# When did Morgan Kelly first identify the property bubble?



## Brendan Burgess (18 Mar 2012)

This arose from this thread about Ronan Lyons' lecture on property. I have always wondered when the economists first forecast the bubble. 

It appears to be McWilliams in 1999  and Morgan Kelly was as late as [broken link removed]Does anyone else have an earlier report for Kelly? 

McWilliams spoke about it as early as 1999.  

(The heading says 1999 - I presume that this is correct?)

Gay Byrne: Do you think it's going to crash? 
McWilliams: There is no doubt about it. Possibly over the next 18 months/24 months
The property market is a classic speculative property bubble 
The media says "It's all about the labour force" but the labour force is rising by 2% while property prices are rising by 40%.
Byrne: Is that a sure fire indication that the bubble is about to burst? 
McWilliams: absolutely. 
Byrne: and there will be a lot of weeping and gnashing of teeth and negative equity and people stuck in mortgages?
McWilliams: In all these cases, someone is left holding something they have paid too much for.
Byrne: I don't want to dwell on this, but how come every other economist is saying. "No. We are fine. It's boom time,"
McWilliams: In 1995 , when I was working in a Swiss bank, it seemed to me that Ireland was going to grow very strongly and I wrote that we would grow at 3 times the European average [Didn't answer why no other economist was making the same prediction]


----------



## ajapale (18 Mar 2012)

Im not sure about morgan but tedd posted here in 2002 about a property buble.

Is the investment property boom the next dotcom bubble?


----------



## Sunny (18 Mar 2012)

Williams was still years out with his prediction. He would have cost his clients a lot of money. He also didn't predict the global financial system meltdown.  I can tell you now that there is a bubble in gold prices. It will go down. Publishers can PM me to discuss book deals.


----------



## jhegarty (18 Mar 2012)

Was there a bubble in 1999 ?


----------



## becky (18 Mar 2012)

Sunny said:


> Williams was still years out with his prediction. He would have cost his clients a lot of money. He also didn't predict the global financial system meltdown.  I can tell you now that there is a bubble in gold prices. It will go down. Publishers can PM me to discuss book deals.



Very good sunny.


----------



## Brendan Burgess (19 Mar 2012)

Sunny said:


> Williams was still years out with his prediction. He would have cost his clients a lot of money.



Hi Sunny

I remember when dot.com shares were overvalued, telling people this. They rubbished me for getting  "only" 10% returns on my bricks and mortar shares such as CRH, IAWS, AIB, etc. 

At the time I believed that markets were efficient, so it was odd telling people that the market had overpriced those particular shares. 

People whom I had told to sell off their shares gloated for a very long time as the shares  went from being overvalued to bubble to complete madness, but it seemed to last a long time. 

Assuming that McWilliams first advised people to stay out of the market in 1999, would his clients not be significantly better off on average? I think that someone who bought in 1999 would have paid cumulatively less rent than interest on a mortgage.  Prices are probably back to 1999 levels.  

I think he was wrong that it was a bubble back then, but he was not far wrong.


----------



## DerKaiser (21 Mar 2012)

Brendan Burgess said:


> Assuming that McWilliams first advised people to stay out of the market in 1999, would his clients not be significantly better off on average? I think that someone who bought in 1999 would have paid cumulatively less rent than interest on a mortgage. Prices are probably back to 1999 levels.
> 
> I think he was wrong that it was a bubble back then, but he was not far wrong.


 
I think the following situation would be far more likely if you initially took McWilliams advice in 1999.

It's December 1999 and I'm 30, getting married and we want to settle down in our own place. We're interested in a house worth €200k. The bank will give us a €160k mortgage and we could pull the rest together. I listen to DMcW (he's convincing) and persuade the other half to wait a few years.

Come December 2002 we start getting impatient as things are turning out quite the opposite, our target house is now €290k. Surely there will be an even bigger fall quite soon?

Roll on December 2004 the same house is up to €355k. Very frustrating.

It's Christmas 2006. 7 Years on from initially thinking about getting a home. We're 37 have a couple of kids and haven't saved much as we always seem maxed out on credit cards, but hey, everyone is in the same boat. The house is now worth €440k, but we're doing OK with a couple of jobs and the bank will lend us €400k. We take the plunge...

