What does economic collapse look like?
As much as I am familiar with economics, I remain puzzled by one thing: if Ireland really is heading for absolute collapse – IMF intervention, seven lean years and everything else that the most pessimistic prognosticators claim – what would that mean in practical terms?
It’s not enough to say things will be bad. Things are already bad. Unemployment is at 13.7 per cent and emigration has returned to historic levels (estimated by the government no less, at 5,000 people leaving each month). Jobs are virtually non-existent and everything feels like it’s held together with little more than blind hope and sticky tape.
Despite this, Ireland remains hideously expensive.
To take just one example, rents have fallen since their 2007 peak but they remain high. Certainly they are much higher in Dublin than, say, Belfast. Obviously there’s the capital city premium, but if a quarter of all apartments are lying vacant, why haven’t prices crashed?
And what would happen if they did?
How come landlords, particularly of the small, buy-to-let variety, haven’t decided that €400 is better than zero euros? How can they continue to service their mortgages? What would happen if they failed? Would the rest of us, the great unwashed of non-property owners, start squatting?
Rents aren’t the only issue, but surely I can’t be the only person who is confused as to why Ireland remains so astonishingly expensive a place to live in.
A principal effect, as you mentioned, will be a return to emigration. But I wonder where the young men will go. Where are the jobs now? Government should be offering classes in Hindi and Chinese?
Young women too, of course.
one small country for sale
But it’s too expensive so nobody can afford it . Maybe if and its a big IF if the USA economy returns to ‘normal’ in about a decade or so that might spark some interest . The UK is on its knees and apart from Canada and Australia who seem to avoided the worst of the Wall St/City financial disease the rest of the planet apart from Brazil all await the ‘upturn ‘.
Those of us who know that ‘capitalism ‘ neo con -trickle down has failed can like the Chinese think about just exactly how much State control of the economy there needs to be so that future sociopathic bankers and investment hedge fund managers cannot wreak the havoc they did to the world economy this past decade .
The western world needs to rethink it’s attitude to ‘financial crime ‘ in light of recent events on Wall St and in international banking circles .. Capital punishment for capital crimes above one million euros/dollars /yuan etc should become the world norm .
Interest rates more than 5% above the inflation rate should be rated as usury for which the minumum sentence should be a public flaying followed by 10 years hard labour !
Could help to introduce a higher ethical standard among the ‘masters of the universe ‘ sorry ‘masters of disaster !!
surely I can’t be the only person who is confused as to why Ireland remains so astonishingly expensive a place to live in.
You are not.
Many of the owners have mortgages which they have no way of servicing without a significant rental income. Some owners have only two choices – hang on in their grimly and hope for light at the end of the tunnel or face bankruptcy.
My gut feeling is that the market is near to a tipping point and that a crash or heavy fall will occur.
Greenflag: Interest rates more than 5% above the inflation rate should be rated as usury for which the minumum sentence should be a public flaying followed by 10 years hard labour !
Then who will lend to high risk borrowers? (And are you sure you mean flaying? That’s normally fatal, I would expect.)
I have asked this question several times and the answer seems to be that reneging on Anglo debt would be unacceptable and the consequences much worse. Surely the question is how much worse?
I keep an eye on property prices and the prices have not changed since I returned four years ago. In many cases the same houses are still iadvertised at the same price!
Everyone knows or at least says “of course you would not pay that price!” but I think it is misleading to both buyer and seller to quote prices years out of date apparently on the off chance someone might fall for it or offer more than the property is actually worth.
It is unrealistic and I think the result is a reluctance to buy property because a) everyone is waiting for realistic prices and b) is afraid any offer they made would be higher than the actual value of the property.
No one knows and everyone is afraid of the truth, and that is just (just!) the housing market.
Jason Walsh: How come landlords, particularly of the small, buy-to-let variety, haven’t decided that €400 is better than zero euros?
Once you start renting out at a loss, that’s it, game over, foreclosure. But if you can hold on until you can get a profitable rent, then you can eventually pay off your debt. The landlords are all playing chicken with each other, and it can’t go on forever.
