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Juan Cole
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Circle of Complicity – Dublin property prices

I’ve been a-thinking about this a lot, and it’s a representative analogy of the unique bubble of the Celtic Tiger. It’s also a riddle and a conundrum that explains why property prices in Dublin have been skyrocketing for the last ten years; pricing almost everyone out of the market – everyone except the desperate and the fabulously wealthy. Here’s the problem in a nutshell.

When the Irish government of the early 90s lowered interest rates and introduced incentives for companies (esp in the Finance and IT sectors) in the hope of boosting a long-stagnant economy, they also created ways of defraying tax back as economic stimulus. A company could minimise its bill by investing back in property development. Result: property speculation became big business; new building developments went up everywhere and cranes began to dominate the Dublin town aesthetic. Hotels, residential housing developments, major refurbishments, huge commercial estates. Which meant extra jobs and a greater need for housing, so the demand helped supply and tax incentives along.

With many property developers benefiting from tax breaks and high demand, property prices went through the roof. Everyone who owned a house or two in Dublin suddenly became semi-millionaires. This is why the Celtic Tiger was perceived as a success. Everyone refinanced and got brand new BMWs, investment properties, summer houses in Spain. Quality of life was perceived to have improved but nothing was really fed back into infrastructure, kinda like the Republican idea that tax cuts for the rich will benefit everyone. The hospitals are still shite. Inequality is second only to America.

An interjection at this point would point out that a) the Irish taxation system is about 40 years behind the rest of Europe and b) the government was happy to be getting so much more revenue from its range of new stealth (or hidden) taxes as well as all the extra income tax and stamp duties. Not that this meant revenue went back into infrastructure, not by a long shot. And not that this streamlined or modernised the taxation system; for instance, it was only until recently that you could get away with not declaring income from overseas accounts. In fact, the government doesn’t care at all that many people get away with dodgy declarations (you declare what you want, in essence, if you don’t pay PAYE) because the system is obtuse and expensive accountants are very willing to overestimate your projected income in the hope of securing a loan, or point you to ways of defraying your bill…).

In the first years of the boom, real estate agents and speculators made huge sums of money and consequently lent the industry an air of cutthroat greed which trickled down to the bottom, with desperate renters trying to outbid one another for subdivided crapshacks (and landlords taking the highest bids). New money made a lot of landlords very arrogant. But, people selling property could make even more because most sales-deals are not of the Western, above-board kind but a dodgy three-part system of closed auctions where bidders are played off against eachother via a ludicrous, nominal guide price. A house sold at auction can go up to four, five times higher than the guide price, especially if already near the million mark. The agents can treat buyers like pawns, hanging on for the competitive bidders, and of course they make huge commissions when trumped-up prices go higher. Even when the closed auction seems to be over and done, there’s still an opportunity for a higher bidder to come in and outbid the final offer. To wit: it’s all deliciously corrupt and greedy if you know how to fake a few bids with your real estate chums. The industry regulator, of course, thinks there’s nothing wrong with the current system, writing it off as merely the economics of a booming economy. Speaking of write-offs, one of the tax incentives makes it more worthwhile for a company to leave a property empty than to lower the rental price and get tenants in. Go figure. Keep them prices high.

So, tax incentives and speculation spiked the prices, and real estate agents benefit from a very dodgy system (as do their notaries and solicitors). Add in the banks willing and eager to lend everyone huge sums at low rates, and then price hikes are no biggie. If it continues at this rate, they say, then imagine what it’s worth in 35 years when you’ve finished paying your mortgage! (Do a quick calculation: if you pay a third to two thirds of your mortgage in added interest, and the average price of a house in Ireland is around €350,000, and there are several hundred thousand in the same boat, then you can see why Ireland is perceived as a wealthy economy: the finance sector is laughing all the way to, or rather, inside its own bank).

Now, in an average year the government pulls in well over a BILLION euro in stamp duties (hey, like a stealth tax), so of course the government benefits from all the speculation too. None of that money goes into regulating the industry properly or fairly. Government has cosy relations with developers (see tax breaks: those hands don’t wash themselves) and government favours dodgy or corrupt developers (one roads/construction company favours exploiting Turkish labour at half the minimum wage. No harsh penalties or regulation there. Of course they can outbid all the other companies for government tenders, they don’t even pay their workers properly, the workers are dependent on the company for work visas). Many property developers are either corrupt in not paying fair taxes and fees, or completely circumventing regulators and auditors (think dodgy changes in name) and others are adept at exploiting government contracts (like the hilariously useless LUAS) by dodgy workmanship, dodgy and slovenly planning and by coming in over three times the alloted budget (thankyou taxpayer!). Which, for a government tender, you’d think would have the entire nation up in arms. But no, the two LUAS lines don’t even connect, or integrate well with other public transport, or even travel in meaningful directions. But says the government: everyone’s lifestyle is good, property prices are healthy and high, there couldn’t possibly be anything wrong! Well, unless of course you’re a first time buyer looking at €400,000 for a two bedroom flat not too close to the city, which is probably poorly constructed or leaky or showing signs of early structural damage. Thank the builders, contractors, tax laws and governmental incompetence for that one.

When everyone gets a kickback – owners, developers, agents, the government – there simply IS NO PROBLEM. The classic Irish head-in-the-sand. The beauty of which is that there’s really no fine line between mild corruption and general incompetence, from the government on down. Which is worrying.

But, it has created a bubble of artificially exaggerated and unreal property prices – the banks are only happy to lend acres of money – but it cannot last and the entire circle of complicity will fall apart when the banks start to ratchet up interest rates by whole points, by necessity. If I remember rightly, several EU reports have indicated this is becoming glaringly necessary and long overdue if the economy is to stay viable. Most people paying off a second or investment property will be forced to dump it, there’ll be an oversupply of property all over the shop, and prices will be forced down by simple economics. There’s already a feeling of oversupply in commercial lets. Many middle-income folks won’t be able to keep up repayments and go into hock, and the bank will cash in again. And the contractors will be fat enough by then to move their money and projects to new EU countries looking to repeat the magic Celtic formula.

In sum then: dodgy government » dodgy tax laws + dodgy real estate agents » cheap loans = unreal property values » imminent collapse of the value bubble. And everyone does of course suspect that it’s unsustainable, but whatchoo gonna do?

posted by rino breebaart  # 11:29 pm
Quick calculation via AIB: if you borrow 300k for 35 years at the standard variable rate, you pay €1282 per month. Which, after 35 years, comes to €538,444 paid in total. Which means 238,444 in interest to the bank!
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Alternatively, read about it at: The Slow Review or the long blog. Or even Nurture Health

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