Generation Game- David McWilliam's take on Irish economy

[simplyjoe]

His predictions been wrong previously but does anyone really think he'll be wrong this time

His previous predictions were not wrong. The property was overvalued! It was only that we refused to believe it and the gamblers/greed took over. Please don't continue to deny the existence of this monstrosity. We cannot live and continue to thrive off a building boom. Saturation point has to arrive at some point. We cannot have property esp in Dublin aat prices that exceed London, the USA, Germany, France, etc. What then do we fall back on - manufacturing?. We cannot survive on the few major US multinationals. Fianna Fail are complicit in this - they continued to drive this false building boom - took the stamp duty and turned around and said 'what brilliant managers of the economy we are'. McWilliams is and was right. We will be back to 2001 property prices. The developers will have got their money and Joe Soap will still be paying his massive mortgage together with his loan for his BMW Jeep and the wifes mercedes convertible. I worry about people that cannot see that a nation with the highest level of personal debt in the world is not in trouble. Denying it again is not going to work. We have denied it now for the last 5 years.

 

[gonk]

His previous predictions were not wrong . . . Saturation point has to arrive at some point.

I can't do better than quote this post:

If you're out by ten years then you're out, simple as.

I'm as bearish as they come but nobody can credibly claim it was a good idea to sell an asset and forego triple-digit gains, in anticipation of a crash a decade later ...

It's one thing to recognise that a market is in a bubble state - it's quite another to identify when the market is peaking. Those who put off buying in 2001 on McWilliams's advice will be a lot less able to afford today's prices.

 

[joe sod]

I thought it was an excellent program much better than last years "popes children". He is absolutely correct in pointing out that the real economy has done nothing since 2002 and we have been living in a false economy ever since then. I am amazed at the mostly negative reaction to the program on this site. Maybe it is because he did not single out any single group like low skilled workers etc. He criticised all levels in the irish economy ,the accidental millionaires, the young middle class up to their eyes in debt. This is the truth and people don't like to hear the truth especially when it applies to them. I agree that he has taken some of his ideas from international commentators and applied them to the irish economy. Why has bertie ahern gone out of his way to criticise economists like david mcwilliams maybe he knows mcwilliams is directly criticising fianna fails handling of the economy where populism wins out over long term planning.

 

[webtax]

I can't do better than quote this post:
Originally Posted by room305 http://www.askaboutmoney.com/showthread.php?p=486064#post486064
If you're out by ten years then you're out, simple as.
I'm as bearish as they come but nobody can credibly claim it was a good idea to sell an asset and forego triple-digit gains, in anticipation of a crash a decade later ...

It's one thing to recognise that a market is in a bubble state - it's quite another to identify when the market is peaking. Those who put off buying in 2001 on McWilliams's advice will be a lot less able to afford today's prices.

A bubble is a bubble, simple as too.

Same thing happened with internet shares - Alan Greenspan called it a bubble and some people still made big money off it before it crashed by finding a bigger fool to sell on to. This did not mean Greenspan was wrong, just that you can't put a time limit on when people are going to see reason.

 

[gonk]

A bubble is a bubble, simple as too.

Same thing happened with internet shares - Alan Greenspan called it a bubble and some people still made big money off it before it crashed by finding a bigger fool to sell on to. This did not mean Greenspan was wrong, just that you can't put a time limit on when people are going to see reason.

Not the same thing at all. People were throwing money at anything with dot com in its name, regardless of whether there was a viable business plan, never mind any revenue. Many of the companies concerned collapsed with zero or near zero value to shareholders (remember Baltimore?)

While houses may very well fall in price, I don't think even the most pessimistic prophet of doom would suggest they'll be worth nothing.

The Permanent TSB/ESRI index would have to fall about 40% to be back to 2001 levels. While this is within the range of possibilities, it would just mean those who didn't buy in 2001 could buy now at the same price having rented for the last six years. Their peers who bought will on the other hand be six years closer to having their home loans paid off.

