Monday, 8 August 2011

Morgan Kelly - property market "very far from bottom"

Morgan Kelly, UCD Professor of Economics, has been given the sobriquet of "Doctor Doom" by sections of the Irish media.    While other economists were predecting "soft landings" for the Irish property market - and the wider economy - Kelly was predicting 70% price drops. 

As things stand, it looks like he was right on the money.  So far from being Ireland's "pessimistic" economist, he is its most realistic.  

Another thing about Kelly is that he is not tied to the interests of any commercial or financial group.  His only motivation, I should imagine, is to get his predictions correct - therefore confirming his own competence and analysis. 

So what he has to say is always worth a read.  Such as the following in today's Irish Times.

"Irish property prices have yet to hit bottom and as a result the final bill for bailing out the banks is likely to be in the region of €90 billion to €100 billion, economist Morgan Kelly said last night.

In his Hubert Butler Lecture to the Kilkenny Arts Festival, Mr Kelly said: "we are very far from the bottom" of the property market and added it would take a decade for the economy to recover from the fallout.

While prices had fallen by 50 per cent, he said “almost no transactions were taking place at that price” and with unsold properties starting to accumulate, Mr Kelly said “we are very far from the bottom of the market”.

He also estimated Ireland’s national debt would rise to between €240 billion and €250 billion by 2015, far higher than the current Government estimates of €200 billion. He said that there was no way the country could repay this.

The UCD economist said the Irish economy would require a decade to recover from the current crisis.

Addressing the extent of property price inflation, Mr Kelly said that by 2007, “we were building half as many houses as Britain which is 15 times our size”. A consequence of this building boom was that the price of an average Dublin home cost “15 times the average industrial wage”.

Mr Kelly also said banks had become aware of the problems in the Irish property market in 2006 when there was a fall in the number of people taking out mortgages. Despite this, he claimed many bank economists were telling people at the time that there would be a “soft landing” so they would continue buying houses.

Mr Kelly described the bank guarantee that followed as “Cowen and Lenihan’s idea of shock and awe,” which, designed to frighten speculators, turned out to be “shocking and awful” for the country.

He said the real mistake, however, was not passing the guarantee, but sticking with it.

The economist said Central Bank governor Patrick Honohan could have walked way from the deal but decided that the losses were manageable.

Mr Kelly said the next problem Irish banks were likely to face was “organised opposition to repayment” with the possibility of some “Michael Davitt-type figure” emerging.

Referring to the euro zone debt crisis, Mr Kelly said: “I think eventually it will be solved” as it was in Germany’s benefit to remain in the euro.

Predicting “very large ECB loans to Ireland, Spain and Italy,” Mr Kelly said even if Ireland were to receive favourable terms the country faced very deep problems.

Mr Kelly described as “catastrophic” the recent US spending deal that allowed the debt ceiling to be raised, but avoided raising taxes to try and plug the widening deficit, and said "as the US goes under that will hit Ireland very, very badly."

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Anonymous said...

I think you left out a piece from the Irish Times Article

Describing the boom of the 1990s as an extraordinarily beneficial period for Irish society, he said the only group not to benefit were politicians. “In the past, how they operated was direct patronage for jobs and being moved up local authority housing lists” but the problem for politicians in the 1990s was people suddenly had jobs.

My goodness, who were these most enlightened and selfless leaders who helped us so in the 1990.

Charles J. Haughey 1989–1992
Albert Reynolds 1993–1994
Bertie Ahern 1994–2002

The indo also caught a bit the Irish times missed

POLITICAL control of the country's banks creates a real danger that "gombeen" politicians will use their new powers to reward supporters by forgiving mortgages and lending money, UCD academic Morgan Kelly warned over the weekend.

Ownership of the banks gives politicians a say over who will see their mortgages forgiven and who will be evicted.

"You might do well to join Fine Gael. You might find that a party card with a low number is a big asset," the professor told a packed St Canice's Cathedral, which hosted the event as part of the Kilkenny Arts Festival on Saturday evening.

Ella said...

Hi GM, Yesterday's Sindo.

Prof Kelly said he did not think that property prices had reached the bottom yet. Explaining this, he claimed that banks were still providing mortgages to well-paid people in the public service.

The effect of this was to keep property prices artificially inflated, he said.

Well, I'm with Morgan on this one, I think house prices are still over inflated.

Dakota said...

Why the metamorphosis in the Irish housing market, from 2005 onwards, even with the memory of far higher interest rates before 2001? It was, in some respects, counter intuitive? No?
The Irish property market hinges on the whims of the ECB. END OF. AGAIN NOT POPULAR OR PC TO SAY. Therefore, even if the TROIKA never set foot onto the BOG, an exterior agency would have called the shots anyway. There was no smoke and mirrors. Jeez, all those pseudo nationalists, and Paddy and Mary still can't see the wood for the trees.

