RYLE DWYER: Rampant property speculation was a gamble that didn’t pay off

THE Government did not do as much as it should have in providing proper leadership. It cut pensions to sitting ministers and deputies, but it did nothing about the untouched expenses. Yet they did more than I expected. That was not a compliment; if that is a compliment, it was simply that they are not as obtuse as I feared. They have learned something from their recent mistakes.

Let’s face it, there are none so stupid as those who don’t learn from their mistakes. With all the pre-budget hype it seemed like they were going to attack the old reliables by putting up the taxes on alcohol, cigarettes and petrol.

Finance Minister Brian Lenihan admitted recently that the increase in VAT in last October’s budget had been a disaster, because it drove €700 million worth of business across the border. Surely that should have been enough to persuade him and his colleagues of the need to reverse the previous VAT increase.

The price of cigarettes did go up. Nobody seemed to comment on it, but the minister said he was putting up the excise on cigarettes by 25%. This was obviously a slip of the tongue.

What he apparently meant to say was that he was raising the price by 25 cent. The television was fortunately relying his script, not what he was saying, so it got it right from the start. If there was a 25% rise in the excise duty, the increase would have been about five times greater.

That might ultimately have forced more people off cigarettes, which would have been to everyone’s advantage, but it is more likely that such a savage increase would have been a great boost for the black economy. Tobacco is a drug, and nicotine addicts must have it, so they will get it one way or another. Individuals would possibly get together and take turns making tobacco runs to Northern Ireland to get cheaper cigarettes.

Cutting the Christmas bonus for the weakest sector could be a serious political mistake. It seemed like a particularly mean act. In effect, the politicians who presided over the mess are mugging Santa Claus and advocating that the country should risk billions to help all those greedy speculators and bankers who got us into this mess in the first place. This item in the budget should really have set the alarm bells ringing. The National Assets Management Agency (NAMA) is being set up to purchase the property loans from the banks in order to free them up to lend money. Those loans would be purchased at “an appropriate price” to be determined. This could be a financial time bomb that could destroy our whole economy.

Economist Peter Bacon warned that the country was getting into trouble with the house price bubble around 2000, but the government essentially ignored him and paid out hundreds of million in rent supplements. Those supplements were not really to help the needy tenants but the greedy property speculators. The fuelled the bubble.

When houses prices were soaring, some homeowners may have been deluded into thinking that they were gaining, but it was only of value to them if they had another place to live. The only people who were really gaining were the property speculators, who are bought up places, forced the prices up, and then sold before the market collapsed. Prices were climbing faster than earnings, which was the recipe for a bubble. Normally price increases slow demand, but in a bubble they generate buyer enthusiasm and lead to increased demands, thereby forcing prices to rise even higher until the bubble bursts.

For years it was obvious that we had a bubble in our house prices and it should have been just as obviously that this was a recipe for economic disaster, because the bigger the bubble the bigger the eventual trouble. To pay back the exorbitant mortgages, people had to earn more, which meant that costs went up and our competitiveness deteriorated.

This was inevitably going to lead to job losses, with more people drawing unemployment assistance and fewer people paying taxes. “Government will then be compelled either to cut services or raise taxes, or both, and these will likely compound the problems,” I wrote here in 2003. “We are already on the slippery slope.”

I did not have any input in writing of the headline of the column, but it is as significant today as it was almost six years ago: “We’re on the road to ruin and the Japanese model is the one to fear.”

During the 1980s Japanese corporations suffered from a decline in profitability, so they gambled on shares and property prices. By 1990 the Japanese property market was worth four times the value of all US property. The grounds of the imperial palace in Tokyo were worth more than all the property in Canada. To purchase a house, people had to take out multi-generational mortgages. In 1986 Japanese interest rates were cut four times until they reached 3%. In the 30 years since 1960 property prices increased by a multiple of 50. Credit and debt rocketed. Billions were lent to people to buy property, so prices spiralled. Most of the property was held only for its capital appreciation, not its productivity.

The richest 20% in Japan saw their wealth quadruple during the boom, but then on Christmas Day 1989 the finance minister announced a rise in interest rates. Within four days the stock market began to fall. By March it had lost a quarter of its value. By September 1992 stocks were down by 65%.

House prices held up at first but that was because very few people were buying or selling property. It has been pretty much the same here during the past year.

Now we are possibly in the opposite of the bubble. Property prices may have dropped by 20% in the past year, but very little is being sold even at that rate. People are not buying because, even if they could get the money, they believe prices are going to go down further in the coming months.

It was not until 1992, well over two years after the bust began and house prices began to fall in Japan. Then they dropped precipitately, losing 60% of their value. Over the next eight years the values declined further, bringing the overall decline to 80% of 1989 price.

This had consequences for the whole nation. A great many corporations went bankrupt and pension funds evaporated, because they had invested their money in overrated property.

When NAMA buys the € 90 billion in toxic loans off the various banking institution here, what percentage of the original price is it going to be considered approrpriate?

Remember our property prices went up around fifty-fold in the 30 years. Will they now drop by 80% as they did in Japan? Whatever about rescuing people who engaged in property transactions in this country, it seems outrageous to expect Irish taxpayers to hazard their future to rescue speculators who recklessly gambled by investing €30 billion in property abroad. Should the taxpayer also refund people who lost money on the Grand National?


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