DaytonaSS
03-03-11, 20:37
Mar 2, 2011
IRELAND
The Property Bubble
The Irish government was crushed at the polls last week, punished by voters for a housing bubble that bankrupted the country. A look at what led to the collapse in Ireland and efforts by governments elsewhere to avert similar trouble
By Jonathan Eyal, Europe Correspondent
Irish PM Brian Cowen's ruling Fianna Fail lost a stunning 57 seats in the general election last week, the biggest drubbing in its history. It now holds just 20 seats in Parliament. -- PHOTO: AGENCE FRANCE-PRESSE
View more photos
Classic tale of greed & govt bungling
LONDON: On the road leading from Ireland's main airport to Dublin, the country's capital, a huge piece of graffiti scrawled on a wall in red and white letters carries a stark message: 'Greed is the Knife & the Scars Run Deep.'
This is the latest form of protest by ordinary Irishmen against a gigantic property bubble that has literally bankrupted their country.
At last week's general election, the Irish meted out heavy punishment on their leaders: The Fianna Fail, which has ruled the country for three out of every four years since the 1930s, suffered the biggest drubbing in its history. It lost a stunning 57 seats, with most of its ministers booted out, and now holds just 20 seats in Parliament.
Ireland now has a new coalition government, which has pledged to renegotiate its €85 billion (S$149 billion) bailout by the European Union and International Monetary Fund, in the hope of reducing the debt burden. But it will not be easy, with the European Commission insisting last week that the new government stick to the promises made. And whatever happens, it will take more than a decade for the Irish to crawl out of their current misery.
As a result of the popping of a stupendous housing bubble, the average Irish family now faces an estimated £3,900 (S$8,000) a year in extra taxes. Public services will be slashed and 90,000 jobs lost in a country where unemployment is already running at a steep 14 per cent. And even with all this, the cost of servicing interest payments on Irish bank debt will be eating up 85 per cent of people's income taxes by next year.
The collapse, as it were, of Ireland's house of cards is a classic tale of greed and government mismanagement resulting in a national tragedy.
The Fianna Fail government had in recent years given Irish banks free rein to lend recklessly to property developers. When property prices collapsed, it then offered an unconditional guarantee to cover all the banks' losses, despite the fact that, as the authorities subsequently admitted, they had no idea how much money this entailed.
It soon found out: the total bill amounted to a whopping 32 per cent of Ireland's gross domestic product, a figure seldom encountered by economists before. And to make matters worse, tax revenues also collapsed.
In effect, Ireland is 'like a patient bleeding from two gunshot wounds', says Dublin University economics professor Morgan Kelly.
By November last year, Ireland had no choice but to borrow from the EU and IMF.
The rise and fall of the 'Celtic Tiger' was fairly rapid. For centuries, the Irish survived as a small island nation, frequently occupied by the British and kept in perpetual poverty. Their biggest export was their own people, who migrated by the millions, particularly to the United States.
Matters began to change when Ireland entered the European Union, and particularly from the late 1980s when its economy began to grow by a yearly average of 10 per cent. That boom was the outcome of its real advantages, which included a youthful, English-speaking and highly educated population, low taxes, and a predictable legal environment. Foreign companies increasingly used the country as their European entry point.
But as Ireland's wealth fast approached the European average, annual growth rates began to fall, a normal phenomenon in mature economies. However, its politicians, who staked their reputations on double-digit growth, refused to accept this decline. So they encouraged a property bubble instead.
Financial bubbles usually start as a result of real economic facts. It was true that Ireland needed more houses, as its young people left their parents' homes earlier and married later in life. It was also true that, as Ireland's prosperity attracted new immigrants, the demand on housing increased even more.
But as it is often the case with bubbles, they acquire their own momentum and assume grotesque proportions. In the early 1990s, only 5 per cent of Ireland's national income came from house building. By 2006, however, a full 21 per cent of the national economy was dependent on construction. Property became Ireland's 'gold rush'.
Property prices shot up by 270 per cent during the last decade, but there were still plenty of buyers, since banks offered 100 per cent mortgages, with no deposit required and no questions asked.
And people who already owned a house bought another one as an investment. Soon, Ireland was building as many houses as all of Britain, which has a population 14 times bigger.
As the frenzy continued, the Irish government's revenues from duties on house and land sales soared. 'The government was addicted like a street crack cocaine user to all the revenues that came from the property bubble,' says Irish commentator Colm Mac Eochaidh.
Anyone who dared to warn that this circus could not last was simply brushed aside. Mr Bertie Ahern, who was prime minister for much of the period by promising his countrymen that the 'boom is getting boomier', once publicly invited those who 'moaned' about the health of the economy 'to commit suicide', so that the rest of the nation could continue to enjoy its spree.
Mr Ahern also had other reasons to ignore the warning signs: a third of the political donations to his ruling Fianna Fail came from the construction industry. So, instead of trying to deflate the bubble, the government fed it, by offering even bigger tax incentives to home buyers. As noted writer Fintan O'Toole remarked: 'Ireland blew it by ceasing to believe that you sustain prosperity by making things and selling them. Instead, it started to believe that there was a new magic kind of prosperity which was made out of basically selling bits of Ireland to each other.'
