What a big question. It would be easy to throw blame around, but I don’t think that’s appropriate, nor would it really be accurate to point the finger. There are many reasons why things don’t work as they should or could. Simply, the type of property market we have now is as a result of some things outside Irish control, some decisions that with 20-20 hindsight may have been made differently and, most importantly, the generations-old processes and customs of the property industry.
That last one is actually where the biggest problems are lurking, and frighteningly, nothing has changed about how the property industry manages the sale of property. I will go into detail into the mechanics of what’s wrong and how to fix it in a later post and for now simply discuss the effects of what’s wrong and how it brings us to where we are.
So for now, grab a coffee and see if my single-sitting blog post goes through things as you might remember them happening. There are a few insights you may find interesting.
Let’s go back to the late ’90’s. There was a buzz of prosperity in the air. The Punt had received its forever-ratio to the Euro – 0.787564 – and things looked rosy. The money from European banks started to flow and developers got cracking.
By the time 2004 came around and the EU expanded, Ireland’s economy was widely recognised as the ‘Celtic Tiger’ and many people saw Ireland as an excellent place to go to for work. Why not – things were booming!
Houses were springing up in places we thought were just a cross-roads on a map. People were buying second properties. And third properties. And fourth, fifth and sixth properties. It was a bit wild.
And wow – the money flowed. It was easy to borrow and lenders clamoured for customer attention by offering 100% mortgages. Sure, wouldn’t the house be worth easily 10% more in the blink of an eye? No problem.
And so, we brought in workers to build more homes – and they needed homes – so we build more homes for the workers building homes.
So let’s say we’re somewhere around late 2006 by now. For quite a while people had been talking about a soft landing. Much preferred to a hard landing of course – these being terms used to describe what the eventual settlement of house prices might look like. Would they go down a little and roll on then as supply and demand reached equilibrium? Would people stop buying due to affordability and would we, therefore, see a plunge in prices?
Everyone was worried about house prices. Sometimes they had multiple properties and wanted to know when to get out or they were thinking of buying and wanted to know would they get one cheaper if they held off. Of course, there were those who were left behind by the Celtic Tiger who knew they’d never be able to afford a home. Not everyone enjoyed the party.
Property developers were willing to pay huge sums for appropriately zoned land. Sometimes they didn’t even care about the zoning and they took the chance that they’d later get the zoning they’d need. With absolutely huge sums of money. From banks. Wow. Now, if a deal is deserving of cash, it should get it. But one needs data to understand risk and data they simply didn’t have. More on this in a bit.
There was a general election due in 2007. People who wanted to buy a home – not property speculators, not investors in rentals – people who wanted to buy a home to live in, were getting rightly pee’d off. Home prices had essentially doubled in about six years. Various media outlets indulged in ‘property porn’ – a never-ending stream of material showing people the next evolution of the Irish home. And to add insult to injury, the state was making a mint on the back of every transaction.
Stamp duty stood at 9%. Such a whopping figure that property buyers had to carry on their mortgages, just for the privilege of buying a home. In the run up to the general election, all the political parties were making promises of addressing the issue – after the election. I personally know a number of lucky people who decided to stop and wait at that point – why buy before the election if most possible permutations of a future government would lead to lower stamp duty?
Around March of 2007, property prices peaked. What felt astounding at the time were predictions of price contractions, with actual evidence to back them up. Finally. Imagine that! Evidence! Actual graphs going ‘over the top’. Things started to look a bit wobbly and during the first half of 2007 – there was a major pull back by buyers. There was a general feeling that prices were ridiculous, that the government would change stamp duty and the novel nature of having evidence for price constrictions all conspired to kick off the hard landing effect mentioned earlier.
Now, people still wanted a home of course, exactly the same as now. They would offer maybe 10% less than the asking price and of course vendors wouldn’t bite. For a few months there was a frustrating game of cat and mouse between vendors and buyers. Buyers would offer 10% less. Vendors say no. Two months later vendor indicated acceptance, but the buyers were now lower. Buyers were giddy and developers were very nervous – looking for some way to create a floor in prices.
Let your imagination kick in now, for a brief second. If the vendor could see data which showed they were too high – that they should come to meet the market a bit – might crisis have been averted?
