Are we fooling ourselves?

First a disclaimer. I am not an economist so go easy on me. I am not trying to make anything political, I am simply someone who wants to make sure I’m not (along with everyone else here) talking themselves into waiting for something that may never happen (reasonable house prices).
So let rip…

We have moved to a new age. The age of globalisiation. In this age the world is a lot wealthier, however the wealth is becoming even less evenly distributed. The markets have become much more effecient due to better educated people, more players with better information (got from use of the internet) and computers allowing rapid buying and selling of securities and rapid movement of capital. Due to this, upsets in the market are quickly resolved and the markets in general still have peaks and troughs but they last for less time. Further, the world is awash with money looking for a home like never before. The Credit crunch will pass quickly when we find out who has the bad debt and this capital will renew it’s search for a home. Apart from old world economies the main place it will come to rest is India and China. This allows India and China to supply us with dirt cheap goods. Western countries cannot compete against the costs of these two new (to be) economic superpowers.
So what happens in the west? Well the western countries divide into a large group and a small group. The small is the people with money and the large is the people who must work for a living. The rich (or new rich) in Irelnd own property and they rent out to the workers. Their party seems to on the verge of being scuppered as interest rates rise. However, this is only a temporary blip. Interest rates will drop down again and quickly as we are still being supplied with cheap goods from China and India. Far from this ending, the second stage is getting into full swing and they are now offering us services. Interest rates are going to go even lower in the medium to long term. In fact they will probably go below 2%.
What does all this have to do with house prices? Well, if this happens we will find that house prices are currently under valued. Now with the Irish Financial authority changing the stress check from 2% to 2.75% and salaries here under extreme pressure from India and China we will have entered a new age. Banks will now only lend to people who have capital behind them like buy to lettors who have been around for a while. Many “Well paid” workers who didn’t get on the property ladder pre 2006 will now be completely unable to ever buy a home. These people will now need to rent from the generation who priced them out of the market. Ireland turns from a home owner country into a reluctant renter country.

That’s not what I’m doing here.

This is an internet forum, you can’t make a life choice like that based on the information here.

It can inform your decision, no more, no less.

historically interests are 5% in most developed countries. Low interest rates are just a blip. it will never revert back to anything below 4%. Expect it to settle around 5% over the next 20 years. Just look at UK, US, Japan. The EU will look alot like the US in this regard. IMO, House prices will not rise again in the next 10 years.

I know that. :astonished:

This sceanario assumes that there are enough independently wealthy people to keep house prices up. These people would have to buy every place that came on the market (people die, move abroad etc) to prevent the prices coming down to where the banks would loan people money.

Banks are in the business of selling people money, if they only loan you 2 times your salary on a mortgage then that will be enough to get some people onto the very bottom of the ladder.

I think we are unlikely to go back to the old old style of landed gentry and serfs.

One thing that people sometimes forget.

When we say falling house prices, we mean a reduction in the price at the margin. Remember that maybe around 5% of the total housing stock actually traded at those mad 2006 prices. another 5% at those slightly less mad 2005 prices etc.

Which makes abnormally high house prices in one country harder to sustain.

True, but the inequality is growing largely by the wealthy end doing very well, with levels of wealth beyond that feasilbly spendable in their lifetimes. Only inequality of an extreme form, where the average joe can’t afford anything other than bare essentials, would inequality alone mean unaffordable housing.

I see no particular reason to suggest the end of traditional economic cycles - the fact that near free credit was used to delay the end of this cycle likely will end up making the delayed downturn even more painful. The japanese learned this lesson after 1989, the US and europe had to repeat it themselves.

If the lender tolerated levels of leverage drop during this credit crunch, and stay that way, much of this cheap money will simply disappear (or alternatively the velocity will drop, same effect).

If western economies don’t offer productivity levels to match their costs, they’ll lose market share until they do - it’s really that simple. All the while, their currency will devalue and their populations will lose spending power, until productivity vs income balance is restored.

This is not the route to high productivity - wasting the available capital on property, while de-movitating the workforce. Any country which follows this approach will be slaughtered. And yes that includes ireland, once the artifical boost from slightly taxing foreign owned companies for access to EU market disappears, as it will.

