Was the Irish boom a giant Pyramid Scheme ?

M

magicbeans

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Heard a great debate / theory in the pub the other nite, that the Irish Boom was just a giant Pyramid Scheme.

The main points were ;

- Cheap money arrived

- Lots of us started buying and selling property

- Like a pyramid scheme those in earlier made good money until the pyramid got too big, compounded by banks tightening the money

- Everyone kept it going as long as possible as Irelands small enconomny has bet everything on manufacturing houses, and forgot about manufacturing anything else.

- The spin off kicked off a boom in service and retail industries as breakfast roll man spent his cash

- No great investment alternatives at present, as stock market falling and Warren Buffet's shoe shine boys have moved into buying shares, certain of a perceived bounce back (One guy swears he heard ordinary 20 year old lads in his local gym quoting Warren Buffet and convincing one another to buy loads of Irish shares now, as they're bound to go back up)

- We'll all back to the 80's where the country largely depended on the public sector wages to keep the economy going (i.e. nurses, teachers, guards spending on service industry's, buying homes etc.)

- Government now likely to make things worse by putting a chainsaw to the public sector in November, as the media seem to be demanding it, and it will be seen as a popular move after the medical card fiasco. (Public sector report due out end Nov. 08)

All of the above points caused a lively debate in my local this weekend, I'm sure it will be no different here ! :) Have fun !
 
jhegarty said:
As there was actual products for value involved (land , houses) then it's not a pyramid scheme
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I thought the same, but it was explained in the pub like this

"A. Howsit going B., I'll sell you this beermat for 89cent "
"B. But I have a beermat, and no beermat is worth 89cent"
"A. But you can sell it to C. for 109cent in few minutes, trust me I'm a beermat agent and beermats are going up in value"
"B. O.K. but I dont have 89cent"
"A. Dont worry about that, "Z" will lend it to you for 93cent"
"B. Sounds good"

. . .1 hour later

"A-Z - Jaysus lads, this beermat crack is great, lets give up everything else and concentrate on making, buying and selling beermats"

. . . .2 hours later

"A-Z - Cmon there must be someone here that needs another beermat apart from their own"

. . . .2 hours 10 mins later

"A-Y - Sorry "Z" no ones buying beermats anymore, and I cant afford to pay you back, heres my stack of beermats"
 
Dont think it was a pyramid scheme magic beans just collective mania, irrational exuberence, greed, in short a massive bubble.

The people really sitting pretty now are landowners who sold during the boom for housing, CPO's etc and who are sitting on huge cash piles at the moment.

Those commentators who suggested the property market was increasingly bubble like were voices in the wilderness. The media were making huge amounts from 50 page glossy property supplements, property search websites were valued at huge multiples of potential earnings, shows like House Hunters, Im an adult get me out of here et al, fueled the belief that property was a one way bet.

Highly paid economists albeit mostly paid by the banks assured us that double digit price increases were sustainable and the bubble would end in a harmless soft landing.

Our politicians got drunk on the revenues that the boom brought, enabling them to spread their ministerial largesse like so many later day Neros and advised anybody who dared question the mania to "commit suicide" but guess what? The emperor has no clothes!

Now people who are facing ruin, with increased unemployment, businesses collapsing and houses being reposessed, mounting debts,may actually take that advice.

But can we really blame the media? Can we really blame the politicians or the developers or the estate agents?

No. We believed. Like a religious cult we followed and we believed everything we were told unquestionably. A 3 bed semi in Mullingar is worth €350,000 - of course it is. A one bedroom apartment in an industrial estate in Sandyford is worth €400,000 - yes siree. And why not buy a nice section 23 in a village you've never heard of in Leitrim to "shelter all the profit" for €280,000, guarenteed rent for the first 2 years - makes sense to me.

The current financial turmoil is a great scapegoat for the bursting of the Irish property bubble. However after the news headlines aren't covering the daily losses or gains from Wall Street and the phrase "credit crunch" becomes soo 2008, regional RTE reporters will be interviewing Irish people coming out of factory gates having received very bad news, going home to a house that seemed to be the Willy Wonker Golden ticket to their future just a few short years ago.

Such dashed expectations have a revolutionary energy and I expect some uncomfotable turmoil in Irish society in the years to come.
 
- We'll all back to the 80's where the country largely depended on the public sector wages to keep the economy going (i.e. nurses, teachers, guards spending on service industry's, buying homes etc.)
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Where does public sector wages come from?
 
It was a phoney market in this sense:

Developer A and developer B both bid for land bank C.

Both developers have “pet” banks (or are the pet of different banks, depending on your perspective), so they start ratcheting up the price and each bank has to follow of lose the business (even though both banks know that the land is not worth that much).

In the end developer A gets the land for €50’000’000 and goes back to his bank for another hundred million to build 400 units on the land.

Eventually the units are built and developer A calculated that he will need to sell each unit for €450’000 in order to pay back the bank and make a profit.

Developer A says goes to his bank and says, “Look lads, if you don’t lend €450’000 to 1000 punters I can’t pay you back the €150’000’000 I owe to you”.

The bank then has no real choice but to offer 100% mortgages at 8 times income levels (and higher) in order to get its money back. Effectively retail banks underwrote their commercial banking risks by giving out mortgages at stupid multiples to their retail customers.
The commercial loans only became viable when they were underwritten against retail mortgages since in its own right the value of the asset that the original loan was made against came nowhere near covering the value of that loan.

Where was the financial regulator, the central bank and the minister for finance when all this was happening?
 
