The 1913 Strike & lockout was an industrial dispute between a big group of factory workers and around 300 employers. The workers started to strike because they wanted to unionise and get higher wages to get out of the slump. Around this time Ireland was facing the worst housing crisis it has ever known. More then half of the citizens of Dublin were living in horrible conditions and renting from the rich minority. Tenements were getting full and a solution was much needed. Chairman WT Cosgrave, an Irish politician stood up for the people in need and developed a visionary tenant-purchase plan. The plan was first established in Marino Park. The main goal of this plan was to provide ordinary people a home with hot & running water, three bedrooms and even a garden. The first families were chosen by lottery and the size of their families. In according the Ruth McManus this plan only worked because it was build on a modest scale, only 1.500 houses were built. Today these houses are 90 years old and prices are situated around €400.000.
Before World War I the Irish real estate market was dominated by renting from the private sector. But when we are getting towards the early 20th century the Irish government noticed that good secure housing for people could reduce the costs of their health system. After World War II the Irish state starts really promoting the idea for homeownership. The government starts developing new ways to provide affordable loans for the inhabitants through tax breaks (mortgage interest relief).
According to Tom Dunne (Head of School of Surveying & construction Management, DIT) thinks that the Irish desire to be a home owner has grown through political programs and the poor renting culture Ireland has know for a while now. Financial institutions were giving out mortgage loans against low interest rates and loose credit conditions. Because Ireland had an unusually high rate of homeownership there was high demand for mortgages. By 1971, 70.80% of Irish households were home owned, and in 1991 even 80%. This figure fell back when the bubble exploded: 70,1% in 2011.
The economic boom
The Celtic Tiger
Early 20th century.
This section will discuss the period that has led up to the burst of the housing bubble The Celtic Tiger era ran from the mid 1990’s till mid 2000’s. This period has known an extremely long economic growth that transformed Ireland from a poor country to one of European’s wealthiest countries. The Celtic Tiger can be split up in two periods. The first period runs from the mid nineties till 2002. The second started in 2002 and ended when the housing bubble collapsed and the banking crisis started.
Before the 90’s came along Ireland switched from a conservative and protective policy to a rather loser policy in their path to joining the European membership in 1973. Before this time Ireland was looked at an isolated small country somewhere in West-Europe depending on the economy of the United Kingdom. By joining the EU they have developed a very open economy and became very interesting to invest for foreign investors. It’s GDP during the Celtic Tiger was significantly higher then the rest of Europe .
During the 70’s, the global slowdown, Ireland suffers from severe fiscal deficit, which came together with the dropping of the sterling in order to join the European Monetary Union. The actual Celtic Tiger era was born during the debt of the global crisis. The economy started to stabilise and then rise real fast.
Europe has had in a baby boom during the mid sixties but somehow Ireland has had a significant delay when were talking about baby booms. Ireland’s baby boom started around 1970 and peaked in the 80’s. That’s why Ireland suffered even worse during the global crisis in the 1980’s because it had such a great part of the population that wasn’t old enough to work. The working population had to take care of a very large population that was below working age.
In 1999 Ireland entered the European Monetary Union, the euro was also introduced in countries like Spain & Greece. Interest rates had decreased significantly. The benefits were clear; no exchange rate uncertainty anymore, disappearing of transaction costs, transparency in pricing etc. Because of these low interest rates it’s very easy for households to get a mortgage loan. The number of lenders and mortgage products are expanding fast because repayment terms have become more flexible than earlier. Before the 90’s Ireland had an underdeveloped conservative mortgage market. Lending mortgages has become the main activity for commercial banks. This is how a large money supply finds his way to these countries. Which is good, lots of jobs in construction are created and the sector is booming.
On the other side house pricing is increasing as well. This attracts foreign investors, because the economy is doing well, house prices keep getting higher and higher. The same thing happened in Spain and Italy, but in Ireland they were more extreme than the EU norm in general
Irelands Gross domestic product increase very fast, between 1996 and 2006 the Irish population rose by 2017%. Ireland had a young population and high proportion of university graduates, low labour costs and low taxes on corporate profits. Ireland had become very attractive for big corporates to invest in.
The expansion in credit was the key driver of the upward direction of the house prices. House prices rose by almost 300% (without inflation) between 1995 and 2004. Policy makers failed to make regulations to dampen the housing and mortgage boom . The economy became more and more competitive when wages started to rise as well. But these growths appeared to be not healthy. Young home owners where able to get heavy mortgages but the low interest rates kept repayments affordable, at least for a while.
Because things were more extreme in Ireland then the rest of Europe a more radical response from the Irish government was needed.