If we had the stength of conviction to wait 12 years from McWilliams initial prediction we might have fared as well as if we had bought the place to begin with. But that could be a very frustrating course of action and would require us timing our entry to perfection - and that's a very big & unlikely assumption to make.


----------



## Brendan Burgess (21 Mar 2012)

Hi Kaiser

That indeed would be a disaster, but I don't think you can blame McWilliams for being right for so long. 

I remember during the dot.com bubble, Warren Buffett was severely criticised for underperforming the market for some long period of time. He was able to withstand the pressure though. 

Brendan


----------



## Bronte (21 Mar 2012)

All economists will at one time or another be right, most of the time they are wrong. But they do not have a crystal ball no more than anyone else.


----------



## Brendan Burgess (21 Mar 2012)

Apparently  invested in the South Sea Company and made a lot of money by selling out early. But he bought back in again and lost £20,000 - I think his entire wealth at the time. 



> Sir Isaac Newton, scientist, master of the mint, and a certifiably  rational man, fared less well. He sold his £7,000 of stock in April for a  profit of 100 percent. But something induced him to reenter the market  at the top, and he lost £20,000. "I can calculate the motions of the  heavenly bodies," he said, "but not the madness of people."



It's not clear if he was trying to second guess the market, or felt like Der Kaiser's friend that the market must be right. 

If one had a family, it would have been difficult to stay out of the property market since 1999. And it would be difficult enough to know when to go back in. 

Ronan Lyons spoke of some people he knew who correctly anticipated the property bubble and sold out, only to invest the proceeds in bank shares.

It's not enough to get one part of the forecast right. One has to get it all nearly right.


Brendan


----------



## Duke of Marmalade (21 Mar 2012)

House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment.   That tallies with my own experience.  I bought back in 1988.  For the 90s it was fairly pedestrian but by late nineties it had increased to about 200%.  By the height trades in our area were valuing my house at 10 times what I paid for it.  I guess its back to about 5 times.  

McWilliams was getting it spectacularly wrong even way back then.


----------



## jhegarty (21 Mar 2012)

Duke of Marmalade said:


> House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment. McWilliams was getting it spectacularly wrong even way back then.



Add to that you would have 12/13 years paid of a mortgage.

If you had a 20/25 year mortgage you are over half the way there.


----------



## staff (21 Mar 2012)

I bought a house in 1999 for what would be considered a very modest sum by today's standards but if it comes down to percentages I paid 50% more than the person who owned it previously and they had only bought 18 months earlier.  I would consider that quite a jump - and even though the prices have fallen quite considerably over the last 4 years they have still not reached 1999 levels - not yet anyway....


----------



## clownie (21 Mar 2012)

In some part of the country they have reached 1999 prices and in some cases even less when you convert the present price back to punts. The realistically priced houses on daft or myhome are around 1999 prices (we bought our house that year so know the prices for Dublin and Meath back then).


----------



## DerKaiser (21 Mar 2012)

Brendan Burgess said:


> It's not enough to get one part of the forecast right. One has to get it all nearly right.


 
Exactly. 

I admire the Buffet approach when it comes to investment - if I don't understand the fundamentals I'm not interested. It will help you avoid costly mistakes.

Knowing the fundamentals, however, is often dwarfed by the "madness of people". House prices may very well have reached a point at the end of 1999 where they were overvalued. Understanding this was effectively worse than worthless, however, unless you had 13 years to kill whilst waiting for them to return to their fundamental value.


----------



## Bronte (22 Mar 2012)

DerKaiser said:


> House prices may very well have reached a point at the end of 1999 where they were overvalued. Understanding this was effectively worse than worthless, however, unless you had 13 years to kill whilst waiting for them to return to their fundamental value.


 
Or if you ignorred McWilliam in 1999 and bought then and listened to Kelly in 2006 and sold.  

.


----------



## ashambles (22 Mar 2012)

In my opinion there were two separate bubbles.  So someone could express an opinion about the first one that didn’t necessarily carry through to the second. It’d be like predicting a stock price to collapse for one reason, but it doesn’t, but then it does collapse several years later for some another reason, so you can be accidentally right.