 

[webtax]

Gonk,

Not likely we're going to agree, but many people did buy property regardless of value e.g. all those box apartments outside the M50 (poor quality build, no infrastructure, schools etc). Accept they're not going to drop to zero but these could fall very far from the price people paid, if they can even find a buyer.
On those who bought in 2001: yes, they have a substatial cushion before negative equity, but many who bought since then do not. My view is that if people like David McWilliams had been listened to in 2001 about prices rising too fast there would have been no excesive bubble since then and no one would be facing difficulties today.

 

[ubiquitous]

There is a subtle difference between the dotcom bubble and the recent property craze. The dotcom bubble was driven by equity, a lot of which ultimately turned out to be worthless. The property craze has been driven by debt, which ultimately must be paid off regardless of what happens in the market.

If property prices were to fall significantly, a lot of people might find that the ultimate value of their investment (net of debt) might not be a whole lot higher than the ultimate value of their dotcom shares. I'm not saying this will necessarily happen but its not beyond the bounds of possibility.

 

[command]

Maybe the parallels with the dotcom bubble are relevant. It was a new and unknown marekt place where the value of a asset was whatever someone was willing to pay for it. Advisors priced IPO and the share price went through the roof as soon as the share was listed.

In Ireland auctioneers listed properties for auction and once the acution started the price lost all logic.

So long as there are gullible fools who arew willing to buy there will be a buck to be made in the market.

The whole thing went bust when the market relaised that the companies were never going to make money.

Surely if a property never has a hope of returning a relevant rental income or increase in price then it also is bubble in itself waiting to burst.

Apply a P/E ratio to a three bed house on Nutley lane and see how overvalued it is.

 

[simplyjoe]

Ubiq is right. I bought my home, a flat in London in 1990 (91?). Six months after buying it was worth 60% of the value I paid for it. I was lucky in that I found a long term tenant (even better a German) who paid the mortgage and I sold the flat 10 years later at a very small profit. Adjusting for inflation this was actually a loss. Negative equity is horrific. All your choices are taken away. It leads to an increase in interest rates. Anyone aged under 30 will find it hard to understand what Ireland was like prior to 1995. Please someone prove to me that our economy has really improved that our exports have increased - that there is some real basis to the economy not just building boom.

 

[imogen]

My dad keeps pointing out everyone has forgotten the UK property crash in the mid 1970s. The problem that arises is no-one can sell anything -> no-one can value anything -> no-one can sell anything -> nothing moves, it does not matter what your reason for selling is, there are no transactions, everyone is stuck where they are, and as a result confidence plummets in all areas of the economy. I have some UK friends who experienced negative equity in the early 1990s and they reported the same feelings of entrapment and helplessness.

 

[z106]

I can understand how people can dismiss mcwilliams due to him being incorrect in the past.

But even the dogs on teh street now know that house prices cannot continue to grow in any significant way.

 

[demoivre]

Ubiq is right. I bought my home, a flat in London in 1990 (91?). Six months after buying it was worth 60% of the value I paid for it. I was lucky in that I found a long term tenant (even better a German) who paid the mortgage and I sold the flat 10 years later at a very small profit. Adjusting for inflation this was actually a loss. Negative equity is horrific. All your choices are taken away. It leads to an increase in interest rates.

This does not illustrate Ubiq.'s point at all - quite the opposite in fact, and you only held the property for ten years - how much would the property be worth today (use this calculator to work it out) and what rent could you get for it.
How does negative equity lead to higher interest rates?

 

[demoivre]

I have some UK friends who experienced negative equity in the early 1990s and they reported the same feelings of entrapment and helplessness.

Hardly the end of the world is it? They still had a roof over their heads or did negative equity mean they couldn't afford the mortgage repayments? Out of curiosity are they still in negative equity?

 

[Afuera]

Hardly the end of the world is it? They still had a roof over their heads or did negative equity mean they couldn't afford the mortgage repayments? Out of curiosity are they still in negative equity?

I don't think anyone said it was the end of the world. I think imogen's post serves more of a reminder of the feeling of entrapment and helplessness if you get stuck with negative equity. Many people seem to think, if you get into trouble then all you need to do is sell up (as if it was the easiest thing in the world). That may have applied for the last 10 years or so, but not anymore.

