Tuesday, December 11, 2007

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1. Steve:

   the obvious thing for not being pretty is that if you have a mortgage on 150,000 but your house is now worth only 125,000 you are on the horns of a dilemma. Do you continue over paying on a mortgage and hope the prices recover or do you walk away and destroy your credit rating?

   This is the massive fallacy that people seem to be getting sucked into; that if for some reason your house doesn’t keep increasing in value, that there’s something wrong. The fact that your house may drop to in the short or medium term is utterly irrelevant unless you’re selling it. Provided your job is steady and your income and outgoings balance out correctly, you should be fine. I bought my house two years ago (when things were inflated, but before they got really insane), I have no plans to move anywhere so none of this matters to me at all.

   Anyone who is buying a house should think carefully, and think about all the scenarios. What will they do if they lose their job, or if interest rates go up ? But above all, they must realize they are taking a risk. If you’re not happy with the risk that you might might bankrupt yourself - don’t buy a house, rent instead. If you are happy with the risk, then you lose the right to whine about it if the risk fails to pay off.

   I think there are choppy waters coming up ahead. It’s not the house price drop that scares me; it’s the credit crunch. The rising cost of borrowing means that businesses may face temporary cash problems, which will reduce their capability to invest. The retail sector, upon which much of the economy is based, will be hit as fewer people borrow against their equity, or reign in their own spending doing DIY, furnishing or home improvements.

   I hope a few small time buy-to-let get spiked over this.

   dewi:

   1) You can borrow against them.

   I think borrowing against the equity on your house is an extremely foolhardy and financially risky thing to do. I just cannot get my head around people who are going out and risking the roof over their head in order to have a fancy holiday or buy a swanky new car. I have absolutely no sympathy whatsoever when such people find out that they’re in diffs. It says in big letters on the form “your home may be at risk if you cannot afford to keep up the repayments” - on your own head be it.

   To me mortgages and debt are things that need to be got rid of as quickly as possible. Sure, that doesn’t mean you should live your life as a miser; but you need to get rid of that debt, or risk that it will get you in real trouble.

   2) You leave real money to your kids.

   I’ve got problems with the idea that some kids will find themselves with a windfall that they did not earn. It doesn’t seem fair to me that some people will get a leg up because their parents did well out of the property market, and that others will be penalized on the failings of their parents.

   Aside from that, there are a lot of people who will use their house as their pension. Many people in their 50s and older got their pensions badly screwed by the various scandals in the 80s and 90s. Those people will be looking to unlock the equity in their house to see them through their old age.

   Posted by  on Dec 11, 2007 @ 09:51 PM

2. Joseph - I was not making a point of morality. People have borrowed against rising house values to fuel consumption right or wrong.
   Your point on windfalls applies to any source of wealth not particularly property. Again I make no judgemental observation.

   Posted by  on Dec 11, 2007 @ 10:01 PM

3. I think the fact posts like this seem to be gaining attention on Slugger is, in itself, a welcome sign that we are taking the economy more seriously! :)

   Basically I agree with all that has been said. I personally view the survey itself as next to useless - as has been mentioned, it depends on what you take into account (not least but also not exclusively where you draw a ‘city’ boundary), how you take it into account, even when you take it into account (a lot of economic surveys in 2007 in practice use data which are already several years old).

   That would explain why other figures look at it another way. Indeed, some of the evidence base for the ISNI indicates wealth per capita in ‘Belfast’ (meaning Greater Belfast) is 57% about the UK average - Greater London’s is only 49%. Plainly Greater Belfast isn’t wealthier than Greater London, I’m just proving my above point.

   I think it’s more sensible to look at it another way. To me, Belfast is obviously considerably more prosperous than it was even, say, three years ago. I have just arrived back from visiting Stockholm and Copenhagen and do not feel I have returned to a third-world country (which I would have done a decade ago). So that’s good.

