Ireland's Property Bubble

[Shamrock]

Hi Kiwis,

I moved to your lovely country a few years ago and am very happy here.

One thing though that I'm amazed at and follow very closely is your property boom. Its amazing to watch a country fly down the path towards a crash seemingly with some kind of tunnel vision that nothing like this has happened overseas. Not only Ireland but the US and Japan have had very painful bubbles burst recently. All I read on here and other forums and in the media is that things are fantastic, prices are rising and everyone except the first home buyers are doing great and making a mint.

Prices in Auckland rising at 12% per year and nationally having jumped so much in the last five years it seems very similar to what happened in Dublin and Ireland from the late 90s to the peak in 2007. The banks are giving out loans to anyone with a few cents to their name, property investors are leveraging up to their eyeballs in some cases to build huge portfolios and the demand is far outstripping the stock of housing that has been built over the last few years.

You might argue that Ireland was a very different market and in some ways this is true, lax planning laws, low tax rates and the fact the market was overstocked with tons more houses then required. Plus an incredibly poorly regulated banking and mortgage broker industry compounded many issues. But the same underlying theme that prices are WAY overvalued in NZ is present.

So my questions are these...

Why doesnt anything see the burst coming over the horizon? Is it the white elephant in the room that nodoy wants to speak about until they've cashed in their investment property and made a killing?

Why do banks and brokers keep pushing more and more mortages to people with less and less deposit?

If prices continue at 12% per year in Auckland, does nobody think this is somewhat unsustainable and must come back down to a fair value?

What will people do when all the baby boomers and people retiring want to sell up and cash up for their retirement and suddenly the market is flooded with properties?

I just see no real assessment of the danger that is ahead, I see nothing but seminars on how to make money and people all convinced they can make a killing in property.

Or am I totally wrong to be worried and should just go down to the ANZ and grab $500K for a rental somewhere, shut up and get on with it.

Sean

[Maccachic]

Don't live in Auckland and property is affordable...

I lived in Kilkenny for just over a year lovely town, really like Ireland I left just before the crash.

[Davo36]

You might argue that Ireland was a very different market and in some ways this is true, lax planning laws, low tax rates and the fact the market was overstocked with tons more houses then required. Plus an incredibly poorly regulated banking and mortgage broker industry compounded many issues.

I think you've largely answered your own question with this.

Here in NZ, the banks are in very very good shape, they've made more money through the GFC than the years preceding it. So they have very strong balance sheets.

My understanding of what happened in Ireland was banks lent lots of money to property developers who then couldn't pay back the loans when the GFC hit and they were half way through the developments and wouldn't be able to sell their finished properties for enough even if they did manage to finish them - because house prices dropped a lot. So then the banks went under, or at least would have if the Irish public weren't forced to bail them out. So the taxpayer sucked a big fat kumara (a NZ technical term for losing out) and it was all downhill from there.

Now this kind of happened here in that the finance companies did this kind of risky lending and they all went bust. Were you in NZ for that? So they took the fall (along with anyone invested with them) and things were pretty bad, but not catastrophic. We did have to bail out South Canterbury Finance but that was the only one.

Now if say, house prices drop 30% (as per Weekend at Bernie's prediction) in NZ then he banks would be in trouble but maybe not broke. I imagine their profits would decrease drastically and maybe turn negative for a few years but that would be about it. I imagine they wouldn't have to be bailed out by the NZ taxpayer, but who knows? They are doing a lot of lending just now.

I agree house prices in NZ (and especially Auckland) are too high. But I know why. I build a few apartments a few years ago. It nearly killed me. Local councils in this country have managed to more or less shut off house and apartment construction (yes yes I know I bang on about it all the time) to the degree that the government is stepping in to free up land and them built again. But this will take some time for the numbers of new builds to wind up. So it's simply supply and demand keeping the prices up for the forseeable future.

[Shamrock]

Indeed the banks are in great shape and sending billions in profits back to Oz, but as you say they would struggle with a 30% drop in value and shock-horror actually turn a loss for once.

But what about average Joe on the street? He's potentially facing negative equity when his $800K apartment suddenly is only worth $560K. Or the first time buyer couple who were worried of losing out by not being on the "ladder", bought with hardly any deposit now their house is worth way less then their mortgage is.

