Spain, Ireland, the UK and the US have a pretty similar story to tell when it comes to their path from economic glory to gory. Obviously there are differences in one way and another, but all of them made it too easy to get too much credit, especially mortgage credit. This caused house prices to grow far quicker than rents and wages, which created a tinder-box (or a bubble if you'd rather). As people began to either default on the mortgages they had got but couldn't afford, or to be priced out of the market altogether, the tinder box went boom and the bubble went pop (fights the urge to burst into song).
At the same time all of them also allowed their budget deficits and public debt levels to become unsustainable as well. This wouldn't have been noticed had growth continued, but it was always storing up problems for when the growth tamed. The trouble was that growth had been constant for so long and the international economy had become so internationalised that we all came to believe the growth would never end.
Of the four it is a tossup between America and Ireland for which property market has suffered worst from the rapid expulsion of air, with Spain in third and the UK fourth. However, for most people Ireland is the worst, because the economy continues to contract and house prices continue to fall, while in the US, although prices have continued to fall, the economy began to tread water towards a slow recovery since early 2010.
It is perfectly logical that Ireland would be the worst hit; what we are talking about here is massive bubble's going pop, Ireland had the biggest bubble so it had to have the worst pop. Irish house prices quadrupled between 2002 and 2007, which was by far the biggest growth in the developed and established world during this booming period. Lending went crazy, people weren't borrowing 100% LTV; they were borrowing 120% LTV. And not 120% of a sensible value, but 120% of a valuation given based on the hyper inflated value of what people were willing to pay; all of them swept up in the boom vibe.
"We behaved like a poor person who had won the lottery," says Nikki Evans, a businesswoman quoted by the economist.com last year.
As I said, Ireland had the biggest boom, but is paying the biggest price for it now. According to experts on the market, prices are in freefall as the market "over corrects". Official data by the Central Statistics Office showed that prices were down 47% from the 2007 peak in December 2011. The Fitzgerald Group which has been analysing a weighted basket of 1500 properties since 1999 puts the fall at 58.8%. Both indices show the pace of the decline to be accelerating.
"There is no doubt the market is over-correcting," said Marian Finnegan, chief economist at the Sherry FitzGerald Group, with house prices now making it cheaper to buy than to rent. "The pace of deflation picked up in the last 12 months, which illustrates a market that is in over-correction or in freefall," said Finnegan. She said the biggest reason for the freefall was the lack of mortgage finance available from Ireland's bailed-out banks.
According to the Irish Banking Federation, just €2.3bn (£1.9bn) was available in mortgage finance last year, compared with €40bn at the peak of the property market in 2006. Lending went from near lunacy to nearly nothing in a very short space of time, making a market crash inevitable.
At the same time as crazy lending was blowing up the property bubble, crazy spending by the government was storing up a debt balloon that would take-off as soon as growth slowed down.
Europe has just asked that Ireland raise its corporate tax to 12.5% in return for financial assistance, but according to one of Ireland's top economists Dr. Constantin Gurdgiev, Ireland's competitive taxation regime is nothing to do with the predicament the country is in, rather it is the government's use of the incoming taxes that is to blame, like my wife they have been spending the money faster than they have been making it. As you can see in Gurdgiev's chart below, the government has consistently brought in increasing taxes since 1983, but it has also consistently spent every penny of tax as well.
As you can also see from the chart, even when the financial crisis erupted in 2007 and tax revenues fell off a cliff in Ireland, the government continues to spend like a Russian Oligarch that has just bought a top flight UK football club.
Gurdgiev goes on to explain that the Irish government has spent higher than incoming taxes would cover every year since 1983, with the exception of 3, 1999, 2000, and 2006.
But you can't really call these lessons to learn so much as things that should already have been known. The truth is we all got swept up by the boom, and we are just as likely to do the same thing again in another 15 years when we have all forgotten the bad times again.
- Wednesday 22 February 2012