   I also think Sammy‘s point that people are now reflecting that the world doesn’t owe us a living is relevant.

   However, we remain, fundamentally, an economically backward place. That doesn’t mean we’re poor, it means the way we manage our economy is severely flawed - and by ‘we’ I mean the people of Northern Ireland generally. Much of this has already been referenced, but just a few:
   - ludicrous assumptions that property investment is the only way to go (with the underlying assumption that property prices always rise), not just in Ireland but elsewhere (cf the number of people investing in property in countries they can scarcely find on a map);
   - failure to improve labour mobility (not every ‘community’ needs its own factory, and moving from the City Centre to the Waterfront is NOT ‘moving out of Belfast’!)
   - near-absolute focus on retail;
   - bizarre insistence that to be a successful business you must export (but also that ‘exporting’ includes GB and RoI!); and
   - near-absolute focus on jobs rather than value.

   In short, let’s not knock some of the remarkable progress - 3% unemployment is impressive (if state-sponsored), the highest property prices in the UK* does indicate there’s money about (even if much of it is being misplaced), high immigration does show this is a place worth living in (at least at some level).

   On the other hand, we still have ludicrously high economic inactivity rates, a mad obsession with property investment rather than circulating money, and an assumption of wealth with no real statistical basis.

   As usual, the truth is somewhere in between the two extremes most people promote.

   One final point:

   To me mortgages and debt are things that need to be got rid of as quickly as possible.

   There speaks a wise man.

   Posted by  on Dec 11, 2007 @ 11:34 PM

4. IJP,

   Belfast the 3rd world a decade ago? I take it you’ve never been to the Free State then?

   Posted by  on Dec 12, 2007 @ 12:04 AM

5. “How about encouraging business creation from within?  Raising a generation that believes in itself, that its worth is equal to that of any other country?  That would take too long, a bit like educating people.” wrote Damian.

   It’s the only way.  Yes, it will take time.  Yes, you WILL have to put up with a top heavy public sector for a while longer.  No, it DOESN’T suit the Prime Minister formerly known as Iron. 

   But that’s the price you pay for a fledgling private sector starting to go great guns (sorry) after 30 years of being stifled.  There are some real success stories out there.  Every entrepreneur needs to be encouraged - from the guy who wants a window-cleaning round to the hi-tech start-up. 

   It’s the only way. 

   Someone made the point above about labour mobility.  You’re right - not every “community” does need its own factory - but there should be nothing to stop them looking for their own workspace to allow fledgling start-ups space to grow, contribute to, and expand in their own communities. 

   Folks, this isn’t easy stuff to do.  To start, run, grow and make money from your own business is hard; you’ve got to want it really badly to make a decent stab at it, and perhaps even be ready for two or three failures along the way. The Yanks don’t count you as a business person until you’ve had three failures - here, when you fail the first time the system isn’t so forgiving.  We need to grow a culture of entrepreurship. 

   And that’s going to take the generation.

   Posted by  on Dec 12, 2007 @ 12:52 AM

6. “I think the fact posts like this seem to be gaining attention on Slugger is, in itself, a welcome sign that we are taking the economy more seriously!” - IJP

   Is the proverbial penny dropping on economic reality at long last? No, it’s more to do with a sullen realisation that few pennies were dropped into the begging bowl when the Chuckle Brothers passed it around America. Never underestimate the ability of northerners to avoid facing reality.

   In a few weeks they’ll resort to thinking that the state is responsible for satisfying their financial needs because the state has systematically inoculated that belief into NI citizens by Pavlovian conditioning (with a public spending to GDP ratio of 71.3%, for example) and because a plethora of ne’er-do-well socialist agitators have made state-financed careers for themselves by indoctrinating their voters with socialist dogma, convincing them that the state is responsible for their welfare and the state alone and that all others who don’t hold that parasitic view but seek to create wealth and employment through enterprise are the de facto creators and exploiters of the underprivileged class rather than its benefactors.