Nope - the china deflation effect is wearing thin, while india advantages in labour costs are being eroded by a lack of infrastructure and qualified people. They aren’t moving up the food chain anytime soon (good thing for ireland, since we are next above them), but they will do over the next 2 decades.

What happens next is that china / india will start to consume their own produce, leaving less cheap exports, but still keeping competitive pressure on the west. In effect, real incomes in the west will grow slowly if at all, and only if productivity improvements justify them. And as the rise in commodity price shows, once china / india start to consume, the price of anything which they need will rise rapidly, adding inflation in the east and in the west.

Interest rates will average 4 - 5% long term - 2% or less are unlikely and inadvisable except in the face of complete international crisis. And 20%+ unemployment and economic collapse in ireland won’t even register in the ECB.

Not with near zero real income growth, 2% inflation (like it or not) and 4-5% interest rates.

That’s assuming an economy which won’t exist (simply because even when we could afford it, we didn’t build it) and a huge fleet of stupid wealthy people (which common as they may appear, aren’t nearly common enough).

The long term picture is far worse - low producivity, high cost base, massive debt, massive waste of capital in non-productive housing, and once the tax haven loopholes are closed or equalised, basically no reason for the foreign companies to hang around at all, and lots of reasons to leave. They’ll shuffle off, factories/call-centres/offices etc to wherever offers the cheapest workers, HQs to wherever offers the cheapest taxes, and with trade barriers more likely to drop then rise, they’ll have more options then ever. And ireland will be left with an internally oriented bunch of service companies, construction companies and their providers, none of which will earn any meaningful foreign income to offset debts of probably 3x GDP (which will require something like 15% of GDP to service anyway).

A **very **pertinent point.

Indeed - and is the only reason why irelands apparent assets exceed its debts. If one house out of ten is bought using debt, for a new high price, the other 9 become worth more on paper.

I can tell you that I have no motivation to return to Ireland any time soon, especially when salaries in London are at least x2 those in Ireland. Not to mention the fact that there are ten times more opportunities to go ten times higher for young, enthusiastic and hardworking Irish people in their 20s.

money is nothing but a measure of productivity, be that measured in the amount o computers you build, the houses you construct and the amount of brain hours you bill for.

Nothing in the world is free, so while you may borrow today on the strength of tomorrows earnings, you must, in the future become a net exporter of productivity to repay this debt.

So, if I borrow 100 euro tonight to go to the pub, that is 100 hundred euro I must forgo next week when I get paid due to my spending now.

Wealth, it is nothing but an illusion in the current sense of the word.

We, in Ireland, have, on the strength of our past performance and our future assumed ability to over-produce, have borrowed up to the gills.
This productivity must be returned.

Have me over committed ourselves, well, in many minds, yes. We have as a nation promised away large chunks of our future productivity in return for an asset in the form of housing. If we have overpaid, well, its our loss to their gain.

Over paying for an asset is always a bad thing, if measured in the true cost, the opportunity cost. We have forgone goods and services in the future at a great cost today. We don’t know what we have forgone and therein lies the problem.

If our productivity increases and the absolute amount of productivity we must forgo to repay our loans drops as a relative amount of our income, then we are better off… If on the other hands, this ratio of relative income moves the other way, (which is what I predict as a result of globalization, not keeping up with innovation and infrastructure and a drop of productivity), then the amount by which we have overpaid by will increase.

I won’t go too much into my boring detail but in regard to the wealthier getting wealthier and so forth, this, in the course of things, is a phenomomen that won’t have a sustainable time-frame. The western world is losing relative productivity ratios to the emerging markets and as such world wealth is shifting.

With regard to housing markets:
Due the diverse nature of markets and globalization, then the roots of evil can spread further and influence more. Now, not only will US sub-prime result in the loss of homes in the US, it will also push up the price of bread in Russia, which in result will reduce the amount of euros in your pocket. This is a result of globalization, if you disagree, then consider the case that the sub prime causes the fed to lower rates, which pushes up the price of Oil and gas on international markets, this increase pushes up the cost of oil worldwide and the tractors that pick the grain cost more, this grain increases in price and bread increase. The workers in Russia for Gazprom get higher wages to enable them to live and as such the company increase the cost per unit gas to Bord Gais…
This is globalization.

