Dismal science merchants only happy when we're poor (Sindo)

The Irish Property Bubble (2006) The Republic of Property
#1

Dismal science merchants only happy when we’re poor - (Sunday Independent)

BERTIE Ahern got it absolutely right, even if his phraseology was unfortunate, when he said, “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.”

He was speaking about those practitioners of the ‘dismal science’, the economists and their more alarmist fellow-travellers in the media who want to talk Ireland out of its boom because it does not suit a mythical semi-socialist future where we would all be equally poor together.

Like over-enthusiastic football supporters, these people seem ready to cheer when the ball goes into the goalmouth - even if it is an own goal.

Can it be a coincidence that most of those house-price-collapse cheerleaders are themselves cosseted in the public service, with their safe salaries, their benchmarking and their fat pensions funded from the very taxpayers they’re doing their best to stampede into a crisis?

The State-funded Economic & Social Research Institute (ESRI) set the stalled ball rolling again last week when it regurgitated a hysterical rant from an academic who had the audacity to accuse those in the property business of “wishful thinking” because they remained optimistic about the future of house prices.

Professor Morgan Kelly, from the bloated campus of University College, Dublin (UCD), first jumped on the property bandwagon on December 21, 2006, with his paper, Irish House Prices: Gliding into the Abyss?When not too many people paid much attention to his thesis, the state ‘think tank’ reissued his gloom-laden forecast under the new guise of academic research. It came with complicated formulae, big words and long, hard-to-read paragraphs - but the same dismal conclusions.

Before that, we had commentator George Lee with his best doom-laden voice predicting that the end is nigh.

Journalist Richard Curran from the Sunday Business Post did his best to spice up the gloomy scenario with his own punchy tabloid-meets-Hollywood televised treatment of meltdown in the million-euro suburbs.

And, of course, we’ve been waiting years for David McWilliams’s wish-fulfilment on the property crash to happen. Most of the Pope’s Children appear to have abandoned their marriages, snorted a few lines of cocaine and retired to the nearest wine bar to drown their sorrows as they wait for the property crash that will ruin them.

Even further back - and it’s now so long since I first heard UCD’s Professor Brendan Walsh predict a “soft landing” in the property market that the good professor has since retired and the economy and the property market have powered ahead in the intervening years.

When most of the middle-class PAYE workers go to bed at night and dream a little of their good fortune, the only tangible thing of value they have is their house.

They may live in a modern liberal democracy, have a good standard of living and children who don’t have to emigrate to find work, but that’s not the same as knowing that their little plot has gone from being worth €90,000 to being worth €900,000 in the last 15 years.

While readers might find Professor Morgan Kelly’s, On the Likely Extent of Falls in Irish House Prices, published last week by the ESRI, tedious, with sub-headings such as Fundamental Regressions and Macroeconomic Consequences, they should really go back to his Gliding Into the Abysspaper of just six months before which is, in its own way, a brilliant piece of tabloid scholarship, to find out exactly what he’s saying.

“We can expect the biggest falls in apartments as speculators try to sell before getting roasted alive, and in the dismal outlying towns with long commutes to Dublin,” wrote the professor. “For many with 100 per cent mortgages on apartments that have fallen in value by €150,000, it will make sense to leave the keys in the door and relocate to London for a while.”

Residents of those “dismal towns” may wonder why the ERSI is using public funds to insult them, but that’s another day’s work.

Professor Kelly, unlike some of the other gloomy economists, has no difficulty actually measuring the dramatic fall in house pricesfor the ERSI.

“If the experience of economies like ours are anything to go by, we may be looking forward to large and prolonged falls in real house prices of the order of 40-50 per cent, and a collapse of house building activity,” he says.

He goes on to say that the Irish housing boom “is a bubble, pure and simple” and the reason for his thesis is that rents have fallen while mortgages are rising. “Why pay a mortgage on an empty apartment that has stopped rising in value? As speculators rush for the exit, prices will crash,” he says, comparing Ireland with Finland and Holland.

