Five years, six property markets, mixed fortunes

Last week, there was a brief discussion on thepropertypin of an interesting piece of economic history – in the 60 years following their construction in the late 1780s and early 1790s, the Georgian houses of Mountjoy Square fell in value by almost 94%. By comparison, nominal wages fell about 40%-50% during the same period, while the price of food – if bread is anything to go by – stayed largely the same (8 pence for a loaf of bread in the 1790s and in 1848). While I can’t claim to speak for anyone else reading, I would imagine the general perception was: “So property prices can adjust downward by percentages scarily close to 100% – but it probably takes a unique set of circumstances (Act of Union and all that).”

Yesterday, however, I read on Carpe Diem about the latest property price statistics from Detroit. Houses in Detroit are selling for an average of $11,500 at the moment, down an astonishing 88% from their peak values. That translates into a monthly mortgage payment of $50! And this happened not in 60 years of steady economic decline but in less than five years.

It got me thinking about Ireland’s property market in a global context, so I decided to do a little comparison of 2005-2009 for a smattering of cities. The cities were chosen in no particular way other than to give some global coverage, hence two Asian and one American cities, as well as two Western European and an Eastern European city. The figures refer to the start of the year concerned, with Jan 2005 set at 100 for all cities.

Property prices in six cities around the world, Jan 2005-Jan 2009

Property prices in six cities around the world, Jan 2005-Jan 2009

It was a slight surprise to see that, of the cities shown, none apart from Detroit had yet fallen below their Jan 2005 levels by the start of 2009. Indeed, some cities almost 50% above their 2005 levels. Dublin was closest – and more than likely has already fallen back to mid-2004 levels since the start of the year. Tallinn seems to be like an excess version of Dublin – rising and now falling faster. For Singapore and Hong Kong, 2007 seems to have been easily the craziest year, but the correction in 2008 was nowhere near as large. Meanwhile, Detroit props them all up.

For a view on how much more of a correction is needed for five economies, including the US, Ireland and Spain, you can have a look at property yields over the medium term here.

Taxpayers in Baltics, UK and Ireland facing the toughest questions

Two weeks ago, I examined the IMF’s estimates for growth prospects in 2009 and came to the conclusion that in a year where countries such as Afghanistan, Ethiopia and Laos are among the world’s fastest growing economies, more open economies are being hit by a collapse in the globalized consumer’s demand.

The temptation may be to regard this as a somewhat academic question but a closer examination of eurostat figures and the latest European Commission estimates for 2009-2010 shows why this has practical fiscal implications. Eurostat figures show that the EU’s budget deficit between 2000 and 2007 averaged just over 2%. Faster-growing countries such as Bulgaria, Estonia, Ireland and Sweden ran surpluses (Finland ran quite large surpluses in fact), while most of the Old Europe stalwarts, such as Germany, Italy and the UK, ran what would until recently have been termed sizeable budget deficits (i.e. greater than 2% on average).

The EU’s budget deficit grew from 0.8% in 2007 to 2.3% in 2008 and, according to the Commission, is set to almost treble this year to 6%. Next year, that deficit could increase even further to about 7% of EU GDP. Four countries face the prospect of their government balance undergoing a double-digit swing from what they were used to up to 2007 and what they will have to face in 2010 – Spain, the UK, Latvia and Ireland.

Given that foursome, I thought it might be worthwhile to see what groups there are within the EU – when it’s clear that the global trough has been reached, unanimity of purpose may pass, so these groups could have a political as well as economic relevance. The graph below shows mean budget deficits across seven relatively self-explanatory regions in the EU (GAF = Germany, Austria, France; PIGS = Portugal, Italy, Greece, Spain; CEE = Central & Eastern Europe). The regions are ordered from left to right by how ‘in balance’ the economies were from 2001 to 2007. What’s worth noting is that the ordering of the regions will have changed by next year – the Baltics and the British Isles (if I may call them that!) face significant budgetary deficits.

Budget deficits, 2001-2010, by EU region

Budget deficits, 2001-2010, by EU region

With more open economies being harder hit, their governments are facing pressure from all fronts. Alarming statistics are still coming in from places like Latvia, where output is down 30%, and Ireland, where tax revenues are down 24%. If exporters are being hit, their workers are likely to be hit – and the longer the recession goes on, the more workers will hold their consumption in check (not to mention unemployment).