   In McWilliams case he was absolutely correct when he called the second bubble in the 2000s, the earlier one - maybe, it’s not as clear-cut. 

  Bubble #1 finished around 2001-2, after a very strong dollar and the dot com bubble had ramped up salaries across the MNC and related sectors. This briefly allowed workers in these sectors compete for housing against the clique of traditional Irish higher income earners. It was finished off by a combination of factors, 9/11, the dot com bust, weaker dollar and changes to tax relief due to the Bacon report.  

  However bubble #1 was never allowed deflate beyond a couple percent, there was construction industry/“Galway Tent” panic that prices hadn’t simply stopped rising but were dropping, so the tax relief changes were reversed and massive government spending was carelessly applied to the economy.   

  Unfortunately then  the sight of people who’d been predicting the demise of bubble #1 being seemingly being proved wrong seemed to instil in the social partners a feeling of invincibility. If you’re “right” for 10 years it’s hard to think that you may just be lucky.

  To see that first bubble end, you might notice the little stutter on the graph around 2002, the only dip from 1996 to late 2006. [broken link removed].


----------



## Brendan Burgess (22 Mar 2012)

Duke of Marmalade said:


> House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment.
> 
> McWilliams was getting it spectacularly wrong even way back then.



I had it in my mind that house prices were back to 1999 levels. From looking at the graph, they seem to be back to "just" the 2002 levels. 

So McWilliams was way too early and people would have lost out by following his advice. And, of course, this is not just a financial loss. They would have been renting for the past 13 years instead of living in their own home. 

Brendan


----------



## Brendan Burgess (22 Mar 2012)

jhegarty said:


> Add to that you would have 12/13 years paid of a mortgage.
> 
> If you had a 20/25 year mortgage you are over half the way there.



Hi j

I don't think that this argument is valid. Someone who was renting instead of buying, could have saved the capital repayment element of the mortgage, so they would have this money available to them now.

Brendan


----------



## Duke of Marmalade (22 Mar 2012)

Nice chart _ashambles_. So there it is in glorious technicolour, today's prices are considerably ahead of 1999's. 1999, with hindsight was not a bubble by any accepted meaning of that term. Easy for McWiiliams to get it wrong as we had just experienced substantial price rises, but just as with the "blanket guarantee was a master stroke" David never admits to his mistakes.

The fact is that in the early 90's/1980s when interest rates were astronomical house prices were artificially low. More normalised interest rates caused an appropriate "correction".

Unfortunately the correction did not know when to stop and went out of control fuelled partly by still further falls in interest rates.


----------



## Chris (23 Mar 2012)

Brendan Burgess said:


> Assuming that McWilliams first advised people to stay out of the market in 1999, would his clients not be significantly better off on average? I think that someone who bought in 1999 would have paid cumulatively less rent than interest on a mortgage.  Prices are probably back to 1999 levels.
> 
> I think he was wrong that it was a bubble back then, but he was not far wrong.


I agree that he was not far wrong. He predicted a bubble that would spectacularly collapse which happened. It isn't the case that he said house prices will go down a bit and when they eventually did he claimed glory. 

If you use the now discontinued PTSB house price index, then the peak average price was €310,000 at the end of 2006. If you use the CSO house price index you see that since the peak prices have dropped by 48%. That means the average national price is now about €161,000. Going back to the PTSB house price index reveals that the last time that average price was achieved, was around June 2000. So we are almost at 1999 levels, with so far no end in sight for a slow down in the decline.



Brendan Burgess said:


> It's not enough to get one part of the forecast right. One has to get it all nearly right.


Yes, you can completely negate a good decision with one bad decision. But why people sold property, because they believed the bubble was about to burst, and then put all that money into banks who would obviously be most affected by a property bubble is beyond me.

We sold our house in early 2008, as I was about to change job and I didn't want a longer commute than I had. At the time friends, family and the media suggested that we take our profit and buy a new home and possibly an investment property too. I did not buy this idea, even with pressure from my wife. At that stage prices had been declining for several quarters and the sub-prime crisis was slowly unravelling. 4 years later, we still rent, have one child with one on the way and are no less happy than if we owned the house. While I did invest a small amount in bank shares, I certainly didn't put all my eggs in one basket.

