Much has been made of the recent rise in property prices in South Dublin, which is already being hailed as a 'property bubble', a phrase that would instil fear in any Irishman's heart. I have a particular bee in my bonnet on this topic, and the unrelenting press coverage isn't helping anything.*
First, let me explain what a bubble is. A bubble is a situation where a group of people think that the price of an asset will continue to rise ad nauseam**, hence they lose all inhibitions and try and buy into that asset (sometimes multiple times) in order to take advantage of the price rise; get into the asset while they can still afford it***; or both. This state of irrational exuberance continues until an event occurs**** which makes people re-evaluate their purchase(s), and/or until enough people question why the asset is priced in such a way (which in essence creates the aforementioned event). Ireland was gripped in the throws of an enormous property bubble in the latter years of the Celtic Tiger (up to 2007/08), the likes of which has arguably never been seen before. The painful readjustment following on from the crash (in which house prices dropped 50%) has made many Irish people***** wary of bubbles and over stretching themselves ever again.
I have no doubt that the Irish bubble will be cited by economists and studied by students, for years to come, but we are not alone in getting excited about such assets******. Spain and the UK also had property crashes, as did the US but the scale of the Irish case is definitely unique in the modern era.
Anyway to the here and now.
Ireland's property prices are 50% lower than their peak and in most areas are still falling. However, while all the boats rose evenly on the tide in the boom years, all boats have not fallen at the same rate in the recession. Dublin prices fell far more than the rest of Ireland (circa 53%) with apartments falling approx 59% from the peak. The rest of Ireland faired somewhat better dropping circa 47%.
Dublin as the capital, was always going to be the first to rebound from the crisis, and we have seen big gains in employment in Dublin, which is yet to be matched by the rest of the country. Coupled with this (or maybe as a result of this) the prices of houses have stabilised and started increasing. A 12% rise in a single year is most certainly the stuff of bubbles, yet given the circumstances I think calling it a bubble is irrational (with a hint of exuberance).....
In a market, irrational exuberance is often followed by irrational panic. As people realise their bet is going sour, they sell like mad to try and limit the losses. The people that lent them the money (the banks) also start to sit up (start off by singing songs) and then probably curse a lot. After this they get serious and demand their money back, forcing more people to sell as most of their wealth has been invested in the asset......the one that was only ever going to increase in value.
So prices generally tend to undershoot their true market value. This is, I believe a part of what we are seeing in Dublin. Prices have gone too low; people with cash have taken note; and there has been a flood of buyers coming in to snap up these deals (of the century). There is another point to note here however. When we were back in the crazy days, building all these houses we built many of them in Monaghan, Northern Donegal, the land of Tir Na nOg etc. We also built a lot of apartments in Dublin (stack em high, sell them extremely expensive) but we did not build any where near enough family homes, for a growing population in a booming city. Construction has been no existent over the last 5 years and, as a result the amount of available and suitable family housing (3/4 beds) is quite low. Additionally there is the problem that all the people who's domiciles are in negative equity are unwilling and unable to sell, exacerbating the problem. This is causing a constraint in supply and basic economics tells you, that high demand and low supply forces up prices. In a properly functioning market, builders would react to these price signals and would start building. However, given most of Ireland's developers went bust during the crisis there may not be the demand side reaction that is needed. This might necessitate foreign companies entering the market, to fill the gap which is perfectly fine.
So why is this not a bubble?
1. In my opinion it's a correction for now and nothing more.
2. Most of these purchases are being made with cash which means the banks are not taking any risks, unlike in the previous bubble. This also means the taxpayer is not at risk.
3. The amount of housing transactions in the height of the boom was 90,000 per year. It is now around 10,000 per year. The level of transactions during a bubble tend to be very high.
4. It is confined to South Dublin, the rest of the country is in fact still falling.
5. Even with the recent price rises Dublin is still only catching up with the rest of Ireland in terms of % fall. Both are now heading towards 50% of their peak levels.
6. There is plenty of land that can be developed in Dublin, the glass bottle site is a notable example.
7. Nama have a lot of property that they can release onto the market to meet demand.
In conclusion, I think that all in all we can say that this is not a property bubble. However, if prices were to continue to rise at these levels over a sustained period the situation may change. I feel that this is a storm in a tea cup and that sensationalism is being used by the media to sell papers. As is their right.
We are a long way from the madness of the boom years, and maybe, just maybe, this is the beginning of the end of the recession.
*Which makes me wonder why I am adding to it with this blog
**Thats called irony
***Especially true with property
****In Ireland's case it was the subprime crisis in the US, which was itself a bubble
*****Leave to go and take advantage of other bubbles (London, Canada, OZ)
******See tulip-mania and the South Sea Bubble for historical examples.
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