The Property boom
In the mid nineties, the Irish people weren’t al homeowners and the housing market was relatively small compared to the growing population. This was about to change; the economy was booming and the wages were rising so people started to earn enough money to buy their own home. This led to an extreme housing demand. At this moment the EMU gave the Irish banks and financial institutions permission to provide the Irish people mortgages at very low interest rates. The result is that house prices in Ireland quadrupled in price over the period 1996-2007.
Because of the housing demand a construction boom takes place. In the year 1990 there were approximately 19.539 houses completed in Ireland. In 2000 this figure has risen to almost 50.000 houses to reach a top in 2006 when 93.419 houses were completed all over Ireland. Construction became one of the biggest factors in the Irish economy . Ireland already was
almost at full employment at this moment, which led to an immigration of construction workers from Eastern Europe. Ireland had to develop new policies. First of all they made al list of safe countries from which people could immigrate (mostly the 10 countries that joined the EU in 2004). Secondly they changed the law that gave a child the automatic right to citizenship when it was born in Ireland even though the parents were not Irish. Third, they tightened up their work-permit system . Figure X shows us the immigration increases severely from 2004 till 2006.
Mortgage Finance institutions
The number of Mortgages Finance institutions has increased from 12 to 17 between 2000 and 2010 because some Irish banks just started on the mortgage market and the entry of a couple foreign banks. Before this change in the market there was barely any competition but know with this many players on the market things are changing. Through financial product innovation and a decline in lending standards the number of interest-only mortgage products increased radically. The total outstanding amount of credit has risen by 300% from 2000-2008. The decline in mortgage interest rates was the key to this growth in mortgage lending. Money was cheap because of the low interest rates.
The chart shows us the deposit and loans in percentage of the Gross National Product. Until 1997 everything seemed fine because there was enough deposit to cover the given non-financial loans around about 75% of the total GNP. In 2008 the non-financial lending had risen to 200% of the GNP while the deposits only had risen 125%. There was no safety net anymore
Lending to the private sector and deposits of Irish banks as a percentage of GNP (1992-2009)
Property bubbles grow as long as buyers are willing to borrow increasingly large amounts in the expectation that prices will continue to rise. Irish houses were overvalued. At some point the rise had to stop and make place for a drop. Almost nothing was done that time to ease the recession. When the demand for residential property fell in early 2007 the attitude from potential buyers started to change . The demand for new homes decreased; very soon an oversupply of house was developed. The construction boom reaches as plafond and lots of construction workers were losing their jobs.
The financial institutions start reporting that more and more people are going into arrears on their mortgage loans. The banks tried to fix their insolvency with inter-bank lending but this became almost impossible because the global financial crisis had already started.
People noticed prices were dropping. Everyone who was thinking of buying had the same thought: Prices are dropping; let’s wait for a better price. Of course when everyone starts thinking like this the market collapses. House prices fell about 50% from their highest value. Figure x shows us how much the fall of the construction industry the unemployment ratio in Ireland had influenced when the crisis kicked in.
Figur x Construction figures compared to the unemployment ratio in Ireland
The housing crisis turns into a fiscal crisis.
The construction market was the biggest part of the booming Irish economy. The fact that Ireland had positioned itself in a strong financial position couldn’t help the situation. When the housing market collapsed and a lot of people lost their jobs which leads to a huge loss in income tax revenues for the government plus the big increase in social welfare costs because there are so many people lost their income. Ireland didn’t have a property tax that continuously guarantees revenue. In 2013 they introduced a local property tax (LPT), this LPT is an annual self-assessed property tax administered by the Revenue Department. They were using a stamp duty tax that was fully paid at the moment of the house purchase. A stamp duty tax is a tax paid on the transaction of property. During the boom this resulted in high revenues but with the collapse of the housing market this source of revenue for the government almost disappeared completely because it was a “one-time” tax. Together with the fall of the revenues out of income taxes the government lost a lot of income. The following chart shows how the tax revenue is increasing until 2006 when it’s peaking and then makes an incredible drop when the bubble bursts.
With the collapse of the property bubble, Irelands GPD growth declined by 10% over 2007-2009. (Figure x) Ireland was suddenly facing a big fiscal gap. The previous years of budget surpluses couldn’t cover what was coming. If this wasn’t enough the government decides to bail out all the Irish banks. Buy doing this they worsened the fiscal crisis. By the end of 2008 the public debt in Ireland was about 27,5% this figure rose to 118% by the end of 2012.