“Second, if prices stop rising, it makes no sense to buy a house,” he says, debunking the myth that every Irish person has some pre-Famine memory of being landless.

“Compared with mortgages, rents are ridiculously low,” says the professor. “For €2,000 a month you can pay a mortgage on something in a muddy field on the wrong side of Celbridge, without nearby shops or schools and a two-hour commute to Dublin. For the same amount, you can rent a €1,000,000 house in southeast Dublin, close to the Dart line and surrounded by good schools. Once people put off buying in favour of renting, prices will not stabilise, they will crash.”

But then he goes on to say that, “Just as rising prices generate self-fulfilling expectations - you have to buy now before prices rise further, causing prices to rise - so falling prices generate their own momentum.”

Do Professor Kelly and his doom-laden cohorts ever stop to think that they themselves are perpetrating a “self-fulfilling expectation” that prices will fall?

Naturally enough, estate agents CBRE take the other side of the argument, labelling George Lee and Richard Curran as “doom merchants” and pointing out that while investor demand is “easing”, houses are still selling.

“A house price crash is not imminent - just because it happened elsewhere does not mean it will happen here,” says Marie Hunt of CBRE.

Of course, there is no legislating for people who have unrealistic expectations. A lot of houses out there are not selling because the sellers are expecting the same prices that people were prepared to pay in the property madness of two years ago. But that’s another story altogether.

So do we need an arm of the State to be talking down the property market in what is still the most vibrant economy in Europe? Make up your own mind, but most people who have invested their lives in a “ticky-tacky little box” are depending on the feel-good factor to keep a little joy in their hearts.

#2

I was amazed when I read that article. It seems that the Sunday Independent has its own unique take on the property market and no one can stand in its way. Its amazing how the editor even allowed such an article with numerous personal attacks to be published in the first place.

At least now Bertie has a shortlist of candidates drawn up for him to call in the firing squad. I wonder if at some point we might see a shortlist of people from the pin. “Captain round up the following unpatriotic doom mongers - OW, TUG etc. etc.”

#3

When you can’t dispute the message, kill the messenger. The Sindo must think the economy is just smoke and mirrors if a few people pointing out some facts are such a major threat to it.

#4

Professor Morgan Kelly and his counterpart in UCHG ( I can’t remember his name), are very brave people. It would not suprise me if these people got
shafted from their cushy numbers for some internal investigation, or other
feeble disciplinary action :open_mouth: . This is Ireland people the land of the cute whores :wink: . Likewise posters on here who admit to working in the public service should take the following advice from Duplex.

irish-property-bubble.blogspot.com/

Watch your back people :unamused: .

#5

Alan Ahearne

#6

It’s not the only “head in the sand” article from the Sindo today. I think they are just trying to stir it up a bit and be controversial to get readers to discuss/respond/write in etc. That’s the job of any half-serious rag mag editor. I wouldn’t read aything into them.

What goes up and up does not have to crash down
By Alan Ruddock
Sunday July 08 2007

MELODRAMA and the Economic and Social Research Institute are strange bedfellows, but last week they were tucked up snugly together. Professor Morgan Kelly’s doom-laden prognosis for the Irish property market may have been a minority report, and it may have included conclusions that the ESRI itself would not support, but it was published with the ESRI’s imprimatur as a ‘special article’ and was, naturally enough, given the weight that always attaches to the musings of the ESRI.

Prof Kelly’s conclusions appeared stark enough, and melodramatic enough, to garner the sort of coverage that he and his publishers must have anticipated. In an already gloomy property market, Kelly’s headline analysis was that 60 per cent could be wiped off property values over the next eight years. And according to RTE’s Morning Ireland report on his findings, Kelly’s detailed economic analysis could be reduced to the law of gravity: what goes up, we were told, must come down.

