Threats to economy from interest rates and property

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bearishbull

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found this article in the sunday times from normally very bullish damien kiebard. seems young people with mortgages and personal debt will be worst hit in any slowdown in property and wider economy(commonsense would obviously tells you that without an economics degree!). seems to suggest people buying to let could cause market to turn when capital appreciation slows.if consumer and property sectors slow we could be up the creek without a paddle.both government and economy seems far too dependant on property sector which in turns fuels the property sector further in a positively reinforcing virtuous circle but it isnt sustainable and can go in reverse too.
http://www.timesonline.co.uk/newspaper/0,,176-2113977,00.html
 
Is there anything new here? Aren't interest rates and our economy's dependency on construction/property been cited as the main threats to our prosperity by anyone who is bearish/realistic about the near/medium-term future of the Irish economy?
 
CCOVICH said:
Is there anything new here? Aren't interest rates and our economy's dependency on construction/property been cited as the main threats to our prosperity by anyone who is bearish/realistic about the near/medium-term future of the Irish economy?
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yes but its interesting to plot this evolving situation with increasing bearish sentiment in media and greater questioning of the vested interests propaganda.
i suppose im wondering how bulls out there envisage this economy in ten/fifteen years time given the unsustainable dependence on certain sectors.
i think we're highly vunerable and a property correction would have wide spread implications for the economic and social fabric of this country.
 
Judging by the posts in the long and now closed thread on The Future Price of Irish Properties, we don't seem to have many bullish contributors on AAM who are interested in entering into such a debate.
 
surely bulls beleive we can overcome our dependence on certain unsustainable sectors? maybe some will enlighten us.
another article in sunday times says our moves to a knowledge economy(which may allow us to overcome the dependence on certain sectors) is being hindered by dramatic falls in competitiveness.theres a lot of negatives hanging over irish economy. im not confident for our future.
sunday times.
IRELAND’S economic success is at risk unless it embraces offshore outsourcing, moves up the foreign direct investment (FDI) value chain and shuns its “idiotic and short-sighted defence of self-interest” including support for EU Agricultural subsidies, a leading business figure said last week.
In a speech to the Irish Stock Exchange’s Reuters Irish Forum, Niall Fitzgerald, the Reuters chairman and former chief executive of Unilever, said Ireland would lose out to low-cost, low-tax competition from eastern Europe and China unless it learnt to “adopt different attitudes towards low-cost locations”.
"We need to see them not only as the competition, but also as a means by which to improve the efficiency of our own businesses. Logic dictates that we should transfer activities to the locations that offer the optimal combination of cost and quality,” said Fitzgerald.

Referring to Ireland’s “surprisingly low” ranking of 17th in a World Economic Forum (WEF) league table of the competitiveness of economies, he said: “Ireland can no longer compete for inward investment on the basis of a low-cost economy or a competitive tax regime. Attracting a different type of investment in higher value-added areas must be a primary objective.” Ireland was ranked fifth in the WEF table in 2000.
“Improving Ireland’s research capability is crucial. To date, most of the employment generated by FDI has been at low points along the value chain, in manufacturing and support functions. There is much more to do to change how the outside world views Ireland as an investment destination.”
The National Competitiveness Council’s most recent report concludes that Ireland is relatively weak in areas that will be required to drive the knowledge economy.
In terms of its level of “technological readiness”, which includes innovation, spending on research and development and collaboration with universities, the country is ranked 31st by the WEF. He said Ireland needed to fast-track infrastructure plans if it was to remain competitive. “Unless Ireland focuses on maintaining its business-friendly environment, business will go elsewhere,” he said. “Have we become complacent now that we’re a fully paid-up member of the rich club? Playing catch-up is easy. Staying ahead of the pack is tougher.”
 
I'm wondering if I missed something. The Indo yesterday had a load of articles on what would happen in the event of a property downturn yesterday. They could have been pretending given the date...but still and all...I thought it was interesting given that a few weeks ago no one was discussing the possibility openly, apart from the usual doomsayers.