My point is, that you do not have to get everything right or have some magic ability to foresee certain possibilities.



ashambles said:


> In my opinion there were two separate bubbles.  So someone could express an opinion about the first one that didn’t necessarily carry through to the second. It’d be like predicting a stock price to collapse for one reason, but it doesn’t, but then it does collapse several years later for some another reason, so you can be accidentally right.
> 
> In McWilliams case he was absolutely correct when he called the second bubble in the 2000s, the earlier one - maybe, it’s not as clear-cut.
> 
> ...



A great post and right on the ball. I would add to it that it wasn't just the Irish government that didn't let the first bubble deflate, they would not have been able to do this alone. What really kept the first bubble from bursting is the unprecedented level of easy money policy by the Fed, ECB and BoE. And the same cronies are trying to do the same thing now. Will they ever learn.



Duke of Marmalade said:


> Nice chart _ashambles_. So there it is in glorious technicolour, today's prices are considerably ahead of 1999's. 1999, with hindsight was not a bubble by any accepted meaning of that term. Easy for McWiiliams to get it wrong as we had just experienced substantial price rises, but just as with the "blanket guarantee was a master stroke" David never admits to his mistakes.
> 
> The fact is that in the early 90's/1980s when interest rates were astronomical house prices were artificially low. More normalised interest rates caused an appropriate "correction".
> 
> Unfortunately the correction did not know when to stop and went out of control fuelled partly by still further falls in interest rates.



That chart only goes as far as 2010, a lot of decline has happened since. As I already pointed out above, prices are back to about June 2000 levels.

If you had not bought in 1999 and waited until now you would not be worse off for it. What you would have spent on rent you would have saved on interest, capital payments, house/life insurance and maintenance costs. And in many places today you can rent nicer houses than you could afford to buy and you have much more mobility and flexibility if things go wrong on the job front.


----------



## DerKaiser (23 Mar 2012)

Chris said:


> I did not buy this idea, even with pressure from my wife.


 
Your finest achievement was keeping the wife happy with this plan! Hard to do that even if you are proved to be spectacularly correct subsequently!!


----------



## Brendan Burgess (23 Mar 2012)

Hi Chris

Someone else pointed out that McWilliams said that the 1999 prices were already a bubble.  He wasn't predicting that house prices would not increase. He was predicting that they would collapse from the 1999 levels. So it would be reasonable to assume that his prediction was that that they would fall by 50%.

He was way wrong. 

Brendan


----------



## Purple (23 Mar 2012)

Brendan Burgess said:


> Hi Chris
> 
> Someone else pointed out that McWilliams said that the 1999 prices were already a bubble.  He wasn't predicting that house prices would not increase. He was predicting that they would collapse from the 1999 levels. So it would be reasonable to assume that his prediction was that that they would fall by 50%.
> 
> ...


But was he wrong because of the reckless pro-cyclical policies of the government(s)? Policies that destroyed the productive sector of the economy and let to the disaster we are now in the middle of?

It's a bit like someone blowing their brains out to prove their doctor wrong, when he tells then that their 80 a day smoking habit will kill them.


----------



## Duke of Marmalade (23 Mar 2012)

Purple said:


> But was he wrong because of the reckless pro-cyclical policies of the government(s)? Policies that destroyed the productive sector of the economy and let to the disaster we are now in the middle of?
> 
> It's a bit like someone blowing their brains out to prove their doctor wrong, when he tells then that their 80 a day smoking habit will kill them.


I don't understand your point or your metaphor. McWilliams was stating that 1999 prices were way over the top and due a collapse. We have different versions of the 13 year intervening performance from being at least 50% up to at very worst being level. Now we have had the most monumental financial and economic cock-up of all time and still McWilliams got it wrong. Imagine if we had behaved sensibly (and I mean the whole world) from 1999 onwards, how very badly wrong would he have been then. 

In other words McWilliams eventually got lucky and still got it badly wrong. If you want a metaphor, it is if I tip some horse in a race and during the race a freak accident takes out most of the rivals and still I don't win.


----------



## Chris (23 Mar 2012)

DerKaiser said:


> Your finest achievement was keeping the wife happy with this plan! Hard to do that even if you are proved to be spectacularly correct subsequently!!


