Saturday, April 27, 1991

Irish property bubble

Irish property bubble
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This article is about the housing bubble in Ireland. For the general phenomenon of housing bubbles, see real estate bubble.
The property market in the Republic of Ireland in 2006 is controversially described by some as the Irish Property Bubble.

Contents [hide]
1 Current situation
2 Growth background
3 Crash Predictions
4 Facts and Figures
5 References
6 See also
7 External links

[edit] Current situation
As of December 2006 the much warned about collapse of the Irish property bubble has not yet occurred. Anecdotal evidence continues that the rate of increase dropped significantly in 2006, and in certain districts for certain house types, may have turned negative. However at an aggregate level, the cost of Irish property continued to rise in 2006. An IMF report in 2000 said the Irish property bubble, if sustained, would go against all evidence collated in other countries that had experienced such a phenomenon. House prices have tripled since that report was published.

Since 2000, approximately 75,000 housing units have been built every year as detailed by the Department of Environment, Heritage and Local Government [1]. However, a significant proportion of these new homes are unoccupied. Economic commentators give a figure of approximately 230,000 vacant properties. Of these up to 115,000 or so may be holiday homes.[2]

Figures exist for completions because the ESB provides information on the number of properties newly connected to the electricity network and from data supplied by Local Authorities and from The Dept of the Environment and the CSO.

Currently (2005) there is enough zoned land to accommodate 460,000 new homes, though as housing density figures continue to rise each year existing land has the potential to provide an even greater number of housing units.[3]

There had also been reported cases of mortgage fraud where borrowers over-estimate their income to enable them to borrow more. There is a worry that these people "could fall into serious debt if Ireland had a property crisis like that in Britain in the late 1980s."[4]

In December 2006, the Irish state-owned broadcasting organization, RTE, broadcast an investigation in a Prime Time documentary which unearthed evidence of financial details of prospective customers were being sold by mortgage brokers to auctioneers. Such information would enable auctioneers to maximize the price attained from prospective buyers. This issue, and further allegations in this area, are currently being investigated by the Irish Office for Data Protection.

The increasing cost of property and the willingness to borrow money to acquire Irish property has resulted in substantial increases in the total level of private sector debt, due to property investment in the Irish economy. This has become of increasing concern to the Irish Central Bank, which has issued many warnings, in an effort to affect consumer behaviour.

Rising property values in Ireland, and prosperity acquired from property trading, has been a strong factor influencing Irish people, to invest in overseas property. The main focus of such activity has been the newly admitted members of the European Union. Irish corporate concerns have also become substantial investors in London, Berlin, Paris and American cities.

The increase in property prices has also resulted in high prices being paid for development land. Irish property valuations are highest in Dublin, where the valuations are being driven by confidence, the highest salary rates in the Irish economy, and heavy US private sector direct investment. Valuations are most pronounced in locations that are perceived as the fashionable residential locations. This has resulted in the redevelopment of many sites to build apartment complexes in the Dublin 4 district. The valuations in this district have become the most expensive in Ireland. The sale of the Veterinary Surgeon site, in Dublin 4 by University College, Dublin (UCD) for a price of €171.56 Million occurred in 2005. This accounted to a cost of almost €85 Million per acre, or €212 Million per hectare. This record was beaten in 2006, by the sale of another site, again in Dublin 4, also owned by UCD, in 2006, for €36 Million. This equates to €95 Million per acre, or almost €240 Million per hectare. There were several sites in the same district which made similar prices. In many cases, the developer has to face down local objections, which delays the planning process for redevelopment substantially.

Another side-effect of high urban housing valuations is a drift into rural hinterlands to live in lower cost housing. This has happened on a substantial scale in the greater Dublin area, in counties Wicklow, Kildare, Meath, Louth, and Carlow. This results in overdevelopment in rural villages, and provincial towns as residential developments exceed the pace of infrastructural development, and services for urban population. This may create social and environmental problems, in rural areas. It also leads to locals being unable to live in the own area, due to prices rising at a rate greatly in excess of local wages. Another effect is this development of increased commuting times for people living in locations that are distant from the large employment centres. This has increased demands on the transport infrastructure, with the Irish public transport company CIE being asked to upgrade capacity in a short time. Ireland's increasing carbon dioxide emissions due to increased road traffic are also causing Ireland to breach previously agreed commitments contained in the Kyoto Accord. These breaches will result in direct cost to the Irish exchequer. The Irish state budget for the fiscal year 2007 contains a number of initiatives and incentives to improve energy efficiency in other areas, and reduce the overall cost of this measure in the future.