I've mixed feelings. Realistically - regardless of what happens, life tends to go on anyway.

I'm not sure what rising interest rates would do to the property market, and by extension the rest of the economy, but I would like to see it slow down rises in property value and I would like it to usher out the era of long term mortgages.

Rising interest rates should, by definition, cause less money to be available for discretionary spending. This could have an impact on say, weekend travel plans, and high-cost consumer items. What's interesting in Germany (apparently) is that although the economy is massively strong on the export front, it's very low on consumer confidence. The UK is not altogether strong on consumer spending either. Realistically, I think that this could be the first thing to take a hit, assuming that property prices themselves aren't immediately affected. Since everyone says they won't be, I'd have to assume that belts elsewhere would have to be tightened.

I'm not so sure how much of our growth is consumer driven, so I don't know what the knock on from there would be.

There's also the possibility that landlords, taking interest rate hits will look to increase rents - I've seen this in letting ads lately; I'd be interested to see how that will pan out because although rents are up, so is availability.
 
15-20 years ago, when young people were trying to make a decision on whether to rent or to buy, the decision was nearly always to rent. The main reasoning behind it?, not wanting to be "tied down" with a mortgage. The implication here is that shifting property was extreemly hard and could take up to 6-12 months. The other, no credit from the banks.

A lot of self publicity from Davy's (You'll hear a lot more from economic think tanks in the coming weeks, grabbing a slice of the airwaves and being talked about) over the last week indicated, in order to restore a proper yield into property investment, house prices could fall instead of rents rising. I suspect that it won't be an "either or issue", rather than a combined effect. Rents won't remain static and will increase marginally due to FTB's taking cover from falling/static house prices, along with people who don't want to be "tied down"

With projected increases in interest rates, downward pressure on house prices can only increase. In fact, history tells us that rents should nearly always be higher that mortgage repayments but with cheap credit sloshing around, even Johny shoeshine boy, can become a "property investor".

The effects are predicable.

Replays of the builders strike out in Ballybrack, with Irish labourers giving out about foreign nationals getting jobs instead of them.

Banks only lending to Rocket scientists and public service employees. The private sector will see jobs losses akin to NEC.

Income taxes will increase ("We have to get the money from somewhere" will be the Governments auto-reply)

A lot of recent BTL investors demanding legislation to warn people about the implications of long term investments. The same battle cry from people who lost out in pyramid schemes.
 
The economy needs drivers whether it is construction,pharmaceutical,IT. Do not see construction as a 'dependency', it is hardly likely to dissapear with an increasing population and requirement for development of infrastructure. A slowdown in this sector would not be a catastrophe.
The main problem with our economy is interest rates which we have no control over. We need higher interest rates to cool the property market and particularly speculation. The interest rate is unlikely to go above 4% base with the sluggish large EU economies and is the best thing that can happen. The last ten years have brought us in line with some of the richer ecomonies and there seems to be an element of panic from some people that the whole thing is going to fall apart. We need capable management from people like Michael O' Leary build stability going forward.
 
Rico said:
We need capable management from people like Michael O' Leary build stability going forward.
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We won't get that. We will get political 'management' which this year will see around a 20% increase in spending with no discernable benefit. Then, when times get tight as the construction industry slows we will face higher taxes to pay for this extra public spending. Higher taxes will affect the economy slowing it further. Unless you are tied to this country I would have an escape plan in place, unless you feel like paying for all this waste in the near future.
 
Rico said:
The economy needs drivers whether it is construction,pharmaceutical,IT.
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More accurately, what the economy (or any economy) needs are (multiple) thriving sectors which generate long term employment & preferably a number of these sectors will be competive internationally and be strong exporters which will have a positive effect on the national balance of payments. Minor exceptions aside, this is not what Irish construction sector is about.