If only life, and economics, were so simple. Kelly’s arguments, of course, were more sophisticated than RTE’s boiled-down assessment. His ‘special article’ is an academic work pitched at fellow lovers of the miserable science and comes complete with complex formulae and often impenetrable language. But there was a simple message: according to the Irish Times report last Tuesday, Prof Kelly “said the housing market could go into rapid freefall, with house prices falling by 5 per cent per annum over the best part of the next decade”. And if your maths is not as sharp as it should be, that means that “up to 60 per cent could be wiped off the real value of houses over the next eight years”.

As warnings go, you can’t get much starker than that. But as always, the detail of his arguments paints a slightly different picture. To reach his conclusions, Kelly studied property booms in a host of other developed countries and discovered that “typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows”.

The bust, as he calls it, is an inevitable consequence of the boom (what goes up must come down), but he is not saying what you might think he is saying.

To a non-economist, the notion of giving up 70 per cent of the gain might suggest that if you bought a house 10 years ago for €100,000 and watched its value rise to one million euros, you will now watch its value retreat to about €250,000 - that, indeed, most of what it gained in value will be given up in the bust. But Kelly does not mean that. And he does not mean that if you paid €1m at the market’s peak that you will soon be sitting on a property worth a quarter of that.

Take a simple back of the envelope calculation. You buy a house tomorrow for €500,000 and sell it in eight years time for €550,000. Not a great return, but still a bit more than you paid for it. Assume that inflation has averaged four per cent in each of those eight years. In Morgan Kelly’s world, the value of your house has tumbled by about a quarter - the gap between your ‘profit’ and the cumulative rate of inflation over the eight years. Assume instead that your house sells for no more than you paid for it, and that inflation has been running at just over five per cent a year, and you have a near 50 per cent collapse in your house’s value, even though you pocket €500,000 when you sell it.

There is no denying that you have suffered opportunity cost - if you had invested that money on the stock market you might have doubled it (or halved it) over the same period and if you had stuck it in a deposit account you would be much better off. But you needed a home, so you bought a house.

In opportunity terms you are out of pocket, but it is still quite a stretch to suggest that you have just lived through a property crash that has seen 50 per cent wiped off the value of your home. But that, in short, is what Kelly is arguing. He talks about ‘real’ house prices - the price of the house adjusted each year for the rate of inflation - and then suggests that over the next eight or nine years, prices could fall by between 40 per cent and 60 per cent.

To make his case sound even more dramatic, he suggests an annual rate of inflation of just 2 per cent (as opposed to Ireland’s rate this year of nearer 5 per cent) and says actual house prices could fall by 6 per cent or 7 per cent a year. Flip the figures around and you actually approach consensus for this year - a decline of about 3 per cent in prices, with inflation running at 5 per cent - but divergence thereafter, with consensus forecasts pointing to flat or slightly rising prices, and inflation of closer to 4 per cent. Kelly thinks it will be worse than that, but remember, in Kelly’s world flat prices for a few years translate into a ‘bust’ because your property is not keeping pace with inflation.

It is an entirely valid point to make, and one that investors will be acutely aware of, but for home buyers the notion of a property collapse is different. To them, a 40 per cent or 60 er cent collapse in eight years means that the actual price of their home has tumbled, not that it has failed to keep pace with the rate of inflation. But a headline that says ‘academic thinks property prices may not keep up with inflation’ does not have the same import as a ‘slump warning’. The effect is that a worthy, if relatively dull, piece of academic literature is transported into the realm of melodrama, and is fed to an already nervous consumer as economic gospel.

But like all predictions about the future, Kelly has provided an educated guess. His is based on the past experiences of other developed countries, none of which would have displayed exactly the same characteristics as the Irish economy in the past 15 years. It is a reasonable analysis, but in the end it is nothing more, or less, thana guess.