Actually was a lot easier than I first expected. I worked out how much buying a new home would cost after stamp duty, legal fees, etc. and then showed her that the price of the house would have to go up by x%, at a time when every month prices were declining, just to break even. We then looked at rental and realized that we could rent a house we couldn't afford to buy and have been happy since. Once there is a leveling off in prices we will probably revisit the idea of buying property.



Brendan Burgess said:


> Someone else pointed out that McWilliams said that the 1999 prices were already a bubble.  He wasn't predicting that house prices would not increase. He was predicting that they would collapse from the 1999 levels. So it would be reasonable to assume that his prediction was that that they would fall by 50%.
> 
> He was way wrong.


Prices haven't stopped falling and have shown no sign of slowing down. Just because he didn't call the exact peak does not mean that he will be proven wrong.

I would also point out that when you adjust house prices for inflation the whole picture changes in McWilliams favour. Since January 2000 Eurozone inflation has resulted in a 30% increase in consumer prices (I calculated this based on the ECB's official figures). The average house price at the start of 2000, according to the PTSB house price index was €145,000, which adjusted for inflation is €189,000. As mentioned in an earlier post, we have seen a 48% decline so far from a peak price of €310,000 to €161,000. So adjusted for inflation we have seen a decline of 15% since January 2000, with no end in sight yet.

These figures would be more meaningful using Ireland's inflation figures, as Irish inflation was a lot higher than the Euro average for quite a few years. Does someone know a good source for irish inflation figures since 2000?


----------



## Brendan Burgess (23 Mar 2012)

Hi Chris

I am not sure that inflation is relevant. 

Let's say in 1999 I was thinking of buying a house for €100,000 with an interest only mortgage of €100,000. The alternative was to rent a house worth €100,000.

In the intervening period, I reckon that the interest paid has probably been a bit lower than the rent paid. But let's assume that the ongoing cost was no different. 

Today I have a mortgage of €100,000 and the property is worth around €130,000. So as of today, the decision to buy was better. 

McWilliams said we were in a bubble. So if I had owned a house worth €100,000 in 1999, I should have sold it in the expectation that at some stage in the future I could buy it back at €50,000 when the bubble burst. 

Prices will need to fall around 60% from their _present _levels for this to be correct. 

brendan


----------



## Sunny (23 Mar 2012)

Chris said:


> Prices haven't stopped falling and have shown no sign of slowing down. Just because he didn't call the exact peak does not mean that he will be proven wrong.


 
McWilliams said we were in a bubble in 1999 and that a crash could possibly occur in the next 18-24 months. He was talking about a crash from 1999 prices. So he missed the huge price growth of the next 8-9 years before the actual crash happened. 

If you had listened to him in 1999 and sold your property on the expectation that you would buy it cheaper in 18-24 months, you would be pretty annoyed to find yourself still waiting..... 

People predict bubbles all the time. There is no great science in it. There is a bubble in gold. There is a bubble in China. There is a bubble in certain parts of Australia. There seems to be a growing bubble in certain commodities. Woopee. Doesn't make me an economic sage.


----------



## Chris (23 Mar 2012)

Brendan Burgess said:


> Hi Chris
> 
> I am not sure that inflation is relevant.
> 
> ...



I disagree. I think inflation is a hugely important aspect as otherwise you are comparing apples with oranges. Your example has several flaws. 
1) Most importantly, almost nobody took out 100% interest only mortgages in 1999, but it does highlight the effect that inflation has on debt, i.e. positive. 
2) I would say that cost of interest, insurances and maintenance over the past 11 years has on average been higher than rental costs would have been.
3) To correct your example simply in nominal terms: A €100,000 house at the end of 1999 would now be worth €110,000, but €110,000 of today's money is equivalent to €84,000 in 1999.

Yes your debt has gained in value by 30% through inflation, but the asset you purchased is now worth less than what it was at the end of 1999. Your example shows how you could have hedged against a downturn in prices, but it is simply not a realistic example for the majority of people. 

