Irish property bubble

The Irish Property Bubble is a controversial topic, with many "experts" denying its existence at all.

What is not disputed is the astonishing rate of home building in Ireland. From the early 1990s to mid 2000s, approximately 75,000 units have been built every year. Suprisingly a significant proportion of these new homes are unoccupied, which begs the question, why should this be the case?, Are these empty properties holiday homes mainly for the owner's use or are many of these new homes speculative purchases either waiting to be sold or waiting to be occupied by tenants? Figures exist only for completions because the ESB provides information on the number of properties newly connected to the electricity network.

Currently (2005) there is enough zoned land to accommodate 330,000 new homes, the plentiful supply of land has stopped the bubble reaching critical mass with a short sharp shock, instead drawn out inflation has facilitated socio economic coping strategies to emerge such as intergenerational lending and mortgage fraud.

Interest rates set by the ECB to accommodate a German economy with record post war unemployment, falling house prices and consumer spending, apply in a country with record levels of employment, rising house prices and consumer spending. The Irish economy has fallen down the global competitiveness table from fourth to thirtieth in the past three years due to the rising costs of doing business.

The housing boom is responsible for the employment of approximately 20-30% of the working population. The Irish Central Bank estimates that 15% of the workforce is employed directly in the construction industry.

Agricultural land has been affected by the residential property market. The decoupling of farm payments has meant that most agricultural land cannot "pay for itself" with a future stream of income. The option of forestry is currently providing a floor of €3000 per cleared acre. Land unsuitable for forestry has no floor anymore and its price is unsupported. Land with forestry already planted (pre-premium in 1989 for example) is being offered at €2800 or less per acre. Wheat has been sold in 2005 for €75/ton with one acre yielding a loss-making 2 tons or so this year and 4 tons or more in a good year.

It appears that the only way for agricultural land to pay for itself at current market values is if it can be: -

Used for residential development

Developed as a golf course or other leisure use

Compulsorily purchased for use in national infrastructural projects, especially road-building

It is difficult, to find independent experts on the the residential property market in Ireland. Even stockbroking firms, who might be expected to talk down a property bubble in favour of investing in stocks and shares, are in many cases are owned by mortgage banks in Ireland.

Property Bulls are those who believe in house price stagnation or inflation in nominal terms.

Property Bears are those who believe in house price deflation in nominal terms.

Irish Property Bears

The Economist newspaper maintains that a large bubble exists in the Irish market.
The IMF also say that residential property in Ireland is overvalued.
Eddie Hobbs argues against buying Irish property: "It's only going one way..." and has directed investors overseas instead. He also argues against the Jumbo Mortgages needed for most purchasers of Irish property today.
The Central Bank and Financial Services Authority of Ireland admitted on 7 November 2005 that various models show between a 0% and 60% overvaluation of Irish Property. The news was broken by The Irish Times who saw a document from an OECD meeting with their estimate of an overvaluation of 15%. Minutes of the meeting indicate that senior Irish officials agreed with the estimate but couldn't announce a figure to the public in case they would be blamed for triggering the crash. The Central Bank now denies this.
Following the outing of the Central Bank's estimate, economists have rushed to agree, making their opinions on the morning radio shows that the ratio of rent to property price is absolutely unsustainable and that any downturn in construction would start a spiral that would depress growth by 3-4%. They further state that the market is driven by the 20% of sales to buy-to-let owners, which again is unsustainable as it appears impossible to make a profit at current prices and rents.

Irish Property Bulls

The mortgage banks.
Some stock brokers owned by mortgage banks.
The estage agents.
The media in general, taking advertising revenue from the estate agents.
The government.
Many property owners, when asked their opinion in surveys etc.

Bearish arguments

A record 12% of the Irish workforce is employed by the construction industry: any slowdown in construction would lead to a spiral of unemployment and less construction.

Values have deviated too far from long-term trends.

There is no true shortage of land, only a shortage of planning permission. Even in Dublin, Cork, Limerick etc. there is no shortage of land.

There is effectively no price floor for rural/agricultural land.

The p/e (Total Price divided by annual earnings) ratio for private housing is at an all time high. Even with the bulls predicting stagnation, these ratios are extremely high, and only justifiable by a Survivor Investing strategy.

ECB interest rates are (Nov. 2005) are at an accommodating 2%, with many Jumbo mortgages taken out in Ireland. If interest rates return to normal, holders of these mortgages would be forced to default. As the market price for housing is set on the margins, the forced repossession sales which follow would lower house prices.

Consumer behaviour in Japan is really not so different from Ireland or indeed any other capitalist society. If house prices decreased there for 14 years, then the same is possible in Ireland.

Bullish arguments

The property bulls have dismissed the calculations of the IMF as not taking into account Ireland's unique conditions. They have further dismissed the crash predictions of The Economist by stating that anyone who listened to that advice a year ago (and not bought property) would have missed out on the capital appreciation since then.

Demographics: A net 50,000 immigrants per year who must live somewhere, also more people are buying second homes

House prices have never really gone down much before, only fallen a little and sat there (stagnated) for a period

Irish Property Bears

Irish Property Bulls

Bearish arguments

Bullish arguments

See also