Now extend this to financial markets. Whether you like it or not, you will pay a cost for the sub prime, either directly through increased taxes due to tighter lending restrictions, or through a decrease in your pension fund.

The amount by how much it affects you is impossible to measure for the simple fact is that no one knows, not the investment banks and hedge funds with their models and simulations or the governments with their huge central banks…

This is the time for interesting times indeed.

Sorry, I don’t follow this. Lower rates might push up the nominal price of oil by devaluing the dollar further, but the other currencies will appreciate to compensate, with the net difference being zero?

in a perfect market they would…but when you have middle men in finance then some of the transfer is taken out, so, in thoery its zero sum, in reality, it goes a little baove or below,…kinda akin to momentum trading…

did these middle men not exist before teh fed lowered their rates? if so , then this is a consistant condition of the system , so babytooths question is still valid.

This big fear of losing out to developing economies is a bugbear that people have been bleating on about for ages.

The truth is India and China are not as competitive as they seem. India’s Infosys, has now for years had to outsource jobs to Germany, California, and Dublin. China outsources alot to east asia, more then you think.

Globalisation is a process that has been in motion for thousands of years, there’s nothing new about it. It’s just speeding up a little but not much, the 19th century was far more rapid. Remember the Roman empire, remember the Islamic golden age. There’s nothing new about it, and the net result of globalisation is always positive. There are hugely negative aspects of it though. Like New York banks screwing weak countries central banks out of hard currency reserves, that have been borrowed (generally under IMF duress, so former IMF employees can rip them off, for their new Employers, the New York banks). And the way the Greeks spread gayness around the world.

But I can give you a case from my own experience. I worked for a call centre (yes I am low waged scum). That outsourced jobs to India, thinking they were going to make huge profits and have low cost labour. What they ended up with was 250 muppets, and 25 million down the tubes. Low wage countries tended to have ruinous hidden rents. That is lazy scum in positions of power, who must be given sinecures and mercedes, before you can lay a hand on the cheap labour. The upshot of it was, that as it turned out, my small desk of twenty people in Dublin were able to out preform the 250 Indian muppets. We even had two Indian guys, working the desk, who couldn’t believe the muppetry of their compatriots. The contract was nearly lost with the client. Now they’ve learned their lesson, and are not scurrying back to Indian in a hurry. Low waged countries are generally low waged, because they’re terrible places for investment. Their competitive advantage is generally an illusion.

Its clear you have not been to China lately.

However I will agree with a portion of your comment. The company I work for outsourced some software development to India two years ago and it was a disaster - for a number of reasons.

However we are now working with machined parts and assemblies in China and I am shocked at A) their low cost and B) their competence - it is really very high

As Dr Johnson said of eggs in the Highlands being cheap “Not because eggs are many, but because pence are few”

Damned greeks :laughing:

Ah, thank you for pointing it out. I had misread it as Geeks originally. I had the thought “oh, that explains why so many IT and call-centre workers are as camp as knickers”.

India is a terrible place to do business. As Kaboom points out, management practice is either seniority/social class based, or is bookish. Neither work well when faced with novelty.

China is not so bad, but it is a poor place to put intellectual property with the aim of making money long term.

Both countries suffer terribly from brain-drain. Those who have learned enough to realise that they are good at what they are doing are off in a flash. (And not just because of over-exuberant Diwali or new year celebrations!).

Agree with regard to staff turnover - just today I had to remove permssions to access an application for over 50 Indian colleagues who had left the company. Many of the people I trained up in India are no longer in the company. But I don’t resent it. Nobody should sell themselves short.
But otherwise the India project is going well. Our company get the best of the graduates available and time was spent on getting a good management structure in place early on.

It is more of an issue for upper management who come from a tradition of less than 1% staff turnover and a somewhat justified view that their company is one of the most prestigious companies in the industry to work for whereas I still remember the dot-com boom and being lucky to get 12 months out of an employee before they move on.