When he talks of the Irish property ‘bust’ of the early 1980s, for example, we have to remember that he is talking about ‘real’ values, and then have to remember that Irish inflation in those dim days back was measured in double, not single digits. So avoiding a property ‘collapse’ in 1981 and 1982 would have required house prices to leap by about 35 per cent in two years. If they had, we might have’The constant hand-wringing about the economy allows government to pretend that there is nothing it

can do’

called it a boom, not a standstill. Affordability does not figure in his thinking, and the availability of cheap money has not informed his assessment of the rental market. But whatever the merits of his economics, Kelly and the ESRI seem to have fallen foul of a more base human desire: wanting to be noticed.And the way to be noticed in 2007 is to be deeply gloomy about everything (which may in part explain Bertie Ahern’s dismal diversion off-script last week, when he wondered why the gloom-mongers did not commit suicide).

Unfortunately, however, overstatement of the gloomy prospects for the Irish economy makes it that much easier for the Government, and the Taoiseach, to shirk the difficult decisions that they could make to ease the problems.

Kelly argues that stamp duty reform will not make a difference to the property market, but the Government’s failure was to delay reform and exacerbate the difficulties that had become apparent last year. It compounded that failure by then announcing minimal and limited reform, rather than wholesale change. So Kelly may be right that reform now will not make much, if any, difference, but the opportunity to make a difference was missed by Ahern and Brian Cowen, the minister for finance.

More broadly, though, the constant hand-wringing about the economy allows government to pretend that there is nothing it can do, when in reality there is a huge amount that could be done. As the public finances begin to tighten this year and next, reform and modernisation of the public service becomes ever more urgent. The rate of increase in government spending has to be halved - a painful process for a profligate Government that has never measured value - yet we are about to embark on the next round of benchmarking pay awards for public servants. Instead of being another series of secretive handouts, this benchmarking process must become an exercise in serious reform, or it must be stopped in its tracks.

Ahern and Cowen cannot set interest rates, and cannot determine the price of oil, but there are innumerable costs within the economy that are under their control, ranging from indirect taxes to the price of services provided by state-owned companies and agencies.

An aggressive onslaught on government costs, coupled with a genuine drive for greater efficiency and productivity in the public sector and value-conscious state spending would have a huge impact on Ireland’s competitiveness as an economy. That, however,will not come easy and Ahernshies away from the necessaryconfrontations.

He failed to seize an early opportunity to stabilise the property market, but that does not mean that the market will inevitably tumble into an abyss. The economy continues to grow and jobs are being created, albeit at a lower rate. The slowdown in housebuilding is a necessary adjustment to a more robust economy and a cooling in house prices is as inevitable as it is healthy. There is, of course, nervousness about a property collapse and there is always a danger that it will become self-fulfilling. Confidence has been battered and it is unfortunate that when sentiment is weak the ESRI should opt for melodrama over cool-headedness. But then again, how else can a poor economist be noticed?

#7

Correct. The S-Indo gets all its windbags to rant in unison about a common topic.

The day they turn on Bertie you will find all their windbags from soft right to hard right to demented a blowing hard in unison.

#8

Perhaps this is why our beloved Duplex has disappeared.

The only discernable logic I can derive from that article is that the private sector is good and has a universal right to “lie, moan, lie and moan some more”, put it in writing and trick you into buying. Those who dealt & speak in truth or facts, who look to history to instruct them on the future, whom are paid by the public, therefore with he public interest at heart should shut the fuck up because it upsetting the private sectors apple cart. (Maybe in this case, advertising revenue and a few ousted disgruntled Indo jurnos who can’t sell their overpriced gaffs… see phoenix magazine)

There is an increasing air of nastiness since Bertie told the Irish people to fuck off with their problems. The gloves are off the lambs are being roasted the scapegoats are being lined up.

I ask all PIN posters to keep this in mind when posting so as not to sail this ship of course into shallow waters where rocks abound.

#9

The doomsayers are now being blamed as the cause of the economic downturn. Hwo long did bertie think that we could keep selling houses to each other.

The Celtic Tiger ended in the year 2000, the private borrowing from Europe kept us from going under.

Who are the dismal science merchents? Rememebr we need Europe to be bad in order for us to be strong. Countries like Germany actually make products that people want to buy.