I found a reference in MoneyWeek magazine from 16 May 2008 where they talk about a Goldman Sachs study on house price crashes. In that they define a house price crash as an inflation adjusted decline of more than 15%. The magazine has a nice graph showing past house price crashes, where the largest one at the time was Japan with 44%. Ireland's decline has been pretty much unprecedented, and I would agree that if McWilliams said in 1999 that prices would drop by 50% from that level that he is still far off. But by Goldman Sachs' definition we have a house price crash from late 1999 levels. Did McWilliams actually say how much of a decline there would be from that level?



Sunny said:


> McWilliams said we were in a bubble in 1999 and that a crash could possibly occur in the next 18-24 months. He was talking about a crash from 1999 prices. So he missed the huge price growth of the next 8-9 years before the actual crash happened.
> 
> If you had listened to him in 1999 and sold your property on the expectation that you would buy it cheaper in 18-24 months, you would be pretty annoyed to find yourself still waiting.....


That is entirely subjective. People would not be worse off today had they rented the property they bought in 1999; and I would go so far to say they would be financially better off. Only if owning a property is one of the most important things to you (which it is to many Irish people) would you be annoyed today. But from a financial point of view you are no worse off.


----------



## Sunny (23 Mar 2012)

Chris said:


> That is entirely subjective. People would not be worse off today had they rented the property they bought in 1999; and I would go so far to say they would be financially better off. Only if owning a property is one of the most important things to you (which it is to many Irish people) would you be annoyed today. But from a financial point of view you are no worse off.


 
Well actually you are. You could have kept hold of it until Morgan Kelly came out in 2006 and then sold. Morgan Kelly called the bubble correctly. David McWilliams didn't.


----------



## Firefly (23 Mar 2012)

Chris said:


> That is entirely subjective. People would not be worse off today had they rented the property they bought in 1999; and I would go so far to say they would be financially better off. Only if owning a property is one of the most important things to you (which it is to many Irish people) would you be annoyed today. But from a financial point of view you are no worse off.


 

Hi Chris, this might be true in absolute terms, but only if those renting were disciplined to save the equivalent capital repayments that would have been made under a non-interest only mortgage. It would be easy for someone to reduce their rate of savings as they see house prices falling as they would need less of a deposit. I fully accept that it's a personal choice and they indeed may have had to opportunity to be better off, but I think most people would start to spend more once they reached a certain level of savings.


----------



## Purple (23 Mar 2012)

I sold my investment property in August 2008 because I saw the crash coming. Can I get my own thread?


----------



## Purple (23 Mar 2012)

Duke of Marmalade said:


> I don't understand your point or your metaphor. McWilliams was stating that 1999 prices were way over the top and due a collapse. We have different versions of the 13 year intervening performance from being at least 50% up to at very worst being level. Now we have had the most monumental financial and economic cock-up of all time and still McWilliams got it wrong. Imagine if we had behaved sensibly (and I mean the whole world) from 1999 onwards, how very badly wrong would he have been then.


If the Irish government had behaved prudently after the dot-com bubble burst and not massively over-stimulated the property market through tax breaks etc then there would probably have been a drop in prices then. That’s the point I was making. I’m not defending McWilliams’s modus-operandi, I’m suggesting that the reason that there wasn’t a drop in house prices in the early 00’s was because of stupid and ultimately very damaging government economic policies. 

 I was going to reply to the second bit of your post but I’d visions of a prolonged metaphor fight which could quickly descent into the ridiculous (or at least it does when I’m in the pub )


----------



## Firefly (23 Mar 2012)

Purple said:


> If the Irish government had behaved prudently after the dot-com bubble burst and not massively over-stimulated the property market through tax breaks etc then there would probably have been a drop in prices then. That’s the point I was making. I’m not defending McWilliams’s modus-operandi, *I’m suggesting that the reason that there wasn’t a drop in house prices in the early 00’s was because of stupid and ultimately very damaging government economic policies. *
> 
> I was going to reply to the second bit of your post but I’d visions of a prolonged metaphor fight which could quickly descent into the ridiculous (or at least it does when I’m in the pub )


 
Whilst that's true, I'm not sure (and I stand to be corrected) if FG/Labour were in power if they could resist giving the people what they wanted either...and most people were happy with rising house prices and wages...


----------



## Chris (23 Mar 2012)

Sunny said:


> Well actually you are. You could have kept hold of it until Morgan Kelly came out in 2006 and then sold. Morgan Kelly called the bubble correctly. David McWilliams didn't.