My feeling is that the minority who had some idea in this country of the fundamentals which proped this ponzi scheme up could see that the "game" was up, when Germany wanted to cash in it's chips. The hint there is Germany. Funny, to think a lot that got into property, especially in the 00s were in there twenties. Can you hear an obvious alarm bell ringing anywhere? I can, and could.....
Apart from that, I am genuinely surprised at how easy the elite got away with it here. Then again, no I'M NOT.
House prices are in reality now down as much as 60%, all ready, with futher falls inevitable. 70% is just an innocuous figure why not 80 or 90%? The bigger the bubble, the bigger the bust. The greater the insanity the larger the asylum. Ireland is one large open air assylum.

The Gombeen Man said...

@ Anon. Hmmm... if one can describe getting up to one's hoxters in debt as a benefit. Debts even the prudent now have to pick up the tab for. It should have been possible to have increased employment through the multinationals without blowing the whole economy to smithereens, I would assert.

@ Ella. It's a fair point to make. If well-paid civil servants are the only ones getting mortgages, therefore dictating mortgage draw-down figures, those prices can't really be a fair reflection of property values.

@ Dakota. It's bloody, certified, doo-lally. But let's not forget that it was obvious before joining the Euro, and being signed up to the Eurozone interest rates, that European rates were historically lower than we were used to connected with Sterling.

And what did our Minister of Finance of the time do? Extend property tax incentive shelters and cut capital gains tax from 40 to 20 per cent. Instead we should have had fiscal measures to dampen the reduced cost of lending.

But hey - it's Ireland. McCreevy's monumentally stupid measures were hailed as strokes of economic genius. Eeeeeehhhh!!!!!

Dakota said...

GM alas very true. GM this is the land where if you didn't buy a house and/or large new car you were unpatriotic (here in the land of spuds). While if you did either or both, you were actually doing nothing but increasing the national debt burden.

Anonymous said...

yes indeed MR GM speaking of soft landings, woke up to the terrifying sounds of the DOW crashing yesterday so i lit up a big fat one jumped back in bed and had a soft landing that lasted all day, BTW WHERE IS BERTY when the world needs him still poncing around nigeria i suppose cheeerio BH

The Gombeen Man said...

Yes BH. Bertie is a modest character at heart. I fear he has gone to ground know that he knows the world needs him to sort out its economic problems.

Dakota said...

I'm surprised at BH it's not BERTY it's BERTIE. Do ya not read the IT?
Oh and now that I think of it GM, get your name in now for the Eurobond. Its not conceived yet but the Irish are a forward thinking people, of course.
Ah yes I can see it now GM, Mr Sarkozy and the lads (the presidency, that wonderful and illustrious office, will be shared for the betterment of the Irish nation) languishing and quaffing wine, smoking the best Cubans on a slow boat down the Liffey, while Paddy in his 11 D rowing boat doffs his cap and promises he'll always be the best boy in the class. A celtic love-in if you will. (Of course tighter regulation from Europe will never happen GM, because the French and Germans know two things about the Irish (1) they're great craic altogether and (2) they know how much they love their transnationals. Sure they'll never do anything to upset that? Surely? Sure they'll start printing more money for us, put a word in for us State side and write off our fiscal and sovereign debts before then?

The Gombeen Man said...

**** the Bollocks or **** the Bollix? That is the question ;-)

Anonymous said...

Kelly is missing out the fact that most of the losses are already priced into the next couple of earnings. Where he is correct is the ration of prices to earnings - houses are still running at 6-8 times the earning of average income earners, who are probably earning about 34-36k per annum now.

I do think there is a problem with indiscriminate lending to public sector workers on the assumption that they are untouchables. They are not. Many instutitons funded by public money are already feeling the pinch: for example, it is only a matter of time before at least one hospital simply cannot pay salaries - or maybe a county council or two. Its ridiculous assuming that such workers are "safer" than private sector earners, yet this is precisely the new foolishness of the banking oligarchy.

The real problem at the moment is the lack of feasible options to actually buying a home. Since there is no social housing accessible to anybody with a wage, the only choice is to move in with family of some kind or rent. Increasingly, people are doing the former and rejecting the rackrents of the latter. Or else bunking up and sharing at life stages you wouldn't previously have expected.

This hasn't been priced into the asking prices on the likes of Daft, which enables their celebrity economists to fabricate narratives on the basis of these false figures every quarter that are unproven and sometimes downright propoganda (the attempt to generate student hysteria by including a UCDSU staffer was shamelessly irresponsible, exploiting the legitimate fears of such a young and vulnernable group).

I suspect that we are still in the early days of the EndGame and that the worst is yet to come, but banking has already written in a lot of the losses so I don't think Kelly is quite right on this, I think the cost to the state as a result of rising welfare bills and lost taxation is the pressing concern for the next decade.

John said...

Morgan does not offer any radical solutions to fix this crisis and from another perspective and not going too off the point of this discussion, I would recommend this video
The documentary mainly focuses on two points: the causes of the Greek debt crisis in 2010 and possible future solutions that could be given to the problem that are not currently being considered by the government, IMF et al, of the country.Irleand is also mentioned in it well worth a view.