Looking at history to see the future

Excerpt from A Short History of Financial Euphoria by John Kenneth Galbraith.

Blue Horseshoe

This was a post I put on hpc.co.uk this evening.

The current Irish government has an election coming up soon and part of their (Fíanna Fáil) election manifesto in the last election was that planning permission was granted on the basis that 20% of the housing was made available for social housing. They also added a get out clause for the developers allowing them to pay the councils in lieu of providing said housing. Also they introduced generous tax breaks (section 23 & section 50) to encourage people to invest in property and increase the housing stock.

To put this in context of the time (2001), the economy had seen massive growth throughout the 1990’s with a strong manufacturing base due to investment by technology and pharmaceutical companies. Low corporate taxes, cheap labour, entry to the Euro and a government willing to do business made Ireland a favoured location for American foreign direct investment. This was a dramatic reversal of the 1980’s when the economy had almost collapsed and emmigration to the USA/Britain/Australia/Germany or wherever was your only choice. There are still thousands of Irish living illegally in the USA from this period, who are being squeezed by the post September 11, 2001 laws. The 1980’s saw a period of managed decline and lack of investment in infrastructure, it also forced all political parties backs to the wall and made them focus on a common goal of turning the country around. The country had also experienced a baby boom during the 1970’s reaching its zenith in 1980 and falling dramatically in the years following. It was also during the 80’s, that farsighted developers and speculators began to accumulate land banks around Dublin and were able to bribe some politicians and councillors to rezone these areas for development.

So back to 2001, the economy had been going through a boom since the 90’s, and this created its own challenges, the first generation in decades started settling raise families en masse, people who had left in the previous decade returned to Ireland. Demand for housing rocketed, and prices increased along with productivity and wages, banks were still conservative with their lending criteria. So you have a savings and investment backed boom and house price’s rose substantially from a very low base. Rents are also rising to to point it is cheaper to take out a mortgage on a house. In short there was a supply problem and the government commissioned an economist, Peter Bacon, to report and make recommendations on the housing crises in the late 90’s.

Now the scene is set for the property bubble to develop over the next 5 years.

  • Tax incentives are introduced to encourage investment in the housing stock.
  • The stamp duty thresholds are raised for first time buyers.
  • The Euro brings low interest rates.
  • Alan Greenspan drops interest rates to superlow levels in 2001 to stave off a recession after the dot.com crash. The ECB follows suit.
  • Planning applications are readily approved.
  • The banks loosen their lending criteria and have access to more cheap Eurozone capital.post 2001

Encouraged by the tax incentives, established property owners have been using their existing properties as leverage to get mortgages to buy 2nd, and 3rd houses etc.as investments. In order to compete with these investors for suitable property the first time buyers who earn less are forced to extend themselves by taking on longer term mortage terms of up to 40 years.

The banks continue to loosen lending criteria introducing I/O mortages and later 100% mortgages, thus raising the bar further for FTB’s.
The era of the specuvestor* has arrived, interest rates are lower than the consumer price index, effectively the banks are lending money for free.

As the councils have loosened their planning permission criteria, ‘investment’ properties start getting built in isolated parts of the country to satisfy the demand.

The property ‘bug’ is infectious and people start buying properties in Spain, Hungary, Bulgaria, Cape Verde and lately Germany, on the back of leverage of their existing property which has increased in value. Weather is relegated as the favourite topic of conversation in favour of property.

First time buyers are forced further and further from the main urban centers if they want to buy, and they do, encouraged by their elders and peers, this generation faces two hour commutes to work every day.

Prices keep going up, to get on the ladder, FTB’s now need parental help, and some parents are prepared to MEW to help their son or daughter compete with the specuvestor.


  • Employment in construction has reached an all time record.
  • Unemployment is the low. Construction is 25% of the countries GNP.
  • Immigration has been sustaining the rental market since 2004.
  • Rental yields have dropped under 3%, in fact there are some housing estates where the properties are almost entirely owned by investors who let the properties to the workers building the estates.
  • The banks are self regulating, being able to tell the financial regulator what rules they are going to abide by.
  • ECB interest rates have risen with more rises in the pipeline
  • We will likely overtake Britain as the most indebted per capita this year.
  • Ghost estates are becomming obvious in some areas.
  • The housing market has stalled and inventory for sale is continues to rise as sellers are in denial
  • House prices are starting to decrease
  • Some estate agents won’t take on properties from some areas as they have enough on their books
  • Most of the baby boomers from the 70’s have settled now.

*specuvestor - one who is in the market for capital appreciation only, rental yield what’s that?

That’s still true in most cases or the case is equilibrium.