Yes, you are worse off than the best possible outcome of having bought in 99 and sold in 2007, but you are heading into market timing here. Bottom line is, you are not worse off today than in 99.



Firefly said:


> Hi Chris, this might be true in absolute terms, but only if those renting were disciplined to save the equivalent capital repayments that would have been made under a non-interest only mortgage. It would be easy for someone to reduce their rate of savings as they see house prices falling as they would need less of a deposit. I fully accept that it's a personal choice and they indeed may have had to opportunity to be better off, but I think most people would start to spend more once they reached a certain level of savings.



Yes, that is entirely possible. If people made normal mortgage payments then the they would have built up equity in the house, and if renters saved money they would build up equity/assets in the form of cash savings. I agree that a mortgage forces some sort of discipline on people, so there is a benefit from that point of view. And there are of course all sorts of other benefits that come with home ownership.
But purely from a numbers point of view, you would not be better off.



Firefly said:


> Whilst that's true, I'm not sure (and I stand to be corrected) if FG/Labour were in power if they could resist giving the people what they wanted either...and most people were happy with rising house prices and wages...



100% agree. I have posted this elsewhere, but no matter what party had been in power, and even if the government had 100% regulation and control over banks, they would have done exactly the same as the banks actually did. This is evidenced by, to my knowledge, no politician calling for an increase in stamp duty, decrease in mortgage interest relief, increase in interest rates, increase in minimum deposits. Those that still couldn't get mortgages under what are now termed too easy lending practices, were then helped out by various government schemes. If anything, those in opposition regularly came out with comments that what government was doing was too little and too late.


----------



## Firefly (23 Mar 2012)

Chris said:


> 100% agree. I have posted this elsewhere, but no matter what party had been in power, and even if the government had 100% regulation and control over banks, they would have done exactly the same as the banks actually did. This is evidenced by, to my knowledge, no politician calling for an increase in stamp duty, decrease in mortgage interest relief, increase in interest rates, increase in minimum deposits. Those that still couldn't get mortgages under what are now termed too easy lending practices, were then helped out by various government schemes. If anything, those in opposition regularly came out with comments that what government was doing was too little and too late.


 

As this is the 2nd time that FG/Labour had to clean up FF's mess, I think we are in all liklyhood going to see FF in government again whenever this mess is cleaned up with the promise of lower taxes, to start with, and the whole thing kicks off again. Mental note....sell my house 3 years after DMcW predicts a bubble!


----------



## DerKaiser (23 Mar 2012)

Firefly said:


> As this is the 2nd time that FG/Labour had to clean up FF's mess


 
From my understanding of the last time ('82 to '87) they just looked after the mess for a few years!


----------



## Brendan Burgess (23 Mar 2012)

Chris said:


> I disagree. I think inflation is a hugely important aspect as otherwise you are comparing apples with oranges. Your example has several flaws.
> 1) Most importantly, almost nobody took out 100% interest only mortgages in 1999, but it does highlight the effect that inflation has on debt, i.e. positive.
> 2) I would say that cost of interest, insurances and maintenance over the past 11 years has on average been higher than rental costs would have been.
> 3) To correct your example simply in nominal terms: A €100,000 house at the end of 1999 would now be worth €110,000, but €110,000 of today's money is equivalent to €84,000 in 1999.



1) The assumption of interest-only is to compare like with like. I have seen people comparing mortgage repayments with rental payments which is incorrect. They would have to compare mortgage repayments with rent + savings.  But it's simpler and no less valid to compare rent with the interest on a mortgage

2) Was rent higher or lower than interest?  I just don't the answer to this. Maybe someone like Ronan Lyons could crunch the numbers. I have assumed that they were about the same. 

3) A €100,000 house at the end of 1999 would now be worth €110,000, but €110,000 of today's money is equivalent to €84,000 in 1999. 

But you are missing the point. The €100,000 of debt is worth €77,000 so you are still ahead.  You can't adjust one without adjusting the other. 

Brendan


----------



## Duke of Marmalade (23 Mar 2012)

_Chris_ I think the _Boss_ has fairly well trumped you there on the inflation point. Why are you on your own supporting McW here? Is it just contrarianism? Even McW would be embarrassed to claim any prescience with that 1999 call.