Purple said:
Where was the financial regulator, the central bank and the minister for finance when all this was happening?
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Now then, the FR hasn't done such a bad job you know :rolleyes:

But I agree with your analysis, if not necessarily with the 'have tos'. I have a further culprit to add to you list - the shareholders of the banks that received absurd returns without looking to see where they came from. To me it is like buying a laptop from a guy in the pub for a hundred quid. You know it is stolen, but still, it's really good value. In the main part, the shareholders are mutual funds and should know what a sustainable return is. They are also buy and hold investors so should be concerned with long-term success. My anger stems from the fact that its my money these mutual funds are losing.
 
jhegarty said:
As there was actual products for value involved (land , houses) then it's not a pyramid scheme
Click to expand...
Pyramid Scheme describes it perfectly. Whilst the initial item is a product, its increase in price, which was the real driver, came from no added value or product whatsoever and was sustained by a belief that it would continue to increase in price with no value being added.
 
On a visit to my home town (a small country town about seventy miles from Dublin) in 2006 I was astonished to see the number of new housing estates.

I asked my elderly mother what new factories were in the town to support the growing population. Well she replied, "there’s the meat factory and the furniture factory", both of which were there when I was growing up forty years ago. My next question was " who is buying or renting all the new houses then to which she replied with all innocence " the foreigners working on the buildings”.

Could this continue indefinitely?

I think not!
 
A number of OT posts have been removed.

Please keep to the topic and avoid personalised comments (for instance speculating on alternative user names of posters or making claims that posters are "vested interests").
 
Surely any property inflation could be described thus. Excepting the fact that the correction may not be as acute at the end of a cycle. After all, the price of a building is what the market dictates and markets move both ways.
 
SPC100 said:
I have read a survey that makes a very good case, that zoning regulation, is the ultimate cause of high house prices. i.e. supply of land for building.
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Certainly that is the case in Ireland. We have a huge amount of land considering our small population. There is no way houses should be as expensive as the UK or Holland, where they have a lot less land. Large developers were allowed buy up land around all our towns and cities. Very little land outside that which these developers held was zoned for housing. This helped to artificially inflate house prices. All old news now anyways!
 
Yes it was a pyramid scheme but it was worse because the money to purchase was borrowed. I have heard of some people borrowing money to 'invest' in Pyramid schemes but this would have been at a much lower level and in relation to property all of the Irish boom was borrowed money it seems to me. There is one difference though there is still an asset (albeit a devalued asset) whereas in a pyramid scheme there is nothing at all.
 
shnaek said:
Large developers were allowed buy up land around all our towns and cities.
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A bit naive perhaps to expect that this doesn't happen in other countries?

Its hard to believe that development land in London and other UK cities is held by anyone else except property developers.

In addition, developments around UK cities tend to be restricted heavily due to green belt policies that don't exist in Ireland. These policies create a scarcity of development land and increase prices.
 
I don't believe it acted like a pyramid scheme. Such schemes involve trickery where only the very early incumbents make a profit.
I don't recall banks / building societies tricking anyone into taking a mortgage. The real build up of house prices came from a comnbination of one or more of the following:
a)
 
spending said:
I don't believe it acted like a pyramid scheme. Such schemes involve trickery where only the very early incumbents make a profit.
I don't recall banks / building societies tricking anyone into taking a mortgage. The real build up of house prices came from a comnbination of one or more of the following:
a)
Click to expand...
And with your list, you have it exactly right :)
 
There was also a Global property boom (bubble) which the Irish inhaled like a junkie. If you think back to the conversations between 2001-2006," house prices, location,location,location. " pretty much nothing else....
Free 3rd level education helped to fill the multinationals needs, people who couldn't get a job in Mcdonalds in the mid 90's were now qualified and earning a fairly decent salary, demand for houses was intense and all this now in retrospect looks quite silly.
BTW I'm not knocking Free 3rd level education- just my take on its effect

Capitalism needs at least one Pyramid type scheme(bubble) to keep itself going.
Track back over the years- eircom shares, 90's dot com boom, 2000s property boom ( of which sub-prime was born ) , recent Oil boom , whats next?
Actually that might be a good thread -
What is the next boom cycle that we should all jump on board of?

Roro
 
spending said:
I don't believe it acted like a pyramid scheme. Such schemes involve trickery where only the very early incumbents make a profit.
I don't recall banks / building societies tricking anyone into taking a mortgage. The real build up of house prices came from a comnbination of one or more of the following:
a)
Click to expand...
You don't need trickery when you have stupidity.
 
Whos to blame?
1) The 70s mothers and fathers. These kids were spoilt. They were told 'you can do anything'. However they were not told that to do this you needed to work hard and that riches and dreams are only fulfilled by hardwork and good planning. - Joke!!
2) The people who were so naive to believe the rubbish they were told. Just this morning I got an email re property in Bulgaria with the statement 'we confidently expect a return of 129% over 4 years'. People will get taken in by this rubbish.
3) The corrupt and immoral governments who 'sold' the dream to suckers and who told us to'committ suicide'. Why are they not taken to account. If we had a vote in the morning they would get straight back in again.
4) The legal and auctioneering profession who promoted the scams and who suckled from the dribble of the frothing developers.
5) The planners who encouraged 14 units to the acre.
6) The media for laying down the blueprint for living like the upper classes in their shiny full colour magazines. The 'quality' papers for accepting adverts of a highly questionable nature. The quality papers for having no journalist with the foresight to see what was happening. Where were our wise men with social responsibility? The few that did speak out were demonised by people who had more to gain for the lie to continue.


Sorry. I am having a bad day.
 
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