The nervousness spread to lenders and all of a sudden, the money tap was turned off. I remember talking to multiple developers at various stages of planning developments – all shelving their projects. For a time, it seemed that there may be refuge in things like warehousing, but the scale of the crash started to make itself understood. External bad news like a run on Northern Rock later in September and stories of job losses starting here and there – small numbers at first – seemed to hint at a major change coming.
But why did this have to happen? Why did we end up at peak prices in 2007 with some estimates of over 200,000 excess, empty, new units at various stages of construction?
There was none.
And here is where the property industry comes in. I will explore this in much greater detail in a future post, but for now, simply, an estate agent selling homes controls all the interactions with potential buyers. Buyers don’t communicate with each other. Buyers don’t get to see how many buyers are actually out there with the cash and desire to buy a home and they just have to accept that the price is the price. They don’t get to see when a buyer gives up in despair or buys somewhere else – they just get to see that there is a bid they have to beat. Being in an environment with huge pressure to get on the ‘property ladder’, buyers simply buy the houses, as they did during the Celtic Tiger times resulting in the upward climb in prices.
But why did they get the money to buy homes in these circumstances?
Mortgage lenders rely on the performance of the market to assess whether or not a price being paid for a home is reasonable and therefore a safe bet for a mortgage. With so many comparison sales for valuers and lenders to assess, it is regarded as reasonable that if someone is buying a home at a marginal increase on a similar home a few months back, that things are probably OK. What is not understood in this system is the sentiment of buyers at each point. Whether there were ten bidders or just one lonely bidder who was convinced to do the deal.
In 2007, there were some poor, lonely souls who decided to ‘get on the ladder’. They got burned to the max in the years which followed. They didn’t know when they were buying that everyone in industry was nervous at the alarming drop in numbers of willing buyers. They just bought a home.
Now, someone who bought in, say, 2004, with some little bit of the mortgage paid off by 2007, and likely having bought at a better price, had a little bit of time before prices dropped to the level they had paid for their home or, more accurately, were now at in terms of balance outstanding on their mortgage. But so rapid was the drop in prices and volumes of sales over the next few years that soon a huge number of people who had bought in the ’00s were in negative equity.
What that means is that they owed more on their home than it was worth. Not a big deal really if one intends to stay in one’s home and still has a job to pay the mortgage. But with so many people in negative equity and general, external, economic shocks hitting Ireland, we soon had major issues with distressed mortgages. Lenders were overwhelmed with this. And of course, add this to all the money which had been loaned out to developers to buy sites or on half-constructed developments of all kinds, we had a major problem.
But I return again to data. Did we really need to have as spectacular a property crash as we had? Did buyers who pulled back because of stamp duty, for example, know something – or just have a feeling? Were people who bought at the peak in 2007 naive or just unlucky? Would they have bought if they could see that at the price they were being asked, there were just a handful of others willing to pay at that price?
There will always be external influences on any market, especially the property market with the high-ticket-value of a home. What’s missing at times is consumer confidence. What makes people back away from buying in a market?
– prices rising too high
– some mention of a possible reason for a future price drop
– economic circumstances reducing buying power or competition for homes
In my humble opinion, that’s boom/bust economics right there. A yo-yo effect, as the blind buyers stumble in the dark looking for some way to guide themselves through the process of buying a home.
If in 2005/6 people had been able to see that there were fewer fellow buyers willing to buy each time there was a price hike, that would have been a warning in itself. Buyers would have pulled back until prices returned to a level at which more people began to show interest. Then as now, that kind of information is only visible in retrospect, potentially 3 months in arrears. As such, reactions to ups and downs carry forward three months into the future until the next quarterly report and what could have been a self-correcting mechanism in real time ends up being an amplified yo-yo effect to everyone’s detriment. It ripples through the whole home-building eco-system and affects construction finance lending, developer confidence, buyer confidence and policy formation. And to bottom-line it – it affects our ability to keep the financial system, policy formation and buyer capabilities in harmonisation long enough to have a stable environment to ensure we have enough homes.
If things were going so wrong, why did European banks keep lending to Irish banks in the years 2005 – 2007?
Neither the Irish banks or the foreign banks had any insight into the changing attitudes of buyers. All they had to go on is that units were sold at whatever price. They had no insight at all into the anger or the frustration of homebuyers. Such data as they relied upon did not take account of the change in attitude brought about by stamp duty being used as bait in a general election. No, all that mattered was evidence of transactions, such as it was.