In 2009 there was an oversupply of 17,4% (around 345.116 units). The vacancy rate is approximately 17%. All the houses that were build right before the crisis hit couldn’t get sold anymore because the demand disappeared. After the bubble exploded the amount of completed houses fell from 93.000 units in 2009 to 26.420 units in 2009.
As said earlier the construction sector was one of the most successful industries during the economic boom. Lots of migrants from the new EU countries were attracted to Ireland to find work in the construction sector, but what happened with them after the collapse of the housing bubble.
The construction industry has always consisted out of labour –intensive, less-skilled occupations. These kinds of jobs are often unpopular for the local labour force. But in Ireland that wasn’t the only problem, the local workforce just couldn’t handle the building boom. According to the MCA newsletter around 70.000 jobs in construction were lost after the housing bubble collapsed. Lager companies appear to fire fewer employees while they are trying to cut costs at different points. Salaries are going down and the employees have to work longer for the same salary, but who didn’t lose their jobs are holding on to it in spit of worsening in terms and conditions of employment. Measurements haven been taken; for example there developed special training programmes for unemployed construction workers.
As we know the bubble in the housing market was fuelled by the surge of u mortgage lending by the commercial banks. Lot of people even bought a second house because it seemed to be a good investment, but this could only pay off if the property prices continued to rise. People weren’t paying back their mortgages and the banks had to reposes and try to sell the properties to get as much revenue as possible, but with the lack of demand the house prices crashed and they lost a lot of money. When the property bubble collapsed in 2007-2008 the Irish banks suffered severe losses. Even when the banks denied the fact that they were facing difficulties their share prices started to slide slightly after March 2007. In May 2008 the decline of the shares accelerated when the banks start to fall in the international financial crisis. The crisis has been going on for a while and still everyone was shocked about how fast everything was happening .
We are now at the end of September 2008. After the infamous al-night meeting the Irish government decides to take measurements and guarantees all existing senior debt of Irish banks. The reason wherefore they did this because they believed the liquidity problems of the Irish banks came from market nervousness created by the Lehman collapse in the US because all the banks are linked by intern-banking lending. Around this period other European banks are facing difficulties. In Belgium we injected 11,2 billion in Fortis, also the Netherlands had to take actions to save their system, but Ireland provided an unlimited bank guarantee to it’s six biggest financial institutions. Especially
The Anglo Irish Bank was nationalized with a €1,5 Billion capital infusion and is now called the Irish Bank Resolution Corporation Limited (IBRC) . In February 2009 the government announces that it would create a “bad” bank called NAMA. NAMA would buy all non-performing development loans from the other banks who are in trouble. How does it work? Imagine a bank has €10 million of capital and has a €100 million of outstanding loans (€20 million of these loans are non-developing), what happens when they suffer a 50% loss. They won’t have any capital left and suffer losses. Here’s where NAMA comes to the stand. NAMA will buy the €20 million non developing loans, so the bank has it’s capital back and can continue giving out loans as before. This means the Irish people (taxpayers) are paying for these loans while the bank and their shareholders lose nothing at all . The Irish state became responsible for all of the liabilities of their banks, which were way more, than they could carry
The EU-IMF programme (2010-2013)
In 2010 the Irish government officially asked for help. This assistance was needed because yields on Irish bonds had risen to really high levels, which makes it almost impossible to borrow .The International Monetary Fund and the European Union collaborated and developed a support plan. The programme will focus on three main areas: fiscal policy that
needs to change, the restructuring of the financial sector and structural reforms. They tried to find a balance between protecting the yearly growth of the economy, slowly reduce the amount of debt and develop a healthy banking system. Ireland will also not be excluded from the bond market.
The total amount of the financial support will be around 85 billion EUR. 17,5 billion will be provide by Irish sources itself, for example from the National Pension Reserve Fund. All the rest will be external support. This will be divided in 22.5 billion from the Europe Financial Stability Mechanism and 22,5 billion from the IMF itself and 22.5 billion from the European Financial Stability Fund plus some bilateral loans from the UK (€3,8billion), Sweden (0,6 billion) and Denmark (0,4 billion). These “loans” will be provided against a 5,8% yearly interest rate.
This part of the programme aims to restore sustainability to public finances and still protecting economic growth. Fiscal adjustments were held on expenditure. As said earlier in this paper, the property tax is shifted from property transactions to a yearly-based revenue based on the real value of the housing, this to assure yearly revenues. In 2010 lots of tax reliefs are lowered and other taxes are increased (carbon tax). Also they increased the pension age tot 66 years old in 2014, 67 in 2021 and 68 in 2028 to reduce the pension costs.