Rico said:
A slowdown in this sector would not be a catastrophe.
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Sure, only 200k work in construction, with countless others indirectly employed, and sure it only represents 60% of the books of the mortgage banks. A drop in the ocean really. :rolleyes:

Rico said:
The main problem with our economy is interest rates which we have no control over.
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You're half-right.. interest rates are a "problem".. but ask yourself this.. Why are the lowest interest rates since World War II something to be concerned about in a "booming" economy..? Could it be perhaps that the economy is a paper tiger fueled by credit..
 
Sometimes I wonder if it’s worthwhile questioning the widely held belief that the Irish economy is sitting on firm foundations. Public opinion is based largely on perception rather than gritty reality (as any good propagandist will tell you) I think that it may be pointless spelling out some of the more, ‘discouraging’ facts about the economy, such as the reliance on the footloose American multinational sector for 70% of our export sales. It is probably the case, that allowing what will most likely happen, happen, makes more sense than flapping ineffectually at this late stage.

As far as Michael O’Leary managing change in the more vital aspects of our society, such as health or efficient infrastructural development, I’m not so sure. O’Leary at Ryanair, sets the rules and ‘governs’ by edict. If he were given the task of applying his highly effective management style to Ireland Inc. He would have to operate within existing laws and mores and realize change buy consensus, a much more challenging job.

The only way that inefficiency in the broader Irish economy will be addressed is by pressing necessity. When the majority of sectional interests see change as being advantageous/ vital, to their well being and future prosperity.
 
Just read today in the independent that the IRS (US taxman) has just hit Symantecs Irish arm with a $1 billion taxbill for alleged transfer pricing among its irish subsidiaries. Symantec is involved in the Norton Anti-Virus product and employs 600 in Blanchardstown. If this is successful it could be detrimental to US companies operating in ireland. Heres the link

http://www.unison.ie/irish_independent/stories.php3?ca=35&si=1600306&issue_id=13934
 
interesting times article about irish economys reliance on american multinationals.
http://business.timesonline.co.uk/article/0,,16849-2140480,00.html

More worrying is evidence of Ireland’s dependence on the screwdriver plants of foreign multinationals to create jobs and pay bills. A recent study by economists at Trinity College, Dublin, of the effect of globalisation on the Irish economy revealed that American companies accounted for 77 per cent of the Republic’s total exports, with domestic-owned firms accounting for less than a tenth of the total. Moreover, in 2002 foreign multinational investors paid €2.6 billion in corporation taxes to the Irish Government, 56 per cent of the total paid by companies in that year and almost 10 per cent of all tax collected.

This is not sustainable and the Irish Treasury’s golden goose could be strangled more quickly than Common Agricultural Policy subsidies. Even among Irish-American senators in Washington, such a huge subsidy to a foreign government will not stand
 
Failing to encourage indigenous companies to conduct large-scale R&D with proper incentives has been a huge mistake over the last 10 years.
The potential revenues and generally healthy effect on the economy far outweigh the costs involved.

MNC's or Construction, which will be the first pillar to fall?
 
One big problem I see with the current situation is for pensions.

In the past people had 20-25 year mortgages, so they probably had up to 20yrs of mortgage free earning before retirement when they could pump the money into their pension. If people are buying later and have 30-35 year mortgages, where are they going to get the time and money for a pension?
 
Re the Symantec tax isssue, there is a strong possbility they will beat the IRS claim, or if not beat it at least substantially reduce the liability to a a few hundred million. The IRS are basically chancing their arm on this, in the hope that they will get something out of it, or at worst scare a few firms into recognising more taxable revenue in the states. If a transfer price can be shown to be economically justifiable there should be very little they can do.
 
Duplex said:
An ERSI report released today suggests that the Irish property market is 'probably a bubble'. They suggest that at current prices an over valuation
of 15% exists. As prices continue to rise its likley that the size of the bubble will increase.

So what happens now?


http://www.bloomberg.com/apps/news?pid=10000085&sid=a0xF9Dyx1aaI&refer=europe
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Worse yet, its saying we had an overvaluation of about 15% in 2005 (I think they were quoting an OECD report) - must be heading for 20% at this stage easily enough.
 
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