My guess is that this is the start of the next wave in Ireland’s recession. While our woes are partly down to American sub-prime and the new style of global crisis, we also have the classic bust to come. Make no mistake: the demise of construction firms hurts banks.
Was it just me who was turned off by the following sentence about developer Donal Caulfield in Frank McDonald and Kathy Sheridan’s obituary for the Irish housing market:
He has tried to spread his risk, with developments in Poland, the Canaries, London, Madrid and Ibiza.
Spreading risk by buying up property in a series of bubble housing markets? You spread risk by diversifying a portfolio, not by tyring to cash in on every property bubble going. Language appropriate to describe investment ought not to be used to dignify speculation.
Anyway, I know I’ve said that a dig out for banks is inevitable – or at least I think it is – because Irish banks, and everyone on this island as a consequence, will be in a whole load of bother as banking losses mount, but lets hope that the dig out doesn’t either shore up developers or speculative property owners. There is more than one group interested in the politics of housing and, as this guy points out also in yesterday’s Irish Times, there’s no reason for privileging the interests of owners over aspiring owners (or indeed over taxpayers).
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Cross-posted from the Irish Left Review, perhaps to be read in the light of this not entirely surprising news from P. O’Neill on Irish Election.
"If you owe us £1,000, it’s your problem; if you owe us £1 million, it’s our problem" was how Justice Moriarty described the AIB’s attitude towards lending when he was chairing the tribunal investigating Charlie Haughey’s adventures with AIB.
How right he was. While we read the good news about the American government’s using vast amounts of Chinese money to rescue the global capitalist system from total collapse, we shouldn’t think that takes us all out of the path of disaster.
The Irish are bound to go the same way in 2009 that Spain is going at the moment. Like us, the Spanish have been enjoying an enormous property boom for the last few years. And, as in Ireland, it has just come stuttering to a halt, prompting a massive rescue from the Spanish government as the sector struggles "with high debt, plunging prices and an overhang of unsold houses and flats."
This is where Ireland is headed, but we’re probably going to experience something much worse.
As I pointed out in a comment thread in April 2007 on Slugger (itself following a post from here), construction constituted 23% of the Irish economy at the height of the boom. That was twice the EU average (which was 12%). So property going belly-up is very bad news indeed for us. While we talked up the role of investment and industry in the Celtic Tiger, we forgot that a whole lot of what looked like wealth was actually us sticking increasing amounts of our money into private debt. And if we have £1000 problems, it’s also given the banks £1m-style concerns (for a serious of discussions, see UCD’s Morgan Kelly). 30% of their loans are to property developers who now find that they can’t sell houses.
Ireland’s property development business model has proven very dangerous for the banks. They’ve been caught short in two directions. First, they lent to the developer who was essentially selling off the plans (or as good as), in the certainty of a quick return. Second, they’ve been busily lending increasing amounts to mortgage payers in the knowledge that they could repackage the risks from those high-stakes several-multiples-of-income 100% mortgages and sell it on the credit default swaps (CDS) markets. But these have all gone down the hole. Banks can’t lend on wholesale markets so they can’t borrow to feed the mortgage frenzy. And they can’t offset their risky bets. AND the property developers have no customers so can’t repay their loans. AND the risky mortgage-payers are going to default.
On property developers, with the country strewn with half-finished developments, the banks have a series of unpalatable choices. They can shut indebted developers down and repossess more or less worthless (for now) unfinished properties. Or they can continue to send good money after bad to developers who have no revenue. Neither option is good for the banks but they seem to be letting the small boys go to the wall and are propping the big boys up. The question is: how long can that keep going?
On mortgage debt, the real hike in Irish unemployment is yet to hit. And also, we haven’t yet seen the shakedown from all those people who borrowed to the max when interest rates are low – unless their mortgages are fixed they’re at risk of losing their homes (even if they don’t lose their jobs). In other words, the banks are looking at inheriting a whole load of property that they can’t sell as their debtors go bust.
This was all predicated on a global trend towards treating debt as if it was money. The Irish problem is that we’ve just done it more than most both domestically through the property market and globally through hosting businesses in the IFSC. So our trouble is a hybrid of what we’re seeing from London and what’s going on in Spain. We’re in the worst of both worlds.
No wonder everyone is on the blower to Leinster House. The governmental failures have all happened already and the only option left is a huge dig out. That will be no easy thing, especially as Irish company and income tax revenues plummet in 2009. But it will be the best possible solution in the current circumstances.
Congratulations to Maca, who's just bought himself some digs. Fair dues to him, and I mean that. But never let me pass over an opportunity to poo on someone's parade. So here goes…
Maca says that they bought the house because "we figure we’re better off paying our mortgage than someone else’s mortgage." Is this true in the present climate? Is the property ladder the place to be when it's really a snake?
The way I figure it, putting aside all those intangible joys like trips to Ikea etc, the 'am I better off paying my own mortgage?' calculation ought to proceed according to the maxim that the fall in property prices minus the amount paid off the principal on the mortgage ought not be greater than the outlay in rent (by the way, I had this expressed in an equation a couple of minutes ago but decided that I'd never be invited to dinner parties again if I posted it. Truly I am a sad, sad person).
So, if the amount you spend on your rent is more than a fall in value of your house minus the amount you pay onto the principal on the mortgage then buy. If not, then rent. Or, to take an example: in the first year of a mortgage, assuming an average priced €300,000 house at 5.4% APR, you will only pay about €4,200 off the principal (and €16,000 odd in interest). In that time in 2008, the house will have fallen in value by €24,000 (about 8% according to Goodbody). So the purchase of a house is worthwhile if you would otherwise fork out €19,600 in rent in the year. That's €1,633 a month. Of course, you could buy a cheaper house. It's also not unlikely, if you are renting a house, that this calculation might work in favour of buying (well, that or renting somewhere smaller). On the other hand, you could be saddled with a higher interest rate on your mortgage than I've allowed for here. Either way, what is undoubtedly true is that part of the value of the house will simply disappear into thin air in 2008/9. And lots of the mortgage will go toward the upkeep of the bank's shareholders, not towards the principal on the loan.
In which case it's not unlikely that renting until prices bottom out would be better overall than paying one's own mortgage. Let someone else suffer the loss in wealth and then jump onto the ladder. Or at least that it's not automatically the case that you are better off paying your own mortgage from 2008 than you would be leaving it until 2010.
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