Financial restructuring of the banking system
The goal is to proportionate the banking sector to the size of the local economy and put them back in a normal position as a market source of funding. 35 billion will go straight to the banking system. 10 billion out of these 35 billion is immediately used to provide the banks with the necessary capital. The other 20 billion will be injected on a timely basis. The central
bank developed a Prudential Liquidity Assessment review. This is a review system for the Irish banks to check their liquidity (their ability to pay back their short-term liabilities) and make them less reliable of interbank short-term lending. This part of the programme goes about the necessary downsizing of the banking sector. This will be accomplished by a list of measurements. For example: banks will be obligated to provide fully for all nonperforming
assets, the regulation around the credit union will be strengthened and they are preparing specific legislation around restructure actions when customers go in arrear. Instead of immediately selling the customers property when he goes into arrear, they now have to look for a solution. The customer has to get a chance to pay off his mortgage. Through this way the bank can make much more revenue then any other way. Only in severe cases they’ll reposses the house and sell it.
A lot of reformations are made in the labour market. The Irish government reduced the wage by to €1 euro an hour to encourage the creation of new jobs and put back the unemployment figure. The unemployment benefit system will be reformed to stimulate unemployed people to find a job as quick as possible. Also the steps have been taken to streamline the different administration systems that provide unemployment benefits, social assistance and other perks, this to reduce the amount of cases were people receive multiple benefits. Some of these people make so much money without doing anything that they won’t even consider to go to work and rather stay home and do nothing at all.
The programme is very detailed and specific because the entire Irish banking system had to be rebuilt completely and there was a huge amount of debt that had to be repaid as soon as possible. Also the rest of the world had to find confidence in the Irish economy in order to get it back on track.
End of the programme
Ireland exited the 3-year bailout programme at the end of 2013 as first country ever. It was a result of hard work and determination of the Irish people and government at the same time. The three main goals of the programme are reached. The public finances are under control, the banking system is completely rebuilt and the economy is growing while a lot of jobs are being created . Officials assigned by the European Central bank and the European Union will still monitor Ireland every two year. There was a lot of political and economic concern about this decision but IMF Managing Director Christine Lagarde had good hoop in the recovery of the Irish economy.
EMU = cause?
In 2015 Ireland has one of the highest GDP growths. The main factors of these growth were the overall investments in Ireland that grew by almost 30% while the overall consumption or the Irish people expanded for 3,5%. Another important figure is the employment rate, it has increased 8,6% from it’s lowest point in the first quarter of 2012. More and more people are finding it’s way back to the working class. People are working longer hours although the wages stay low compared to the rest of Europe. Only the tourism- and construction sector are still behind. The Department of Finance Forecasts is predicting that real GDP will continue to grow in the coming years. They estimate a growth of 4,3% in 2016 and 3,5% in 2017.
In 2007, right before the crisis struck Ireland had a debt in percentage to GDP of 23,6% to reach a peak in 2012 at 120,2%! The NAMA is projecting that Irelands overall debt in percentage to the GDP should decrease from 97% in 2015 to 75,7% in 2021
The entire boom and bust of mortgage lending is now discussed. Until 2001 we found real gains in the national wealth, employment figures and incomes but the house price inflation was swinging because there was a strong demand grow. After 2001 the housing market exploded because of the large tax revenue made possible by the government. Because of the increasing demand the house prices were rising extremely The EMU had also lowered the interest rates. That’s why it became so cheap for people to get a mortgage that was actually to heavy to carry. House prices continued to grow and properties became overvalued. Eventually the Irish government, MFI’s and households were over-exposed by the real-estate sector.
Not only policy failures played a key-role in the build up to the Irish economic crisis. Also tax incentives for property development, the rising income levels, the rising demand for housing and the entrance of the EMU. Although the Irish government couldn’t do much about the low interest rates brought in by the European Monetary Union but the financial sector needed better regulation. It was way to easy to become credit. It’s a correlation between these key factors that created this crisis. It’s never good to over rely on one sector, it’s better to use a broader approach and monitor the economy and look for imbalances.
There are two lessons we need to keep in mind. First of all there was a loss of national control over interest rates when entering the Eurozone and the Irish government didn’t put a limit on the credit availability people could get loans they couldn’t handle. Also Ireland missed the most obvious way to control house prices: residential property taxes. (conefrey and fitz Gerald 2010)
The property boom made it possible to make a lot off inherent windfall revenues. But these revenues were only for a short time period possible. In Ireland they didn’t take the short-term nature of these revenues into account and future expenditure commitments were made on the base of these revenues. Eventually the growth stagnated and these revenues dried up which led to a fiscal crisis. (Goodbody economics consultants (2005))