I cracked a joke to a mate of mine recently, I said people are worried that we might have a lost decade like Japan had, but in NI we’ve already had a lost generation – another 10 years is nothing!
it was always said that Irelands greatest export was its people, but is that comodity as plentyful as it used to be?
Irish people will always emigrate to much bigger English speaking countries anyway because we are a curious and educated people who know the world doesn’t revolve around Dublin, Belfast, Cork or Galway. Much as it’s home, there’s only so much craic to be had on the ould sod in good times or bad.
Republic of Connaught
Thats fine as long as they remember where they live!
So, if the answer is: “it’s going to crash”, then: when and what does it mean in practice?
Also, surely house prices, both rents and mortgages, must come down by at least another 50 per cent in order to be in line with reality?
I know its bad, but. Fifty percent!!!!? that destroys not just banks but lives!
Commuting is not impossible. The UK has jobs, it’s not so far people can’t get there and back.
What does an Irish economic crash mean? Hopefully less money for sinn fein.
what do you mean?
Not so much a case of cutting your nose to spit you face as amputating your brain in a fit of sdpite, Kathy
Kathy C
Its worse than that, much worse.
This disaster threatens more than industry. One of the things economic success gave us was confidence, that is damaged, I feel wrongly, by the banking crisis, and there is a danger people will seek to blame the ‘old enemy’ however irrational that is and in their efforts to apportion blame reignite the embers.
Jane Jeffers
Lots of young people travel, lots of old people go away to work. Not a problem as long as they all come home.
Pip,
I wouldn’t want to commute to GB, even from Dublin. As for commuting from Galway, forget it. I drove to Oxford last month because it was cheaper.
Jason,
I think there is still an irrational expectation (fuelled in no small part by the terms of reference of NAMA) that the current asset price crash is just a temporary blip, and property will return to its previous form in the medium term. But looking at the property market here in Galway at least, the asking prices for 3-bedroom suburban houses are still in the 250k range, which is patently unrealistic. Whatever happened to the old mortgage benchmark of three times household income?
I know of one 3-bed townhouse that was priced to sell recently by a family that had to move to Dublin for employment reasons, and it eventually went for significantly less than 180k. There is a 4-bed house on Daft identical to that one (save for one internal wall) in a neighbouring street that has 190k on it and is still unsold after several months. It is quite obvious that there is a disparity in expectations between sellers and buyers in the market. I strongly suspect that it is loss-averse sellers who are being unrealistic.
cara leave her to make a virtue of her bitterness
an economic collapse will mean the marginals get voted in.
FF/FG are surplus to requirements, a huge vote for SF and bring on UI.. the ppl can demand a 32C republic
Andrew Gallagher
Check the cost of flights from Knock. Its doable. Its very doable,
Time to look at all possibilities.
“Would the rest of us, the great unwashed of non-property owners, start squatting?”
You might. Or you might form an unincorporated association and approach estate agents with large amounts of unlet properties on their books. You promise to maintain the property, pay any local taxes and sign a legaly binding agreement to quit at 2 weeks notice. They give you the keys because it will prevent squatters who wil do none of these things. No rental income but the property is maintained and secure.
Think of 1970s Albania, with religion and bad weather.
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“What does economic collapse look like ”
It will have massive effects on Northern Ireland (probably violently)
There was an evolution on the island of Ireland that was developing.
The economic collapse has stopped this evolution.
The danger of returning to the old methods is sadly apparent.
lover not a fighter
Sadly, I agree there is a real danger of old ‘methods’ rearing their ugly heads again,
test
Well, a few thoughts.
First up rents in Dublin *are* down significantly.
One reason they were so expensive previously was because of multi-occupancy – not only many people sharing a house but even people sharing rooms (10 or 12 immigrants in a house).
As rents fall, and more properties become available less people share. That still won’t neccessarily mean cheap rents as compared to somewhere like Belfast, just that rents wind up being cheaper than before.
