Learning the lessons of bursting bubbles

EVENTS of the past week suggest the obsession with property as an investment vehicle in this country is far from dead.

The distressed property auction held in Dublin’s historic Shelbourne Hotel last Friday week resulted in 82 of the 84 properties being sold, many achieving prices well above the reserves slapped on them.

Those details have been well documented. What’s more worrying is that, on the basis of the evidence to hand, punters out there still regard property as offering good long-term returns.

The hotel was jammed on the day and people were ringing in bids from the street.

Some auctioneers monitoring the event thought the overwhelming response to the auction suggested property was about to make a comeback.

Do we ever learn?

Long before the boom, The Economist magazine claimed that previous property bubbles took decades to retrieve the values lost after markets collapsed.

Its warnings back in 2005 that the globe was sitting on such a massive property bubble was ignored.

Well after that warning, rounded on by analysts here and condemned as sour grapes by most of us, the Irish banks introduced 100% mortgages to help those with no savings get to fulfil that most fundamental of Irish aspirations, to buy their own little home to keep them safe from the big bad world.

Little did they know that in jumping at the chance to invest, they had bought just at the peak of the boom with their dream of security shattered.

The banking report earlier this week by Peter Nyberg said the entire country got caught up in the property mania and one now wonders if investors are about to indulge in another bout of buying mania?

Nyberg was quite categoric in his findings. Most of us signed up for the easy credit being shoved our way by the banks.

There was an implicit belief that the boom would last forever and the banks themselves seemed to believe that they had security against other assets owned by borrowers that had grown impressively since they had been built or bought for investment purposes.

For that reason Nyberg seems to have thought that he needed to keep the Anglo Irish bankers and other high-profile names linked to the crash out of his report.

Without saying it specifically, it was clear Nyberg wanted to hammer home the message that the very nature of a bubble is such that it required denial on behalf of all of those involved to push it to bursting point.

Without exception, all of those involved, whether lenders, borrowers, the media or indeed the state regulators, all failed to shout stop, he said.

That is the essential nature of a bubble and Nyberg said that the frightening thing was that substantial evidence existed that this economy was in the middle of a property bubble.

From 2005/2006 documented evidence existed in the case of bank lending and other figures that should have caused serious concern among the regulator, the Central Bank, the government and the banks, but few were prepared to question the mania that had gripped the property sector and the country at that point, Nyberg said.

Effectively, we got caught up in a bubble that dragged the whole county and its mother down with it.

People spoke out and some suffered for having the moral courage to do this. But the rush to denial was huge, even when the evidence was strong and pretty incontrovertible, according to Nyberg’s report.

In effect this is the essence of a classic bubble and even when the evidence exists, people fail or refuse to make the connection. It would appear that it is very difficult to identify a property bubble when you are right in the middle of if, and that was Nyberg’s basic conclusion.

In a question and answer session& after the publication of the report this week, he even exonerated the big European banks who supplied us with the wholesale credit that fed the boom.

In his view, they lent in good faith, and were also taken in by the boom factors that had this economy growing faster than most developed economies anywhere in the world.

He said normal rational behaviour vanished and, despite the serious evidence pointing towards catastrophe, the collective mania was so strong that very few were prepared to stand up and say this was wrong.

People were disappointed that Nyberg was not more specific about individuals who were big players in facilitating the crash and saw it as insipid from that point of view.

But Nyberg made clear from his comments and in his report that, as a country we were very much the orchestrators of our own downfall. That does not mean some individuals may not yet be held accountable for a lot of what went on.