To address a perceived lack of planning on the part of Irish state bodies, and to develop poles of growth in the regions, the Irish government initiated the National Spatial Strategy. This was initiated to spread urban development to region centres. However, this contained many promises that were not feasible. It also resulted in standstill, due to disputes over local concerns.

The Irish government's Decentralization Plan for the Civil Service, was created in 2004, and was based loosely on the model previously implemented in Denmark. One of the expected results of this move is to reduce the share of Irish state investment in Dublin, and thereby alleviate the difficulties experienced by first time house buyers in the city. Because the age profile of civil servants is older, than people employed in Ireland's private sector, this would effectively result in older people making way for younger people in Dublin. This would also result in an overall reduction in the cost of doing business in Dublin, and thereby preserve its attractiveness as a location for direct investment. However this was only partially successful, with the first location to fill its allocated quota, being the one nearest to Dublin, Trim. Many civil servants have expressed a wish to reside in other urban centres with sufficient third level institutions, for example Galway. Implementation of the Decentralization plan is considerably behind schedule, and it remains to be seen how this will eventually completed.

[edit] Growth background
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 independently produced Review of the Construction Industry, commissioned by the Department for Environment, estimates that 12% of the workforce are employed directly in the construction industry.[5]

[edit] Crash Predictions
The Economist newspaper says that a large bubble exists in the Irish market.[6]
The Economic and Social Research Institute in Ireland says that a bubble probably exists. [7]
The IMF says that residential property in Ireland is overvalued. [8]
The OECD and certain senior Irish officials of the Central Bank and Financial Services Authority of Ireland agreed in November 2005 that Irish Property is overvalued by 15%. However this was only released to the public by The Irish Times shortly afterwards[9]. The Central Bank denied that they had deliberately withheld this information to avoid triggering a crash, and in April 2006 said the housing boom may be "unsustainable" and poses a "significant risk" to the economy.
Most Economists think that property prices are unsustainable because rental yields have fallen below the risk free rate of over 3.5% offered by Government bonds.[10]
The Economic and Social Research Institute issued a statment on 18 April 2007 in light of the RTE documentary on 16 April 2007 stating that the only activities there is economic certainty in is cigarette manufacturing and undertaking.

[edit] Facts and Figures
Inventory is rising fast all over Ireland at unprecedented levels
12.6% of the Irish workforce is employed by the construction industry.[11]
23% of Irish GNP is dependant on construction. Of this new residential housing construction makes up nearly 13% of GNP.[12]
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.[13]
The p/e (Total Price divided by annual earnings) ratio for private housing is at an all time high. A Davy Stockbrokers report (Mar 06) suggests that for prosperous Dublin suburbs the ratio could be approaching 100 times. Davy states that these ratios can only be justified if investors are extremely bullish about rental growth. Given the plentiful supply of rental properties in these areas however, Davy suggests that it will be an adjustment in property prices, rather than rents that will eventually bring valuations down to more realistic levels.[14]
The Report Quarter 2 2006,[15] which provides a comprehensive analysis of recent trends in the Irish property and rental markets has indicated that the average gross yield of a Buy-To-Let property investment in Ireland is 3.27%. This rate of return is considerably lower than any available mortgage rate in Ireland [1] and also lower than the Jan 2007 ECB base rate [2].
ECB interest rates (Jan. 2007) are at an accommodating 3.50%, with many Jumbo mortgages taken out in Ireland.
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.
A very high proportion of new houses in Ireland remain unoccupied.[16]
A slowdown in property value growth combined with more profitable property investments abroad could reduce the number of domestic property investors thus exacerbating any slowdown.
The number of houses per thousand of population is lower (~391) than the EU average (~428).
Such is the state of the property development 'buzz' in Ireland, that in October 2006, city councillors and national news media organisation RTÉ, were duped by a promotional campaign for 'Seamróg City' - a supposed Dubai-type development in Dublin Bay, which featured a website, and a video purporting to be about the proposed development - including a giraffe only zoo! Youtube Video It turned out to be for the benefit of property website
Prices are starting to fall:[3]