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Tuesday, February 06, 2007

Living in denial - The property bubble

Living in denial seems to be one of the most common pastimes these days.

In fact, it's probably the third most common pastime in Ireland today, behind slumping in front of the telly to watch CSI: Miami and slurping wine with friends while comparing the notional values of their overseas property portfolios.

I thought it might be useful to run through a few known facts that people are living in denial of in Ireland today, just as a reminder and in the vain hope that some people might snap out of their torpor and face up to some of the scary realities that await us all.
Today, we'll kick off with a biggie - the Irish property market.

Irish property prices are about to collapse, because it is the biggest bubble in the global property market bubble. Yes, people have been predicting this for years, and with good reason. It is inevitable. No, it hasn't happened so far, but that just means the crash will be more severe when it occurs, which is very, very soon.

That one bed apartment you bought within a mere hour's commuting distance of Dublin city centre (if you leave for work at 4am) will not continue to inexorably rise from the half million euros you bought it for.

The reason for this is because it is simply not worth anything like that amount in real terms.

Let's look at the fundamentals of this market. Historically, the average family house anywhere was thought to be worth approximately three times the average industrial wage. In Ireland, accommodation now is a factor of around 12 times the average industrial wage.

Also, the US property market has just tanked, and Ireland's exposure to America makes us particularly vulnerable to economic developments there.

Finally, didn't you notice that the only people talking up house prices are those with vested interests in selling them? Auctioneers (recently demonstrated on Prime Time to be utter cowboys), Estate Agents (who increasingly and quietly have been selling their own houses and renting), and newspapers (whose lucrative property sections which shrilly trumpet new developments are dependent on the advertising from those same developers).

Get out now if you can. Banks have already divested themselves both of their own property (HQs and bank branches) and of their property debt. The clever speculators left the Irish market at least a year ago.

This is a pass-the-parcel game where the last one holding the overpriced package will see it explode messily, devastating their finances and personal security.

Indications from data gleaned from popular sales and letting website Daft.ie show that more and more places are on the market longer, being repeatedly listed at ever lower prices and that a full crash is imminent.

There has never been a soft-landing in a bubble market. There wasn't one with Dutch tulips or South Sea stocks, there isn't one in the US housing market now or the London and Tokyo bubbles from previous decades, and there won't be one in Ireland now.

The market will crash, perhaps by as much as 30% in one year. If you are still in doubt, cast an eye over the excellent web analysis conducted at Daftwatch, and the informed discussions on The Property Pin.

Prices in London took the best part of a decade to recover from their crash in the late Eighties. Prices in Tokyo took even longer to recover. Prices in Ireland are more inflated now than either of those markets ever were.

If you've just taken out a large mortgage, you could be trapped in the property you've just bought for a decade or more, in order to avoid negative equity.

If you have a string of properties, each leveraged off the back of notional equity increases in previous properties, you are extremely exposed and could even find yourself close to bankrupcy like this fella.

The party's over and normal rules of engagement are about to resume, people. Which is good in the long term for all those unable to purchase their own dwelling, but very bad news for those seeking to make money by sitting on their backsides.

kick it on kick.ie


Kav said...

I keep telling my dad to sell now and wait for a while - he has plenty of options, but he's too set in his ways. He could make a feckin fortune right now for what amounts to a bog-standard council house. If he waits much longer, he'll end up losing out.

JC Skinner said...

Indications on the Property Pin and elsewhere are that the market peaked last summer at the latest.
In a crash, the first thing that happens is more and more properties stay on the market longer and longer.
Daftwatch proves that this has been happening for months now.
Then properties begin to lose value as vendors seek to make a quick sale.
Again Property Pin maintains a list of examples of this.
After that, there is a stampede as people realise prices are falling and seek to get out fast.
That's where America is now and where we'll be shortly.
Tell your Dad to get it on the market and rent now.

Anonymous said...

There has never been a soft-landing in a bubble market. There wasn't one with Dutch tulips or South Sea stocks,

Could you raise a family in a tulip Mr. Whistleblower extraordinaire?

Your analogies and your endless predictions are frankly quite boring and extremely amateurish.

tulip said...

In retort to the last dribble, advice is an open market, take it or leave it! But you must be heavy in debt and afraid off the coming wave off property despair to make such a statement?

JC Skinner said...