And after things went so spectacularly wrong and we eventually needed NAMA to take toxic debt away from lenders, we were then all looking around to see if things would start again. We bailed out banks. It cost extraordinary sums of money. Perhaps we could have let financial institutions fall and work with whatever remained at a lower cost to the tax payer. All we know for sure, however, is what did happen and it is that which is contributing to our current state.
Let’s say we are now at 2012-2013. People had become weary of a stagnant economy. There were people who again wished to buy a home. The pain was beginning to dull and house hunters were looking to bag a bargain. The problem then was that we had no comparable evidence for house sales.
Remember the mechanism which saw lashings of construction finance flowing as well as the 100% mortgage before the crash? Lenders would look for evidence of market activity and in good times, there was always evidence. Therefore they lent money to almost anyone who asked. Well, in 2012/2013 there wasn’t much evidence of purchases. Therefore, it was difficult to get a mortgage. They scrutinised the borrower up and down. But eventually, people could get a mortgage. And thus, there were some pieces of evidence for those coming a few months later. And slowly, confidence returned to lenders. The price of a house, in some areas at least, could be understood and things started to move again.
The first order of business from a government perspective was to make some dent in the glut of half finished houses. Get them moving again. Vast sites and groups of properties were sold at a fraction of their initial value – to funds with money to complete. Maybe the properties could have been sold individually. I believe the thinking was to simply draw in fresh capital to get the system moving again – notably the same system as we had had before.
Of course, there was significant government tinkering with things and big incentives for people to buy properties with CGT incentives, etc.
Eventually, after having sold lots of properties cheaply to foreign funds, we had something of a system again.
The next order of business became pressing. Stimulating construction again. And after many ups and downs, yes, there is construction taking place. Not enough of course. Also, with the mechanics of how the market was brought back to life, we seem now to have many large funds buying housing developments, apartments, etc and now, we have large scale planning applications for rental-only properties. This is because it is so difficult to buy a home. People need a roof, but anything the market produces in any significant numbers is snatched up by a fund. Some aren’t of course and there are very expensive houses available.
But it’s the same feeling as was prevalent in 2007. People are pee’d off.
And it’s all about data – or the lack of it.
Think of this. in 2006 there were lines of construction workers in the mornings at every provincial filling station around the country, all queuing for a breakfast roll. Now, for some reason, there are no builders’ vans double parked all over the place any more. Why not?
It’s because there is not enough data.
Think about it. Take a small village in Mayo. If there have only been a handful of sales of semi’d’s and a few fixer-uppers, even though it may be the most idyllic location in the country, nobody can get construction finance to build there. All because of the lack of comparable evidence. (Um, what about all the people who want a home, especially those mobile, remote-enabled workers who can go anywhere? See future posts on how Homebuyer’s Hero can get them into homes.)
Having good data means having the ability to mitigate risk. Financiers need to lend prudently, because if they don’t, they fear getting burned. But it is bizarre,# that we have huge demand and yet, rural villages, which would be so in demand from remote-enabled workers, cannot attract finance in a manner so as to enable developers to take the risk.
Dr Rory Hearne wrote in today’s Irish Examiner that Ireland should create a new semi-state construction company so as to give construction workers a decent wage. This company could then build houses, is his thinking.
He feels that construction workers are building hotels and office blocks, when really they should be building housing and that is a reasonable perspective.
From my perspective, and seeing as Homebuyer’s Hero aims to start up by bringing houses to the market in quasi-rural areas, all we need is to get our model working with a test case. (More on this in a future post.) The developers and construction workers who would build those houses are already there – they just leave in unmarked vans early in the mornings and commute to where the work is. Perhaps it is to the hotels and office blocks Dr Hearne mentiones in the Examiner.
All we need is the new housing paradigm offered by Homebuyer’s Hero, which will empower buyers and de-risk construction finance. The vans will stop driving long distance to work.
But at the risk of annoying the reader, in a general sense, it’s all about data, if you haven’t picked that up. That’s why we have a dysfunctional market. When data is made available to homebuyers, they will dictate the pace of pricing. Transparency would ensure that there is an always-on market confidence and it can decouple the ups and downs of the wider economy from the provision of this most important human need – shelter.
The data which can set the property market free and turn it into something which is fair, with no informational asymmetry is already in the hands of homebuyers. Homebuyer’s Hero intends to tap into this data and make it available to everyone for free.
Be sure to see our future post on the nature of the property market and how we intend to fix it.
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