When the bubble finally burst, it spewed deadly venom. Housing prices have plunged by about 40 per cent over the last two years. A total of 621 'ghost estates' are littered across the country, either left unfinished when developers ran out of cash or desperately awaiting buyers.
But the buyers will never come, for many of these estates were built for pure speculation, and in the wrong places. Leitrim, a small, sparsely populated region in Ireland's north, estimated that it needed only 590 new houses to accommodate its population growth. Instead, it received 3,000, and they are now mostly occupied by stray cats and dogs. 'I suppose we can hire the estate as a backdrop for a horror movie,' said a local resident.
And as the economy nosedived, nearly one in 10 of all Irish mortgage holders got into trouble. And that, in turn, sent the country's financial system into a meltdown.
Allied Irish Banks and Anglo Irish Bank - the two biggest players in the domestic market - led the mortgage rush and, when the going was good, saw their profits rise by about 40 per cent each year. Both crashed. Anglo Irish alone ended up with about €39 billion worth of bad debts.
'Anglo Irish was the baddest bank on the planet,' says Dutch financial expert Maarten van Eeden, who was recruited last year in the hope of saving something from the wreckage. 'What you saw here at the bank was recklessness, no checks and balances; it was all a very nasty cocktail.'
The bailout plunged Ireland into a profound sense of national shame. 'Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty,' wrote The Irish Times, the country's top newspaper. Few could understand why every Irishman should assume responsibility for the misdeeds of politicians and bankers. But pay they will, and for generations to come.
The only consolation for the Irish is that, unlike Greece, another European country which has had to be saved from bankruptcy, Ireland has already swallowed the bitter medicine and has started to tackle its difficulties, while the Greeks are still dithering.
However, at least for the moment, all the problems of old Ireland have returned with a vengeance. Unemployment has trebled during the last two years. The flow of Irish people out of the country has also resumed: 50,000 are expected to leave this year, a rate of about 1,000 a week. Ireland is back where it was: poorer than the European average, vulnerable and apprehensive about its future.
As the graffiti outside Dublin Airport aptly put it, the scars will run deep.
[email protected]
TIS MADNESS
'Ireland blew it by ceasing to believe that you sustain prosperity by making things and selling them. Instead, it started to believe that there was a new magic kind of prosperity which was made out of basically selling bits of Ireland to each other.'
extract from straits times , for a lesson on a Govt that cocked up
IRELAND
The Property Bubble
The Irish government was crushed at the polls last week, punished by voters for a housing bubble that bankrupted the country. A look at what led to the collapse in Ireland and efforts by governments elsewhere to avert similar trouble
By Jonathan Eyal, Europe Correspondent
Irish PM Brian Cowen's ruling Fianna Fail lost a stunning 57 seats in the general election last week, the biggest drubbing in its history. It now holds just 20 seats in Parliament. -- PHOTO: AGENCE FRANCE-PRESSE
View more photos
Classic tale of greed & govt bungling
LONDON: On the road leading from Ireland's main airport to Dublin, the country's capital, a huge piece of graffiti scrawled on a wall in red and white letters carries a stark message: 'Greed is the Knife & the Scars Run Deep.'
This is the latest form of protest by ordinary Irishmen against a gigantic property bubble that has literally bankrupted their country.
At last week's general election, the Irish meted out heavy punishment on their leaders: The Fianna Fail, which has ruled the country for three out of every four years since the 1930s, suffered the biggest drubbing in its history. It lost a stunning 57 seats, with most of its ministers booted out, and now holds just 20 seats in Parliament.
Ireland now has a new coalition government, which has pledged to renegotiate its €85 billion (S$149 billion) bailout by the European Union and International Monetary Fund, in the hope of reducing the debt burden. But it will not be easy, with the European Commission insisting last week that the new government stick to the promises made. And whatever happens, it will take more than a decade for the Irish to crawl out of their current misery.
As a result of the popping of a stupendous housing bubble, the average Irish family now faces an estimated £3,900 (S$8,000) a year in extra taxes. Public services will be slashed and 90,000 jobs lost in a country where unemployment is already running at a steep 14 per cent. And even with all this, the cost of servicing interest payments on Irish bank debt will be eating up 85 per cent of people's income taxes by next year.
The collapse, as it were, of Ireland's house of cards is a classic tale of greed and government mismanagement resulting in a national tragedy.
The Fianna Fail government had in recent years given Irish banks free rein to lend recklessly to property developers. When property prices collapsed, it then offered an unconditional guarantee to cover all the banks' losses, despite the fact that, as the authorities subsequently admitted, they had no idea how much money this entailed.
It soon found out: the total bill amounted to a whopping 32 per cent of Ireland's gross domestic product, a figure seldom encountered by economists before. And to make matters worse, tax revenues also collapsed.
In effect, Ireland is 'like a patient bleeding from two gunshot wounds', says Dublin University economics professor Morgan Kelly.
