The Sunday papers were awash with property articles today. I guess I am in a similar position to fellow blogger Una Mullaly in that I am of a similar age (or slightly older) and never bought a property. Although this was also partly because I could never afford one.
Una’s piece is the most read on the Turbine today, and with some merit.
Now the added bonus of being right, and not succumbing to societal pressure of getting on the property ladder, sweetens the deal. Renting was previously a life usually ascribed to flakes, reality deniers, the broke, bold and immature. But it’s pretty sweet listening to all this doom-and-gloom stuff about mortgages going ballistic while the price of a house ticks down by the minute like some sick stopwatch in reverse. No worries for me. Smug? Absolutely.
Indeed. But I still have several relatives in negative equity and mortgage repayments rising – and it ain’t pretty.
And if you thought things were really bad, well you may not want to read the following. Things are going to get a lot worse. Take for example the cycle of market emotions:
Personally, I feel that throughout 2007 with all the talk of “soft landings” and all that nonsense, we were in full scale denial mode. Property prices kept falling from January 2007 to today, but we kept on denying it.
The turning point was the ESRI report last month. We finally entered fear mode. Fear is now widespread, and is evidenced by the Sunday paper coverage. And as I said earlier, we are only at the beginning. We still have desperation, panic, capitulation, despondency and depression to go. I put that as far away as 2010.
I am not fooled by government talk that we will see some sort of magical economic upswing in late 2009. I just don’t buy it. From where will this upswing come? What exactly has Ireland got to offer? And the people who might comment and say “Don’t talk down the economy” can fuck right off. Reality is reality is reality. You can either deal with it or ignore it.
Let’s move to the Sunday Business Post and see if it can offer any cheer.
First to David McWilliams, often called a permabear. McWilliams laments Cowen’s plans for cutbacks. He asks questions of idea that Ireland today is totally different from the 1980s.
All week, this mantra was hammered home on the airwaves by the economists who work for the banks and stockbrokers. Let’s run with the idea that Ireland today is totally different from Ireland 20 years ago. It’s not hard to agree with this assertion. The question that arises then is: if 21st century Ireland is so different, why does the solution being trotted out now by the Department of Finance sound like 1980s thinking?
Examine what has been proposed as the panacea. Everyone is talking about cutting government spending as if the root cause of today’s dilemma were 1980s-style government incontinence. But that’s not the root of the problem at all and therefore can’t be the only solution.
The root cause of today’s problems is a collapsing property market, coincident with a rapid deterioration in Ireland’s competitiveness. A credit binge disguised the underlying weakness. In fact, we lived in a Botox economy where other people’s money made us look richer in the same way as Botox makes a middle-aged person look younger. Now that the Botox economy has been laid bare, we can’t hide the blemishes or wrinkles any more. The root cause of our present difficulties is too much credit; the root cause in the 1980s was too little credit. Therefore, the solutions have to be totally different.
Today, the situation is different. The absolute number on the government’s deficit is a passive residual not an active catalyst. The budget deficit figure is the end of the road rather than the beginning. In the boom, the credit profligacy determined the government deficit. In the 1980s, the government profligacy determined the credit deficit.
In short, cause and effect today are precisely the opposite of what they were in the 1980s.Yet the government’s response has been to wheel out 1980s solutions to 21st-century problems. Obviously, government spending has to be cut as credit-driven revenues dry up.
But McWilliams suggests a novel idea:
This is where the state can start getting inventive. Why not unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan? We need a scheme, targeted at real businesses.
If you travel around the country you will find hundreds of small companies, starved of cash. Yet collectively, these small businesses are our national ‘get out’ cards. These companies need fresh capital. There is lots of capital about. The only problem is that it isn’t finding these opportunities. If the state made it tax-efficient for wealthy investors to back these small guys with big ideas, we could begin the process of gradually clawing our way out of this swamp.
Inventive and cost effective. But such a plan would involve visionary leaders. Ahem.
Now if you are not frightened enough, let’s move on to Financial Times correspondent Wolfgang Munchau, also writing in the Business Post. Hold onto your hats, this is not pretty.
For the world economy, this is surely one of the deepest crises in living memory. For Ireland, it is close to the perfect storm.
Consider for a second the sheer number of economic shocks the world has been subject to over the past year: a crash in the property market, the effective annihilation of securitised credit, broader financial instability that is likely to continue over several years, large shifts in global exchange rates, a sudden slowdown in US economic growth, plus an explosion in oil and commodity prices, followed by rising inflation.
A small open economy at Europe’s outer fringe, with a high reliance on property and financial services for its growth but without the full arsenal of independent macroeconomic policy tools, is going to be harder hit than traditional industrial economies.
In such an environment, you can safely throw away any long-term economic forecast. The Economic and Social Research Institute (ESRI) is almost certainly right in its forecast that Ireland will suffer a recession this year. But I doubt there will be a recovery in 2009. The ESRI’s optimism is based on what forecasting models always do: after a shock, they always assume that the world goes back to normal. Unfortunately, this is not that kind of shock.
To me, the ESRI always give low-ball estimates. So whenever they make forecasts I mark it down as a lot worse than what they are saying. He goes on on to dispel one of the myths of the Irish property boom, that house prices always rise:
There is one fact about the property market that is extremely difficult to relate to people during house price booms (and for a long time after that): house prices, after inflation, do not rise in the long run. This is true virtually everywhere. In the US, real prices have been up a touch over zero since the early 1900s. In Germany, real property prices have stayed flat since the 1970s. In Britain, they have gone up by a little, for largely pathological reasons to do with the country’s urban and rural planning laws. In most countries in the world, real property prices are mean-reverting. What goes up, comes down.
We will know in a few years whether this assertion is true, but I am fairly confident in predicting that the Irish property crash is going to be severe. The main differences between the Irish and US property markets is that the fall in Irish house prices has started a little later, and will be a lot worse. The economic impact on Ireland will also be immeasurably harder. unlike the US, Ireland has no domestic currency, no independent monetary policy that can do the heavy lifting of adjustment.
For that reason alone, I do not believe that the Irish economic downturn will be short-lived. Since inflation is not very high in the eurozone, and only a touch higher in Ireland, most of the real adjustment will come in the form of falling nominal asset prices, as well as falling wages and rising unemployment.
Even under the ESRI’s forecasts, Ireland’s budget deficit will overshoot the Maastricht Treaty’s 3 per cent barrier next year. That overshoot is due entirely to automatic stabilisers – essentially due to a fall in tax revenues. However, if this recession turns into something longer, as I expect, you could easily see a budgetary overshoot of some 5 per cent or more. Given Ireland’s relatively sound debt position and the sharpness of the downturn, we should all accept a temporary rise in the deficit. But the EU will probably not accept a fiscal stimulus on top of those automatic stabilisers.
As for the recent rise in unemployment, things are going to get much worse I fear. Unemployment hit 5.7% according to CSO figures released last week. That means 217,400 people out of work.
Now double it. 10% in 2009, or half a million people out of work. How bad would that be for the economy? Fundamentals are sound my ass.
Doom and gloom yes. Reality yes. If we face reality we can start to deal with it.
Will Fianna Fail and Mr Cowen have the vision and competence to see us through the bad times? I sincerely doubt it.