You can't raise a family in a home you default on either, Anon.
You can of course try to raise a family in a poky apartment in the middle of nowhere you overpaid for that suddenly becomes worth 60% or less of your outstanding mortgage debt.
You'll be trying to raise your family there for a long, long time though, as you try to wait until you're out of negative equity.
The links I cite indicate a crash ALREADY occuring. I'm not predicting anything. It's happening now.
It's getting tedious that all the loopers who come post here do under the veil of anonymity.
Next time, give us an identity so we know who to laugh at.

Bock the Robber said...

People have been sold a load of bullshit by the property supplements and gobshites like Duncan Stewart.

The Dublin property market is a load of bollocks and yet people have mortgaged up to the hilt to purchase former Council shit-holes.

I feel sorry for people who bought into the Dublin scam but at the same time I want the bubble to collapse so that my children can afford a house.

Flirty Something said...

Some interesting points, however no one has been able to predict when a crash will happen except in hindsight. Not my area of expertise (although that doesn’t seem to stop anyone else blogging) but would suggest the following;

The NDP will result in 70m being spent per day in Ireland for the next 7 years that is a huge amount of money in a very small system.

Increasing influx of migrants will continue to fuel the demand for property and increase spend in the country.

The inheritance generation due in the next 5 to 20 years will bring additional wealth e.g. a house that cost them nothing is now worth millions – even if there was a 30% crash.

I agree the market did perhaps peak last year and some leveling is happening, however more realistic prices is not a crash.

Japan and UK had very particular factors which resulted in a crash and you can not merely plaster that example onto Ireland, (as per McWilliams bizarre tall building analogy of which you maybe reading a bit too much)

However, still a well presented argument. Keep up the angry work.

JC Skinner said...

I don't think I'm predicting, Flirty. It's happening now, as the Daftwatch figures indicate.
You don't like the Tokyo and London crash comparisons, any more than Anon liked the tulips. Fair enough.
So let's look at other European crashes in the past thirty years.
Holland 1985, down 50% on 1978 peak.
Finland 1995, down 46% on 89 peak.
Norway 1993, down 39% on 1987 peak.
Switzerland 2000, down 37% on 1990 peak.
New Zealand 1985, down 37% on 1980 peak.
Denmark 1982, down 36% on 1978 peak.
Sweden 1985, down 35% on 1979 peak.
House prices don't level off, Flirty. They crash.
but I agree with Bock and yourself that more affordable housing is not in itself a bad thing.

JC Skinner said...

Just to address some of the points you make, Flirty:
The NDP money is a Government promise based on predicted tax take. Our economy won't look half as pretty once the construction industry stops building 80K plus houses a year.
So tax take will be well down and I suspect that NDP will not be fulfilled.
Furthermore, previous promises by this government have proven to be nonsense - 10 billion for a primary care plan being my personal favourite.
And in that context, we may see a return to net emigration. Or at least a levelling off of immigration.
The census found 275,000 empty houses in Ireland. We have supply without demand already.
Your point about an inheritance generation is well made. All housing markets are cyclical and in the time frame you mention, prices will return to previous levels, but after adjusting for inflation, that's still a net loss.
I know McWilliams has been predicting a crash for years. I haven't been. But one is happening now.

Tulip said...

Now turn your pretty eyes Nort! http://news.bbc.co.uk/1/hi/northern_ireland/6336209.stm
No surprise here as the global (western) bubble spreads its wings to the last area off cheap houses, (no more).

JC Skinner said...

When Northern Ireland is being described as the 'powerhouse of Europe', you know that vested interests are getting desperate!
The Ulster boom is due in no small part to canny investors moving out of the exhausted Southern market in the past 18 months.
Hence the highest rises in Newry and Belfast waterfront.
But like all bubbles, it will pop too, not long after the Southern market does.
But for those of us with Northern houses, there's a little time yet before bailing.
No such luck for those in the 26 counties, however.

Flirty Something said...

Ok - lets meet under the clock at Clearys in 10 years time ( assuming it is not an apartment block by then ) and we can see who is right. Have you considered Yoga to deal with your anger issues ?

JC Skinner said...

Yeh, I tried that. But they threw me out of the class for smacking the elastic limbed hippy who was taking it.
You're single and you're witty, Flirty. I'd happily meet you under Cleary's Clock in ten minutes, only Mrs Skinner would prpbably be waiting for me on top of the GPO with a sniper rifle!

Flirty Something said...

Ahhh - Thanks JC, but you will ruin your bad boy image by giving compliments.

WhatHouse.co.uk said...

And look at what has now happened over last few years - double dip recession, now possibly a triple dip recession, housing crisis in many countries, job loses, homelessness.....and not much signs of it getting better.

what house