Weeks after Ireland’s government gave in to pressure from worried European neighbors to accept an IMF bailout, Finance Minister Brian Lenihan unveiled an emergency 2011 budget Tuesday pushing $6 billion in spending cuts and $2 billion in tax increases.
Under the cloud ofimpending damage to the entire 16-nation euro zone, and with Ireland’s deficit estimated to be 32 percent of its GDP this year, Lenihan urged Parliament to accept the assortment of austerity measures, acknowledging “mistakes,” but saying it was time for the onetime economic powerhouse to move forward with “confidence and purpose.”
One of the major factors in driving Ireland’s once-famous “Celtic Tiger” economy was the housing market, which crashed when the global recession hit.
Since its peak in 2006, the average Irish home price has fallen by 36 percent and continues to fall, according to Economic and Social Research Institute and the government. Contrast that from 1995 to 2005 when the average home price rose by a staggering 270 percent from 75,000 to 280,000 euros – 30 percent in 1998 alone.
To find out what led to the crash of the Irish housing market, we spoke with David Duffy, Economic and Social Research Institute economist and former in-house economist for the Chambers of Commerce of Ireland.
What caused the extreme rise and then fall of Irelands housing market?
DAVID DUFFY: In the end what Ireland had was a long boom cycle. Ireland had a big population turnaround. This, combined with the liberalization of lending, led to the rise in house prices. Mortgages became more available and interest rates were low on mortgages that were sometimes as high as 100 percent. Post-2001-02 Ireland changed from an externally driven economy to an internal, domestically driven one. We started borrowing money from ourselves, to build houses ourselves, which we bought ourselves. In 2006, there was a huge supply response. There were 90,000 houses built in 2006, approximately 21 units per 1,000 population. This was at a time when in Europe the average was around 5 units per 1,000 population. The huge supply response was a major factor contributing to how large the residential and construction sectors became as part of the economy. There began to be fears that the market had run ahead of itself as the construction industry alone now accounted for 13 percent of the Irish workforce.
When the global recession kicked in, people became much less certain about their income and employment. It was this uncertainty factor that really did the damage. People were uncertain and stopped buying houses. When stopped borrowing, the whole economy collapsed.
Was the housing crash the main factor in the economic collapse?
DAVID DUFFY: Ireland was a small economy. The financial downturn of the rest of the world hit us hard, but the imbalances in the housing market economy in Ireland made the downturn in Ireland particularly bad, yes.
Why was bank lending so frivolous?
DAVID DUFFY: The main factor was competition in the market. The mortgage market in Ireland was growing and many new foreign entrants started to get involved. This led to a lot more competition between the banks. One bank might start offering 100 percent mortgages to customers and the others were forced to follow suit to stay competitive. There was a strong desire from every company to maintain the market share.
Did housing incentives like “section 23,” which allowed people to buy “investment properties” and collect rent tax free, contribute to the crash?
DAVID DUFFY: It would have done so,yes. There were a number of incentives such as this one that were intended as a way for people to build holiday homes, particularly on the less-populated west coast. Building these homes drew materials and labor away from the more populated east where the houses were more in demand. With only a finite amount of materials in Ireland, this led to competition for resources which further drove up house prices.
Is there a way back for the Irish housing economy?
DAVID DUFFY: It would take a very significant intervention to bring it back or kick-start the economy, which is unlikely. €6 billion is going to be taken out of the economy in Ireland’s new austerity budget. There continues to be uncertainty about jobs and finance for Irish people. While there has been a small amount of growth predicted in the near future, this will not necessarily translate into more jobs. It is this uncertainty that will keep the market low until next year at the least, with a 45 percent total price drop predicted before it levels off.
A recent report by the Irish Department of the Environment shows that there are 33,000 completed or nearly completed homes that are completely vacant. The same report shows about 10,000 homes still in the early stages of construction. Can any use be made of these?
DAVID DUFFY: Some of these houses may never be finished. Many houses were built in places where the demand will never be high enough to meet the amount of houses that were built. There has been some talk of the government using the excess housing stock for social or affordable housing. This may work but it has one major flaw in that you can only put people in places that they want to live. You may have plenty of vacant housing in a certain area, but if people aren’t willing to move there, it won’t work.
Is there an end in sight? When will we start to see a recovery, an upturn?
DAVID DUFFY: We are starting to see stabilization in the economy. Three or four months ago [before the bailout and its subsequent consequences] there was a pickup in the euro area. In fact the export section of the Irish economy has actually shown signs of growing, so overall growth of the economy should be visible in the next year. However this is unlikely to initially lead to a downturn in unemployment rates. For this reason, house prices will continue to fall until late next year.
The bailout that the Irish government will receive is in part a problem of their own making. The government guaranteed banks that had more potential bad debt than the country could really afford to cover. The crash of Ireland’s housing market has plunged the country into its deepest recession since the 1980s, bringing on a new mass exodus as people leave the island in search of work. The juxtaposition of brand-new homes full of life, next to vacant, half-built shells in many neighborhoods stands as a striking example of boom Ireland compared to bust.
Evan Conway is a native of Ireland and a NewsHour desk assistant.