homes, but the fictitious inflation of housing and land valuations. I’d go so far as to say that Irish housebuilding was restrained artificially by our draconian planning laws.
    Irish house prices are still overpriced and banks’ liabilities and assets are still significantly overstated. We have renewed Ireland’s dilapidated housing stock, albeit by building cramped dwellings in higher densities to suit the developers and planners. At least we’ve avoided the dismal experience of the UK housing market where rapidly rising prices have coincided with historically low housing supply.

    • Hi Steve,

      Thanks for the comment – an interesting perspective, and one worth contrasting with Dan O’Brien’s commentary on a Daft Report early last year. You’re right that property in many counties was at the wrong price-point. I also agree that we’ve improved a lot of our housing stock in recent years. I’m not sure I’d agree, however, that we needed all the properties we built in many counties. I think the evidence suggests that the tax incentives had their intended effect – a bit of a boom in all constituencies, rather than targeted growth in areas that needed it.

      We may need new properties soon in centers of employment, but I think some developments will prove to be ghost estates.

  2. Though since Britney Spear’s breakdown, she has had a number one and a number two album in the US selling over 2 million copies each worldwide. She also has had a US number one hit single and two other top ten hits in the same time period. You would have to wonder if the Irish economy and property market will have a similar display in such times of adversity.

    Any prizes for the least intellectual comment?

    • I think she may be a leading indicator. Watch out for Ireland in 2009!

      Another way of putting it is that she’s only sold 2 million widgets. Ireland sold over 7 billion widgets in October 2008 alone! (Admittedly, we have to sustain 4.5 million, she’s only got two kids. And even then only part of the time…)

  3. Thanks for the feedback.

    I think that the skewed character of housing development may be more accurately treated as the distortionary impact of the arbitrary planning system. I’d agree that many new estates were built in locations that made little sense from a housing need or employment growth perspective, but this does make sense if one understands how planning artificially disfigured the housing market to become an asset market. Irish planners have zealously controlled planning permissions to stop sprawl (urban and rural) and ribbon development. Development control created the environment for planning gain and asset speculation.

  4. One further issue that must be considered is how the integration of the estimated 100,000 unsold units will effect the private rented sector as well as average house prices.
    I’d be keen to read your remarks on the increased availability of these superior homes on the rental market. If capital values of inferior rental stock is destroyed by the supply of more modern accommodation, then that may be considered a positive benefit for society. Although not for the owners of such property.

  5. The “Britney Spears Economy” 🙂 Well, that’s certainly a first. Keep up the great blogging

  6. You picked Britney because Ireland is ultimately talentless??? Worst metaphor for the economy ever dude, distinctly depressing…

  7. Hi TUG,

    Ahem, well, I guess it does depend on whether you think Britney is ultimately talentless.

    IMO, I think Britney is (1) reasonably talented, (2) endowed with natural beauty and (3) given how things have gone since 2002, needs a decent manager to keep her on the straight and narrow. Just like Ireland!

  8. I think todays Daft.ie report on the rental prices answers one of the questions posed about how the stock of empty houses will impact the rental market. Here is the Daft.ie rental Index showing the steady decline: http://www.statusireland.com/statistics/property-house-price-statistics-for-ireland/29/Daft.ie-Rental-Price-Index.html

    Not so sure about the Britney thing.. although perhaps the government has no balls.

  9. Leave Britney alone!!!! :,((

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