My guess is most small time owners of multiple properties either have had them rented out, or don’t / didn’t intend to. It’s much more difficult to sell a rented property so if you’re looking for a get out that’s not neccessarily the route to take (holding onto an apartment in the hope of a rebound is a big gamble).
The large, developer / bank / NAMA owned empty apartment blocks are being drip fed onto the market. I think mark-to-market accounting may well also play a role here (the notional value of many buildings being determined by their notional rental values – folding the market / realising low rents would result in further mark downs in the value of the real estate – certainly applies in commercial could well also be relevant in large residential developments).
An outright rental & price collapse in residential & commercial property could well lead to a boom rather than armagedon. Commercial rents are down significantly in the city, which should play a role in attracting FDI here..
Incidentally it’s also worth conceptually separating notions of the solvency of the state and of the viability of the wider economy. The former is being shot to pieces because private debts are being made public (and because strutural fiscal problems – a legacy of the bubble) the later is in depression (much like many other parts of the Western world) but will recover eventually *regardless* of whether or not the state restructures debt or borrows cheap money with strings from EUSF.
Andrew – check the number of houses for sale / time to sell. House prices are sticky, during a crash supply and time to sell increase quite quickly. House prices fall very slowly. Based on historical data from property crashes across the globe, Constantin Gurdgiev reckons there are 33 quarters to go (or just over 8 years!!).
I agree that a ‘collapse’ of the housing/rental market would create a boom and surely that is what is needed to restore confidence. Trying to sustain prices might help some big developers and banks but it does nothing for the people on the ‘front line’ nor does it inspire confidence, since it simply prolongs what is basically a lie.
Also bear in mind that the state writes a floor on rents by subsidising up to €600 per room for those who qualify for rent supplement. That potentially means a landlord can rent a 2-bed apartment to the state for €1200 per month and a 3-bed house for €1800 per month.
For taxpayers rent is tax deductible up to a max of €800 per year.
If you doubt this Britain called in the IMF in 1975..
Agree 100%
Mack
Does that have anything to do with how many people there are and how many houses are for sale.
The English market is said to be falling but surely that is very short term, they have a real housing need. Our problem is very different.
Also EUSF should be EFSF
Well, generally not. Even with oversupply sellers will still price too high so the numbers of houses for sale grows rather than diminishes.
In Ireland a big issue is the number of empty properties, that represent a huge overhand in the market. The USA had similar issues, bulldozers solved that problem there – expect to see it here eventually..
Mack
Again the US was a much bigger market and with more ‘space’ to move. Ours is a much smaller market with no where to go. Surely it makes sense for the country and the banks to allow the market to find its own level? Some would lose but that is market reality.
Too many houses were built for too small a market. The only way for that to be resolved is as you say to bulldoze those already built or to allow the market to adjust itself. I think the best way is for the market to adjust, anything else is as false as the past.
??? You are not getting ANY rent so you “hold on” for profitable rent? so no rent is better than some rent? I give up
“and there is a danger people will seek to blame the ‘old enemy’ ”
incroyable. A sovereign nation takes on sovereign debt and suddenly it is the fault of people who left 70 years ago.
Somebody gotta grow up a little.
The state subsidy for rents is a real biggie, and the brits are dropping theirs. I guess ROI dare not drop theirs as it feeds straight through into capital values and state solvency.
Office rents in Dublin are two or three times belfast rates, but Dublin offices are empty.
Why? Because it does not cost the agents anything to keep offices empty, and if they drop the prices their commission drops.
But I’ll bet the prices deals are being done, if any, at are a lot lower than the published rates.
Will the price fall be a slow glide to a soft landing or a stall and a crash tail first? Who knows?
Get a mobile phone number and an overnight bag and you could have big apartments monthly for no money.
Agreed. How can holding on with zero rent be preferable to holding on with a rent below the level you expect ?
Kathy was left off the SF Christmas Card list and is so mortally upset that she wants revenge in any way possible.