Its like nobody is telling these people both sides of the potential story, yes its all rosy now and values are going up up up but why isnt anyone warning Joe and the young couple about the other side of the coin that prices might actually go DOWN one day instead of always UP.

There should be a fair and balanced view presented of what could happen in future to these people, not relentless marketing and access to cheap credit.

[Shamrock]

Don't live in Auckland and property is affordable...

I lived in Kilkenny for just over a year lovely town, really like Ireland I left just before the crash.

True but the rises do seem to be gaining momentum in Welly and Christchurch as well. In reality unless you work in mining, farming, tourism or manufacturing you're probably going to have to live in big city to work.

You're right, Kilkenny is one of Ireland's nicest places. Also make a lovely stout

[speights boy]

We did have to bail out South Canterbury Finance but that was the only one.

Not quite.

Certainly the most significant, and very much of National's making as they approved SCF into the extended scheme from where they failed.
There were 2 others of significance, and then the other smaller ones.

During its two years of operation, investors in nine companies were bailed out by taxpayers.
South Canterbury was by far the biggest, though taxpayers have also footed the bill for Allied Nationwide (about $130m) and Equitable Mortgage ($188m).
Other smaller finance companies to be bailed out were Mascot, Strata, Vision Securities, Rockford, Viaduct Capital and Mutual Finance.

www.stuff.co.nz/business/4859373/A-history-of-bailouts

[mortgage broker]

prices have gone down in places, the two cities with most of the gains both have massive issues with supply as evidenced by rents. If you are getting a 7% rent return, how can you complain.

[Davo36]

Not quite.

Certainly the most significant, and very much of National's making as they approved SCF into the extended scheme from where they failed.
There were 2 others of significance, and then the other smaller ones.

www.stuff.co.nz/business/4859373/A-history-of-bailouts

Righto, I stand corrected.

I guess though all the bailouts, collapses etc. were on a much smaller scale than Ireland's were. There's was around $150 billion.

But yeah if house prices went down a lot it would cause a lot of problems alright.

[speights boy]

I guess though all the bailouts, collapses etc. were on a much smaller scale than Ireland's were. There's was around $150 billion

Correct Davo.
As Shamrock states; one of Ireland's problems was building huge spec developments where no one wants to live.
We had a very small amount of that, but now we can't even build where people do want to live.
(Choir and preaching I know)

[cube]

Hi Shamrock,

Some of the members of the forum will have longish memories that stretch all the way back to 2005/6/7 when property was talk of the town, a crash was imminent and every man, woman and dog would be out on the street. Then came the 'crash' which was spectacular ....... not!

Prices flattened out and fell in $ terms (so probably reasonably significantly in real terms, although with inflation sticking around 3-4% most of the time, the damage wasn't too bad). Some high profile, highly leveraged, investors went broke and I'm sure a number of smaller investors got their timing wrong or circumstances conspired against them (loss of job , 'P' lab, earthquake, ...) but, as far as I can tell, a fair few of us made it through pretty much unscathed.

So, not only have we seen property grow and shrink in value, we have also heard the wolf cry 'crash' once too often - doesn't mean it can't happen, but I think it would take a significant black swan to start it.

[flyernzl]

NZ did have its heavy drop in property values in the crash, but these were largely confined to coastal holiday areas where developers and land bankers were hoping to attract holiday home buyers. I understand that most of these vastly inflated values have still not recovered.

Some small towns have also dropped in value, mostly one-industry places where that particular industry took a bath.

In the cities and larger towns values stalled or dropped slightly. However unlike Ireland most NZ residential houses are either owner occupied or tenanted.
Even if they lost a bit of value, owner occupiers stayed in their houses (they had to live somewhere) and kept paying their mortgage payments.

Unlike some other countries, in NZ you cannot hand the keys to the bank and walk away scot free. You would still owe the outstanding debt. The Banks did not really want the house, they wanted the loan serviced so in almost all cases they went along with it rather than forclosed.

Yes the boom can be oversold. It also worries me when I see the 'Make a million dollars in a month' merchants come out of the woodwork once more, but how do you stop fools from throwing their money away?

Those of us who have been in the game for a very long time just putter along in our conservative ways and let the tides ebb and flow.

[Keys]

but, as far as I can tell, a fair few of us made it through pretty much unscathed.

Was there something which needed worrying about back then?