#10

Liam Collins hates the idea that his taxes went to fund the ESRI report. LMAO :laughing: Amazing how the pro-uber-capitalists are writers. It must piss Liam off that someone is excelling in pursuits that he can’t perform in. Liam would only be happy if “arms of the state” were to release statements talking up the economy, would that be advocating propaganda?

This quote caught my attention:

“A house price crash is not imminent - just because it happened elsewhere does not mean it will happen here,” says Marie Hunt of CBRE.

“It’s different this time”. when you hear that phrase being uttered you know its a bubble. Funny how our uber-capitalist friend doesn’t recognise the signature phrase of bursting bubbles, but he’s a writer not a player.

WTF is the CBRE? I’m alays suspicious of organisations that hide behind acronyms.

#11

CBRE are a vested interest, a property agent. They are not hiding behind anything.

cbre.ie/portal/page/portal/ie_en

#12

this has been bandied about for the last four years. It’s like the canary in the mine. Unfortunately, there are too many people down the shaft and we are running out of oxygen very, very fast now.

#13

4 years ago , the Govt had made it easier for people to invest their new found equity and the ECB dropped their interest rates. Maybe it was different then. I wonder what sort of scheme will be concocted next.

The Eu is hinting that they’ll block the €180bn NDP (see the post.ie for more details) , maybe that super fast rail link between the preferred suburbs will be in jeopardy.

#14

Firstly, you’ve got to love the above being a long, hard-t0-read paragraph.

Secondly, have they considered that most many understand words with 3 or 4 syllables, and a few formulae. They shouldn’t assume that their own limited intellects are representative of the whole country.

And even if the majority of people are as stupid as them, aren’t the rest of us entitled to have a conversation without being made fun of? Do we really have to lower our conversation to monosyllabilic grunts like “House Price Go Up Good Yes. Bad Men Say Price Go Down Boo”.

The Anti-Intellectuals have arrived. Why am I not surprised they’ve taken jobs at the Sindo.

-RD

#15

Sindo = the daily mail for paddies.

#16

My point is that if Bertie and his Buddies don’t like whats coming from people
in the public service He/they will find a way to shaft them.

#17

Well now, that puts me in a strange situation: As I’ve mentioned before, I’m a true blue capitalist (I even think Maggie got it mostly right). As for the equally poor, by what metric? Asset rich and cash poor, like today for may house buyers does that count?

I think you’re on the money there daltonr … don’t forget, Berties great hero, Éamon de Valera, was himslef only a step away from Pol Pot with his plans for a return to an agrian, Irish speaking, isolationist, Catholic little island.

Watch out, the Thought Police will be around … all of a sudden I feel like Orwell’s Winston.

Anyway, I haven’t read much suggesting there are may major problems with the Irish Economy or that the Economy is in for a crash. Yes there are some significant issues; inflation, energy costs, credit bubble, property bubble to name but a few. Most of the commentry is specific to the housing market and, the likely effect of a ‘correction’ in that market would have on the bloated construction sector and the subsequent knock on effect to our overly construction dependent economy … ah, now I get it … pointing out that the “king is naked”/there are cracks appearing in the great property boom, by extension, could lead to a collapse in the economy.

Or maybe not … just how fragile is our economy? Am I missing something? Have we actually, despite what we’ve been told by the government and others, created an unbalanced economy, one that ignores fundamentials and runs only on sentiment? In doing so, have we created a single central pillar in residential construction that so ancors our financial well being that should cracks appear in it we’re all doomed? Is it possible that the whole latter day ecomomic success of our little open market island state is so fragile that the mear suggestion of a ‘property bubble’ is enough to bring the whole house of cards crashing down around our ears. And are we so far into a market bubble cycle, that we’ve reached the point, describled by Kindleberger, where the majority of ‘investors’ or those wishing to buy into the market now believe that, rahter than seeing price inflation, we are about to see actual deflation, that point creates what the esteemed ecomomist called “Revulsion”, which comes with an associated dumping of asset and ‘crash’ in prices.