   The Republic is the least socialist country in Europe. It is also the most successful country in Europe. The two are not unrelated. Creating an enterprise culture is crux part of NI’s future if indigenous enterprise is to be a part of it. That means counteracting the culture and legacy of socialist state-dependency dogma with a message of self-sufficiency and a laissez-faire view that is abhorrent to socialists. That’s a lot easy said than done when your ‘government’ is hog-tied by consensus and when one of the major parties in the Executive in seeking to make the socialist state mandatory in your proposed Bill of Rights by injecting socio-economic dogma into it under the guise of ‘human rights.’ Given the talent of northern people, creating an indigenous enterprise culture is the route to go.

   “As usual, the truth is somewhere in between the two extremes most people promote.” - IJP

   Spoken like a true Alliance Party member!

   “Belfast the 3rd world a decade ago? I take it you’ve never been to the Free State then?” - Galibaldy

   Well there you go: Northern Ireland nationalists had greater opportunity than their southern counterparts. Shame they fucked it up, wasn’t it?

   Posted by  on Dec 12, 2007 @ 07:15 AM

7. “How about encouraging business creation from within?  Raising a generation that believes in itself, that its worth is equal to that of any other country?  That would take too long, a bit like educating people.” - Damian O Loan

   Well, unless you can convince Warren Buffett to change his mind about donating his wealth to the Bill & Melinda Gates Foundation, donating it to NI instead, you don’t have a choice, do you?

   The simple reality is that wealth has to be created, not donated, if you want to be independent. Success isn’t instant. With a few exceptions, it takes a decade or more to build a successful company. And the reality for NI is that a successful economy will take a generation to build.

   Posted by  on Dec 12, 2007 @ 07:55 AM

8. a public spending to GDP ratio of 71.3%

   What exactly does this mean?

   Posted by  on Dec 12, 2007 @ 09:13 AM

9. Dub,

   To be fair NI has always understood what was required to grow a modern economy. In the 60’s, O’Neill and Lemass had a common understanding about the importance of FDI. The first with NI’s failing heavy industries and fading agricultural sector. The second in his previous life as Finance minister knew just ruinous Dev’s ‘indigenous’ growth strategy had been.

   High reliance on public money has generated great ‘gaming skills’ for cash. But to be fair (again) it is not that popular a game in NI. It’s a patch-it strategy that was never intended to make up for the fact that 30 years of low level war actually did what it was intended to: destroy the economy. Those with the capacity, the arguments and insider trust that comes from successive rounds of bidding have prospered, though I suspect none of them are rich in any conventional sense.

   The tight fiscal squeeze on spending that’s been so visibly sponsored by Sinn Féin (at least for sectors like housing and health that it has no responsibility for), should pay off in the medium to longer term. It’s not as though people don’t want greater fiscal independence either. Tax varying powers are not part of the devolutionary settlement, but according to a survey cited by Roger McGinty of the ESRC back in 2003, some 47% were in favour.

   One thing raised earlier in the thread though that needs to come first is the need to tighten up on planning and capacity for departments to work together to be able to make tough, smart and most importantly robust long term decisions that give rise to sustainable human and business growth.

   Dublin is both a business miracle and human and environmental disaster. The great lesson for Northern Ireland is that private economic growth, if it ever comes, in Northern Ireland should be planner rather than developer led. We have time not simply to look at and learn the business lessons of high standards of education across the system, and the benefits of consensus on (a la FG’s Tallaght Strategy) fiscal control offered by the Republic, but also from what they got wrong.

   The trouble is our guys are still amateurs, some of them more acclimatised to blocking than building for the future. I suspect some individual ministers are more aware than others of the urgency of the need to get Northern Ireland fit for business, and at the same time building the means to enjoy the accompanying rise in living standards.

   Posted by  on Dec 12, 2007 @ 09:45 AM

10. Dubliner,

    That was intended as sarcasm.  I’m not in favour of not educating people, or discouraging creativity in any sphere.  And tried to suggest some ways of encouraging it.