Sinn fein has benefited by the Irish taxpayer via what the Irish gov’t has paid into the north and invested. Sinn fein has benefited by the Anglo Irish Bank lending the money to developers in the north…..just as the dup has benefited. Both parties wanted investment and this is what they got and this is what they brought in. The Irish taxpayer won’t be able to pay down the bail out money AND continue to fund sinn fein whims. Sinn Fein is great on blame but takes very little or no responsibility for something going badly in their neighborhoods and the bank invested in their neighborhoods.Anyway you look at it…now there will be less money for sinn fein.
Rent is primarily a function of the cost of capital rather than market parameters (such as market demand a property or the market value) or distortion of them (state intervention via NAMA, state subsidy, etc). If market demand was the key dynamic rather than capital then (a) rents would fall to a price determined by the oversupply, and (b) the oversupply would not have occurred.
As I’ve said a few times (and have still not received my Nobel Prize), the mark-to-market model that ALL banks use to determine the market value of a property is deeply flawed because it only allows for two classes of buyer: those who intend to use the property and those who intend to let it to others who will use it. It doesn’t allow for the third class of buyer who is neither of the two: the buyer who neither intends to live in it nor let it but whose business model is to buy it and then sell it to either of the two other classes at a profit when the market price has risen as a result of the artificial demand created by that buyers activity.
So, since rent is primarily a function of the cost of capital, expect to see rent rise in those properties most vulnerable to it when the ECB increases its policy rate.
Ireland is now a property ownership and management agency (the world’s largest), so that is what the government has invested a percentage of your current into income (via the taxation of it) and is it what will fund state provision of any entitlements upon your retirement (health care, pension, etc). The fact that it won’t actually fund it is what should worry you.
Oddly enough, assets that the state bought for multi-million sums per acre will tend not to be worth as much when they bulldoze whatever empty properties were built on them or return the land to agricultural use. Since the value was increased by re-zoning land from agricultural use to building use, re-zoning it back again will decrease the value of it. Yet the government will tell you that NAMA will make a profit. Surely given small children understand that the government cannot be telling the truth to its citizens but that it is lying to them in order to defraud them and damage their collective interest in a way that they would not support it told the truth rather than utter conman’s lies.
Still, as long as eurosystem banks get your money and we remain as good (albeit bankrupt) Europeans then that is all that matters. After all, were it not so, what would Biffo do for a job without a plumb EU post to fall back on when his domestic political career expires at the next general election?
And just to add to the post directly above: demand is now proven as a worthless indicator of property value since it is vulnerable to distortion and the flawed models than underpin it. It is the cost of capital that is determining it, and that is why values are still high – nothing to do with the Irish being a bit slow to respond to low demand. The hard part is, however, that while you might hope that capital will keep the price of property from collapsing (and your pension fund collapses with it), the state intervening to service the cost of capital will have the effect of lowering the value of those properties by the time you retire – and then market will kick back in as the determiner so the oversupply will then come back into play (unless the state bulldozes those assets and collapses the value of your pension fund that way). Either and every way, your government has destroyed your future with these toxic assets.
Crooks in Suits, but Spivs with the Ugly Face of Capitalism on Everyone of Them
Realistic House Price £100,000
Mortgaged House Price £200, 000
Mortgage companies and brokers are then fraudulently obtaining money with menaces from home owners in negative equity …. and the market is a Ponzi market.
amanfrommars: Mortgage companies and brokers are then fraudulently obtaining money with menaces from home owners in negative equity
My sympathy for people with negative equity doesn’t go so far as to blame the entity that responded to their pleas for a loan to get onto the property ladder. Any number of people were telling the buyers that there was a bubble and it was going to burst, but they preferred to listen to other voices.
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Well, that’s all the credit cards gone then
The UK isn’t on its knees. In London the restaurants are full again and the cabs are busy. The economy has turned. there will be a difficult 4 years to get the books back in balance but on average its growing again
Ireland problem is the Euro. In the past the punt would have helped correct the situation and the losses would have fallen to lenders through inflation
I love it now that the lemmings who drove up prices squeak that the big bad banks forced them to borrow!