Perhaps we should print up some posters based on the British WWII “Loose talk costs lives” changed to “Loose talk costs you money”

Blue Horseshoe

#18

Best to just ignore them, they’re like children throwing stones these days. 6 months ago the general public believed them, now they realise they’ve been hard - I’m amazed at the change in sentiment I’ve seen in past few weeks.

By the way, they’re not uber capitalists - no capitalist would have allowed the government promoted construction industry to function in the manner it has, they’re just the usual conservative reactionary nonsense.

#19

I just went back and read that article again, and it’s so much worse than I realised on first reading.

It belittles the work of the ESRI and Morgan Kelly with language like

“mythical semi-socialist future”, “over-enthusiastic football supporters”,
“cosseted in the public service” and of course…
“regurgitated a hysterical rant from an academic who had the audacity to accuse those in the property business of “wishful thinking” because they remained optimistic about the future of house prices.”

There’s no “evidence” that the report was a hysterical rant, or that it requires audacity to to point out that hoping for an endless boom is wishful thinking. The article doesn’t counter Morgan Kelly’s arguments with other valid arguments.

Just more rubushing…

Any why can’t the boom end? What to the authors dream up to hang their hat on?

If it ended some people would be sad, therefore it can’t end. Profound.

The article goes on to list a number of reasonable arguments from Dr. Kelly, including the relationship of rents to mortgages, the historical precendents etc.

The best that the Sindo can come up with to rebuke him is: None of what you’re saying is true, but if you keep saying it it will become true.

If talking down the economy would undo it, wouldn’t it have fallen apart years ago, with the various cases mentioned in the article of people talking it down? Does that fact that it continued prove the falicy of negative talk causing the crash?

The real question that a person with a few brain cells would ask is, what has changed to create so much negative comment? Negative talk isn’t what caused higher interest rates.

Negative talk isn’t what caused people to borrow so much that at the first flutter upwards in interest rates the affordability of mortgages became an issue.

Negative comment isn’t what has stopped people buying houses, it never stopped them before. It sure as hell isn’t what’s stopped builders building houses, why would they stop, unless they believed the negative talk.

What has changed is that the last of the people who could be panicked into buying were caught in 2006. That was the end of the supply of greater fools.

If the economy is so close to the edge that talking about it could knock it off track, doesn’t that prove the very point that the article is trying to rubbish? That the economy is in a fragile state?

They come up with one quote to rebuke the 4 or 5 from Dr. Kelly. They go to Marie Hunt of CBRE. Because as we all know she can be completely objective in her analysis.

“A house price crash is not imminent - just because it happened elsewhere does not mean it will happen here,” says Marie Hunt of CBRE.

That’s it. That’s the sum total of the rebuke.

There’s no “Here’s WHY it won’t happen”. Nothing about how Ireland is different to every other asset bubble in history. Just accept the fact that just because it happened elsewhere does not mean it will happen here.

The Sun has always risen in the East and Set in the West. If I were to tell Marie Hunt that just because that’s always been the case doesn’t mean it will happen tomorrow, do you think she’d accept that? Or do you think she might venture to ask what it is about tomorrow that’s going to make the Sun do something different.

I know there’s an editorial policy that they are upholding here, but I want to know if they actually believe any of the stuff they write. Like the article a while back on why it’s a good idea to Borrow while you have Savings. The author seriously had not thought about it.

Just what are the qualifications for being a journalist anyway? You do need a leaving cert right? I mean we’re not talking about the Ballydung Champion here. These are national newspapers.

I guess what I’m wonder is, is this a deliberate attempt to mislead their readers, or do they just not know what they are talking about. Is it malevolence or stupidity?

-Rd

#20

Journalists who report on reality and news do not generally work for the sindo only opinion writer after opinion writer . Its not really a newspaper but a sort of non glossy glossy thing with death columns .

Its been like that for years. If you want to read news then read the sunday world.