    “And the reality for NI is that a successful economy will take a generation to build.”

    That’s what I said about education, and that’s why I drew the comparison. 

    I think this raises an interesting question about policies that are designed to ensure re-election over a four to six-year period, and that systems impact on the potential of socialism.  Though I’m not suggesting dictatorships.

    Posted by  on Dec 12, 2007 @ 12:40 PM

11. Mick
    No economy that is planner lead is ever successful, unless you are talking about loosely planner lead like establ;ishing economic zones and then allowing the developers freedom to exploit the zones as they see fit

    Posted by  on Dec 12, 2007 @ 01:03 PM

12. Steve,

    Good planning regulation should be able to deliver smart decisions in a timely fashion sufficient to allow development to take place intelligently and sustainably. A bit more focus on getting outcomes right rather than milking divisive and totemic issues to death would do more to enhance the status of politicians and politics than all the public diplomacy in the world.

    Posted by  on Dec 12, 2007 @ 04:02 PM

13. “Quote Steve… the obvious thing for not being pretty is that if you have a mortgage on 150,000 but your house is now worth only 125,000 you are on the horns of a dilemma.”
    Willowfield… “The vast majority won’t be in that situation.  And even for those in that situation, they are no worse off month-to-month as their mortgage payments continue regardless of the value of the house. They’re still going to be paying the same mortgage payment whether or not the value of their house drops. So unless their income also falls they are no worse off.

    So how does that effect the economy?”

    Willowfield - given that NI has suffered rampany house price inflation over the last couple of years - we are now in a situation where houses can be rented for half the cost of the interest on a mortgage (that mortgage is for 25 years).

    People were lured into buying property - outbidding eachother at the frothy Q4 last year - and are now stuck with negative equity.

    So where’s the problem - well people were mis-sold property.
    There are no jobs being created in NI, wages are not rising, inflation is rising, the economy is dead. 
    There are two ways to look at this - either head-on i.e. accept that NI is a failed economy or to surrender all reason and accept what we are told about “the economy is growing”

    Willowfield - do you actually know the number of jobs that are reliant on contuious and everlasting house price inflation.

    What will happen when developers cannot get the funds from banks to build new houses/flats, to create jobs?

    The South is suffering from a housing crash and it will reduce GDP growth.

    And Dewi - house prices being real?
    House prices are a matter of speculation whereas debt is real (a quote from M. King - if you’ve heard of him)

    And to thouse who think that there is a shortage of houses - have a look at how many ghost developments there are in NI.

    House prices will drop here - and it will have a devasting result on the economy.

    Posted by  on Dec 14, 2007 @ 11:31 AM

14. I am the House Price Crash

    Willowfield - given that NI has suffered rampany house price inflation over the last couple of years - we are now in a situation where houses can be rented for half the cost of the interest on a mortgage (that mortgage is for 25 years).

    So?

    People were lured into buying property - outbidding eachother at the frothy Q4 last year - and are now stuck with negative equity.

    A very small number of people are “stuck with negative equity”.  Over time, the number will reduce as house prices will eventually rise again.

    So where’s the problem - well people were mis-sold property.

    Nonsense. People chose of their own free will to offer large sums for property.

    There are no jobs being created in NI, wages are not rising, inflation is rising, the economy is dead. 

    And therefore a drop in house prices will be good for the economy.  If wages are low and inflation rising, then high house prices are not good.

    Willowfield - do you actually know the number of jobs that are reliant on contuious and everlasting house price inflation.

    No.  Do you? 

    What will happen when developers cannot get the funds from banks to build new houses/flats, to create jobs?

    I don’t know, but I suspect that is very unlikely.

    House prices will drop here - and it will have a devasting result on the economy.

    How?

    Posted by  on Dec 17, 2007 @ 10:55 AM
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