Comparing what happened in the UK with the current situation in Ireland is probably not that useful though. The UK didn't have people paying up to 10 times their annual salary on 40 year mortgages the last time they had a slump. Also, the notion of people buying a starter property that they would have to trade up from within a 2 or 3 year period was not commonplace back then. Combined with the fact that over 15% of our economy is directly dependant on construction, it all suggests that we could encounter a harder and longer slump than that experienced in the UK.

 

[MichaelDes]

No amount of doomsday talking can cause an economy to go into a tail spin otherwise pundits would have been right before the Millennium. The economy fails due to internal and externals mechanisms and fundamentals. We all know what these are at the moment, but when this will cause a complete fracture no one can say. Down turns however are inevitable within any economy. It is good to get rid of the chaff - a bit like an essential spring clean.

In this case of house prices, it is like any other investment cycle; for every profiteer someone will eventually get burnt (and will always be the case). Doomsday scenarios for what happened in the past are not a guide of future inevitabilities – no one can predict the future direction of an economy for definite – not even Mc Williams. But after a fall off, things always seem to pick themselves up - the UK survived more rounds than I care to remember and is still robust.

 

[Trish2006]

I bought my first (and current) house back in 2001. I remember at the time being sickened by the price (200k punts), thought it ridiculously overpriced and listened to all the predictions of 'the crash'. But we wanted a family home and decided to take a chance. But just in case we extended ourselves as much as the bank would allow (nowhere near as much as they'd allow in later years) to get a home in an area that we would be happy to stay if indeed we ended up in negative equity. Best decision ever. Same houses currently asking for just under €600k. The only problem we have is that with a growing family we'd like to trade up but refuse to get into higher debt. So teh option is to get a bigger house in a cheaper area. That's what we're currently looking for. Of course stamp duty means that the area has to be considerably cheaper so we can pay the duty without having to add it to the mortgage.
But realistically I can see us still being where we are in a few years time, houses just don't seem to be selling. For us I think the key was picking somewhere that we knew we could bear to stay longterm in case the economy started to weaken. Too many people didn't consider this and are now stuck with the prospect of raising their kids in areas with no green space, no schools, no facilities, etc..
I'm just glad we bit the bullet when we did and didn't listen to advice to 'hold out'.

 

[Thomas22]

I bought my first (and current) house back in 2001. I remember at the time being sickened by the price (200k punts), thought it ridiculously overpriced and listened to all the predictions of 'the crash'. But we wanted a family home and decided to take a chance. But just in case we extended ourselves as much as the bank would allow (nowhere near as much as they'd allow in later years) to get a home in an area that we would be happy to stay if indeed we ended up in negative equity. Best decision ever. Same houses currently asking for just under €600k. The only problem we have is that with a growing family we'd like to trade up but refuse to get into higher debt. So teh option is to get a bigger house in a cheaper area. That's what we're currently looking for. Of course stamp duty means that the area has to be considerably cheaper so we can pay the duty without having to add it to the mortgage.
But realistically I can see us still being where we are in a few years time, houses just don't seem to be selling. For us I think the key was picking somewhere that we knew we could bear to stay longterm in case the economy started to weaken. Too many people didn't consider this and are now stuck with the prospect of raising their kids in areas with no green space, no schools, no facilities, etc..
I'm just glad we bit the bullet when we did and didn't listen to advice to 'hold out'.

Would you do it again right now?

 

[Trish2006]

wouldn't be able to afford it now!

 

[gonk]

Would you do it again right now?

Coming back to the thread topic - David McWilliams - the point is he has been saying for as long as I can remember that there is a bubble in property prices and it'll all end in tears.

Identifying that the Irish residential property market was in a bubble was not hard and McWilliams can't claim credit for any great insight. Obviously double digit property price percentage growth rates cannot be sustained indefinitely while general inflation and wages are growing in low single figures.

What is extremely difficult to do and is usually only possible in hindsight, is to identify when prices have peaked. I'm open to correction, but I don't believe McWilliams spotted the peak in advance, except to the extent that he was continuing to say what he had been saying for years.

 

[samfarrell]

Yes I think everyone agrees it hardly takes David McWilliams TV programs and several books,all about the same topic really, to tell you that residential property is overvalued. He spoke about how we cannot compete with China and India, I am not aware we ever did really compete with them, they generally make mass produced low value products, we dont
I would be more interested to hear what he proposes we do about the impending doom.