The problem is that government deficits are the last point in the cycle – increasing taxes may have to wait unless the government wants to be responsible for second-round effects. This leaves Ireland in quite a conundrum, as its 2001-2007 tax base will not be coming back any time soon.

Are more open countries being hit harder in the recession?

This morning, the ESRI has published its latest Quarterly Economic Commentary, which led to George Lee being pushed on Morning Ireland into saying Ireland was the “worst in the developed world” when it came to economic contraction. Fortunately, within the last week, the IMF has produced its latest World Economic Outlook, “Crisis & Recovery“. This contains the latest predictions by the Washington-based organisation on economic output for all countries for this year out to 2014… although to be fair, the focus from most people is understandably on 2009, rather than 2014.

The map below – fully available on Manyeyes – shows estimated GDP growth (or not) by country in 2009, the worst year for the world economy since World War II. Speaking of war, while 27 countries are predicted to have strong growth in 2009, many of them are post-conflict countries, presumably with a lot of spare capacity and/or natural resources, such as Afghanistan, Congo, Ethiopia, Iraq, Laos, Myanmar and Timor Leste. A couple more are simple cases of natural resource-driven economies, such as Qatar and potentially Turkmenistan and Uzbekistan.

GDP growth, 2009 (Source: IMF)

GDP growth, 2009 (Source: IMF)

Large swathes of the world, almost 70 countries in total, are blue, meaning GDP contraction in 2009. These are concentrated particularly in developed and transition markets, as well as the larger economies of Latin America. A dozen economies face GDP contractions of greater than 5% this year. While Ireland is on the list, it is not a sore thumb, particularly when one looks at countries such as Iceland, Estonia and Singapore, also small open economies. In fact, the whole list of those worst affected this year reads, unfortunately, like a Who’s Who of Washington Consensus poster boys from earlier in the decade:

  • Botswana – one of Africa’s few success stories over the past two decades, growing at more than 8% a year until recently
  • Estonia, Latvia and Lithuania – three small open economies that had bought heavily into the dream of European integration
  • Iceland – no explanation needed, unfortunately
  • Ireland – end of the exporting good days… or end of the domestic boom?
  • Japan – one of two large economies on the list, facing collapsing export values
  • Russia – the other giant on the list, hit more heavily than other resource economies
  • Seychelles – a relatively successful and open economy, coming down from a heady 2006/2007 boom
  • Singapore and Taiwan –  two of Asia’s most successful exporters in the good days
  • Ukraine – again, a very strong economic performance since 2000, with natural resources playing their part

Largely speaking, these, the worst hit economies of the 2009 recession, are open economies and in many cases small ones too. I thought it would be worth investigating across the entire pool of almost 200 economies whether there was a correlation between 2009 performance and (1) openness and (2) 2001-2007 ‘trend’ growth. The full visualization is here (you can play with the axes, highlight your own country – Ireland highlighted below, flip the chart, etc..), but for the overall story, see below.

Openness & Growth, 2001-2009

Openness & Growth, 2001-2009

A quick guide to how to read it:

  • The further down a country is, the greater its GDP contraction this year. (Qatar’s expected phenomenal 20% growth this year – oh, to have gas reserves! – actually stretches out the axes a little more than ideal.)
  • The further to the right a country is, the more open it is, as measured by World Bank trade-GDP ratios. (The three trade-a-holics, Singapore, Hong Kong and Luxembourg, again stretch this out a little – closely followed, incidentally, by the Seychelles.)
  • And if two dimensions weren’t enough, the size of the bubble represents average growth between 2001 and 2007.

While not a perfect correlation, it’s pretty clear that more open economies are facing into tougher economic times. Two quick and related concluding remarks. Firstly, a second glance back at the map shows that Africa and Asia are the best performing continental economies this year. I doubt it’s a coincidence that the vast bulk of population growth over the coming two decades will be from these two regions. The slow but steady formalization of markets continues under the radar in both.

The second point builds on this. The story we were all sold in 2007 was one of decoupling. “No matter if the US and Europe go into recession,” went the story, “because the BRICs will rescue us.” Brazil and Russia in particular did not pass that test, but China and India have fared better. Both economies do look like coming in about 5 percentage points below 2001-2007 trend growth this year, which may certainly feel recession-esque, particular with global euphoria and expansion a thing of the past. Nonetheless, they are still among the fastest growing economies in the world, forecast at above 5% in 2009. China and India are also by the largest of the BRIC countries, with almost 30% of the world’s population, suggesting that they have a critical mass of domestic demand that Brazil and Russia lack.