As to rental yields, intuitively one would expect these to be higher than interest, as there is the third party, the landlord, to feed. [broken link removed] link gives us some idea. Resi rental yields are about 9% at today's prices which we agree are at least as high as 1999 prices. So I think it is reasonable to compare these with the average interest rate of a mortgagee, let's say 5%. I really cannot see how anyone can persist with an argument that says renting instead of buying back in 1999 would have turned out the superior option.


----------



## Chris (3 Apr 2012)

Just to clarify, I'm not a fan of MacWilliams and I 'm not defending his position for the sake of doing so. There are many things where I agree with him but also many where I totally disagree. He is not an economist I turn to for opinion.

As for the impact of inflation on the debt, my point is that we shouldn't be looking at how an asset purchase was financed when trying to assess whether and when the asset was a bubble. Investing in property through debt is simply a hedge against inflation. If someone had bet on tech stocks in 1999 and hedged against a large downturn that would not mean there was no bubble.
The subject of debate here is when a property bubble was identified and whether that call was correct. Fact is that prices are now down 15% on 1999 prices in inflation adjusted terms. Another fact is that house prices have still not hit bottom. I don't want to go against posting rules and I certainly do not have a crystal ball. But if you consider that in the UK the average income to house price ratio went down to about 3 after the bubble in the 90s and that the average income in Ireland is about €34k then house prices could still have a long way to fall.

Where the impact of inflation on debt does come into account is when you want to try and figure out whether you would have been better off renting or buying in 1999. I think it would be interesting to work this out. Does someone know how or where to calculate the cost of a mortgage over a given time period taking into account fluctuations in interest rates? I'd be happy to do some research into cost of renting over the same period.


----------



## Firefly (3 Apr 2012)

Chris said:


> Another fact is that house prices have still not hit bottom. I don't want to go against posting rules and I certainly do not have a crystal ball. But if you consider that in the UK the average income to house price ratio went down to about 3 after the bubble in the 90s and that the average income in Ireland is about €34k then house prices could still have a long way to fall.


 
Hi Chris,

Weren't interest rates a lot higher in the UK at this time though? Surely with such a difference in interest rates the 3 x multiple isn't as valid. Perhaps % net disposable income would be a better yardstick as this would exclude the differences in incomes taxes also?


----------



## 44brendan (3 Apr 2012)

I'd imagine that if a graph was drawn over a 50 year period on a corelation between average income and average house price it would be difficult to see a continuous relationship. I think the point above about interest rates, would need to be factored in to any conclusions made.


----------



## Chris (4 Apr 2012)

I agree that a ratio to disposable income would be more relevant, but I dob't think such a ratio exists or would be easy to put together. Interet rates are also an important factor and in the mid 90s the BoE had rates at about 6%. 
At the peak of the Irish housing boom the income to house price ratio was about 8.6 (€310,000/€36,000). Today it is at about 4.6 (€157,000/€34,000). And that decline has happened despite record low interest rates. What do you think will happen when, not if, interst rates start rising towards historic averages?
The unfortunate truth is that interest rates and taxes are only going in one direction.


----------



## DerKaiser (4 Apr 2012)

Chris said:


> What do you think will happen when, not if, interst rates start rising towards historic averages?
> The unfortunate truth is that interest rates and taxes are only going in one direction.


 
All other things being equal, prices would fall - through reduced demand for credit amongst those to whom credit is available.

Increased availability of credit to a wider demographic might offset this, but that's a separate matter.


----------



## Firefly (4 Apr 2012)

Chris said:


> I agree that a ratio to disposable income would be more relevant, but I dob't think such a ratio exists or would be easy to put together. Interet rates are also an important factor and in the mid 90s the BoE had rates at about 6%.
> At the peak of the Irish housing boom the income to house price ratio was about 8.6 (€310,000/€36,000). Today it is at about 4.6 (€157,000/€34,000). And that decline has happened despite record low interest rates. *What do you think will happen when, not if, interst rates start rising towards historic averages?*
> The unfortunate truth is that interest rates and taxes are only going in one direction.


 
*MASS* default of mortgages.


----------