By November last year, Ireland had no choice but to borrow from the EU and IMF.
The rise and fall of the 'Celtic Tiger' was fairly rapid. For centuries, the Irish survived as a small island nation, frequently occupied by the British and kept in perpetual poverty. Their biggest export was their own people, who migrated by the millions, particularly to the United States.
Matters began to change when Ireland entered the European Union, and particularly from the late 1980s when its economy began to grow by a yearly average of 10 per cent. That boom was the outcome of its real advantages, which included a youthful, English-speaking and highly educated population, low taxes, and a predictable legal environment. Foreign companies increasingly used the country as their European entry point.
But as Ireland's wealth fast approached the European average, annual growth rates began to fall, a normal phenomenon in mature economies. However, its politicians, who staked their reputations on double-digit growth, refused to accept this decline. So they encouraged a property bubble instead.
Financial bubbles usually start as a result of real economic facts. It was true that Ireland needed more houses, as its young people left their parents' homes earlier and married later in life. It was also true that, as Ireland's prosperity attracted new immigrants, the demand on housing increased even more.
But as it is often the case with bubbles, they acquire their own momentum and assume grotesque proportions. In the early 1990s, only 5 per cent of Ireland's national income came from house building. By 2006, however, a full 21 per cent of the national economy was dependent on construction. Property became Ireland's 'gold rush'.
Property prices shot up by 270 per cent during the last decade, but there were still plenty of buyers, since banks offered 100 per cent mortgages, with no deposit required and no questions asked.
And people who already owned a house bought another one as an investment. Soon, Ireland was building as many houses as all of Britain, which has a population 14 times bigger.
As the frenzy continued, the Irish government's revenues from duties on house and land sales soared. 'The government was addicted like a street crack cocaine user to all the revenues that came from the property bubble,' says Irish commentator Colm Mac Eochaidh.
Anyone who dared to warn that this circus could not last was simply brushed aside. Mr Bertie Ahern, who was prime minister for much of the period by promising his countrymen that the 'boom is getting boomier', once publicly invited those who 'moaned' about the health of the economy 'to commit suicide', so that the rest of the nation could continue to enjoy its spree.
Mr Ahern also had other reasons to ignore the warning signs: a third of the political donations to his ruling Fianna Fail came from the construction industry. So, instead of trying to deflate the bubble, the government fed it, by offering even bigger tax incentives to home buyers. As noted writer Fintan O'Toole remarked: 'Ireland blew it by ceasing to believe that you sustain prosperity by making things and selling them. Instead, it started to believe that there was a new magic kind of prosperity which was made out of basically selling bits of Ireland to each other.'
When the bubble finally burst, it spewed deadly venom. Housing prices have plunged by about 40 per cent over the last two years. A total of 621 'ghost estates' are littered across the country, either left unfinished when developers ran out of cash or desperately awaiting buyers.
But the buyers will never come, for many of these estates were built for pure speculation, and in the wrong places. Leitrim, a small, sparsely populated region in Ireland's north, estimated that it needed only 590 new houses to accommodate its population growth. Instead, it received 3,000, and they are now mostly occupied by stray cats and dogs. 'I suppose we can hire the estate as a backdrop for a horror movie,' said a local resident.
And as the economy nosedived, nearly one in 10 of all Irish mortgage holders got into trouble. And that, in turn, sent the country's financial system into a meltdown.
Allied Irish Banks and Anglo Irish Bank - the two biggest players in the domestic market - led the mortgage rush and, when the going was good, saw their profits rise by about 40 per cent each year. Both crashed. Anglo Irish alone ended up with about €39 billion worth of bad debts.
'Anglo Irish was the baddest bank on the planet,' says Dutch financial expert Maarten van Eeden, who was recruited last year in the hope of saving something from the wreckage. 'What you saw here at the bank was recklessness, no checks and balances; it was all a very nasty cocktail.'
The bailout plunged Ireland into a profound sense of national shame. 'Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty,' wrote The Irish Times, the country's top newspaper. Few could understand why every Irishman should assume responsibility for the misdeeds of politicians and bankers. But pay they will, and for generations to come.
The only consolation for the Irish is that, unlike Greece, another European country which has had to be saved from bankruptcy, Ireland has already swallowed the bitter medicine and has started to tackle its difficulties, while the Greeks are still dithering.
However, at least for the moment, all the problems of old Ireland have returned with a vengeance. Unemployment has trebled during the last two years. The flow of Irish people out of the country has also resumed: 50,000 are expected to leave this year, a rate of about 1,000 a week. Ireland is back where it was: poorer than the European average, vulnerable and apprehensive about its future.
As the graffiti outside Dublin Airport aptly put it, the scars will run deep.
[email protected]
TIS MADNESS
'Ireland blew it by ceasing to believe that you sustain prosperity by making things and selling them. Instead, it started to believe that there was a new magic kind of prosperity which was made out of basically selling bits of Ireland to each other.'
extract from straits times , for a lesson on a Govt that cocked up