Aug 25, 2009 - 4:33:28 AM
International House Price Comparisons 1970-2006: Irish price growth in 36-year period third highest among 18 Developed Countries
By Michael Hennigan, Founder and Editor of Finfacts
Feb 4, 2008 - 6:14:17 AM
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BIS House Price Data 1970-2006 (in Microsoft Excel format)
Data from the Basel, Switzerland-based Bank for International Settlements (BIS) shows that in 1980, Irish house price growth from 1970, adjusted for inflation, was well ahead of Europe's most successful economies of the past four decades - Sweden, Norway and Denmark. A spurt in Irish prices had been fuelled by a huge growth in public spending in the period 1977-1980 and Irish prices then fell every year until 1987.
In 2006, Irish price growth from 1970, exceeded that in Sweden by 168%, Denmark by 65%, Norway by 79% and Finland which has been a strong economic performer since 1993 - a period that coincides with the emergence of the Celtic Tiger - by 123%.
Irish price growth has been comparable with that of the UK where planning restrictions keeps building of new houses at the lowest level of the big European economies. Traditionally, the Tory controlled councils in the shires have supported the protection of the green belt i.e. Nimbyism (Not-in-My-Backyard Syndrome) while it has suited Labour controlled councils in the cities to pack as many people as possible into existing urban areas.
Hugh Pavletich a New Zealand based commercial property developer and co-author of the of the Annual Demographia International Housing Affordability Survey, says that the “build rate per 1000 population” is as low as 3 in the UK, around 7 in Australia, 6 New Zealand, 20 in Ireland in 2006 and 17 in 2007. He says that it is due to fall to 4 in the US this year but is holding up very well in normal markets such as Texas.
While the sprawl footprint of Dublin is said to be as big as that of Los Angeles with a quarter of its population, a typical two-bed apartment in Dublin of about 750 square feet sells for €400,000 - 12.5 times the average industrial wage.
In October 2006, we reported on a global survey which showed that for the cost of a typical house in an area favoured by a management level family in Dublin, you could buy nine similar houses in Houston, Texas, three in Amsterdam, two in Sydney and almost two in Tokyo.
Consultant economists DKM in 2000 produced a paper critical of planning authorities and advocated development as far out from the centre of Dublin as a 25-mile radius.
The paper pointed out that the M25 ring route around London is 25 miles from the centre of that city and contains within its circumference a city of eight million people. A similar ring around Dublin contains just one million people, indicating that Dublin's future development should be in higher density along transport corridors.
Dublin planners and politicians reacted to the grim experience of housing young families in high rise blocks in Ballymun in North Dublin in the 1960's by providing a gift to vocal Nimbies (Not-In-My-Backyard Syndrome) railing against any development that could cast a shadow and effectively banned high-rise developments.
The myopic jellyfish and their cheerleaders, through design or stupidity, ignored the fact that extrapolating from the inevitable outcome in a massive public housing development, where there was no property interest and inadequate playing facilities for children, was not good urban planning.
Dublin property prices are comparable with those in London now. So it would seem that the rational proposal from DKM consultants on concentrated development in Dublin, would fuel further house price inflation?
Every society has its taboos and sex is seldom missing from the top ranks. While issues such as clerical child abuse are no longer taboo subjects in Ireland, the issue of land development reform remains the great untouchable. While Ireland can brag about some low taxes, the creation of an artificial scarcity of land in a country that is 4% urbanised, creates an army of lottery winners, paid for by other taxpayers. It is a double whammy because the principal beneficiaries - farmers - are already on public welfare via the Common Agricultural Policy, which subsidises up to 80% of their income.
A public tribunal has been investigating planning corruption for more than ten years and the land-rezoning system that triggers a huge multiple in value when land is rezoned or likely to be rezoned for development, thereby promoting inducements for politicians, is impervious to reform.
The two principal political parties, Fianna Fáil and Fine Gael, compete for the votes of farmers and neither party would risk taking away the opportunities, while the urban electorate remains largely indifferent to the issue.
Even the Progressive Democrats - currently on a respirator because of its failure to promote consistent ideas that were separate from the conventional Irish system of bogman politics, that gives primacy to "messenger-boy" local politics - fatally fell for the short-termism of pandering for the farmer's vote.
Tom Parlon, the former President of the Progressive Democrats, said in a speech in 2003:
The provision of quality affordable housing to all citizens is the ultimate goal that the State wants to achieve, and I fully support that. But I believe that weakening private property rights as a means to achieve this goal would be a great mistake.
Such an approach is gift-wrapped in an ideology somewhere left of Stalin, which has no place in a modern dynamic open economy like Ireland.
Any measure giving the State the power to control the value of private assets would have major negative ramifications for thousands of property owners and would be a jump back to the dark days of the 19th century.
What if your home, your business or your farm is zoned for development? Should you be allowed reap the benefits of this? In a democracy of course you should.
Yes indeed - at the expense of other plonkers!
As for ideology, it would surely be a travesty to term those recipients, including Parlon and top recipient beef processor Larry Goodman, of cheques from the CAP - the pan-European welfare system - of being socialists. Praise the lord and pass the ammunition! Goodman collects more than €500,000 per year from the CAP and it is payable even if he just watches the grass grow on his 1,600 estate.
Hugh Pavletich |
The Irish of course have a great attachment to property because of the British landlord system but those who gain from the Irish system have no qualms becoming landlords! [See Finfacts comment: Irish Property Obsession, British Landlordism and Myths ] Before Parlon became a TD in 2002, as leader of the Irish Farmers' Association - which has vied with the Irish Hospital Consultants' Association in recent decades for the prize of the most militant trade union - won another bonanza from the Irish Government, extending the numbers in the land development lottery.
AVERAGE ANNUAL INFLATION ADJUSTED INCREASE 1970-2006
The Government agreed to significantly increase the compensation for land acquired for roadbuilding.
It was reported in 2006 that a quarter of the €18.5bn of taxpayers' money being spent on new main roads will go into the pockets of landowners and archaeologists.
An astonishing €4.6bn is being spent on compensating landowners along the routes of roads by companies over the next 10 years.
A further €370m is earmarked for archaeological digs to satisfy environmental concerns.
This is far more than is being spent on land or archaeological digs in any other European country where major roads projects are undertaken.
A full 23% of the overall budget of the National Roads Authority for roads is to be spent on compensating landowners.
This means that as little as €13.5bn will remain out of the original €18.5bn announced by the Government for roads in the Transport 21 package up to 2014.
The increase in the price of land for infrastructure projects has rocketed in line with the Celtic Tiger property and land boom.
The amount the State has been forced to pay out for land compensation has been described as "disturbing" by the head of the National Roads Authority.
It accounts for 23% of the cost of roads projects in Ireland, but just 12% in England, 10% in Denmark, 9.4% in Greece and 1% in Iceland. A further 2% of the €18.5bn provided in the Government's Transport 21 for road building over the next decade will go to archaeologists.
In Greece, one of the country's with the richest archaeological treasures, has managed to build new roads while spending far less than Ireland on either land compensation or archaeology.
As a percentage of the total costs of roads, we have the biggest land cost.
Fred Barry, chief executive of the National Roads Authority, said that Ireland's expenditure on archaeology exceeded all European countries.
He described the increases in the cost of land for major roads projects as "disturbing".
Public funding of archaeologists as well as thousands of researchers (4,600 Full-time equivalents on the public payroll), will surely be a challenge when public spending is no longer on autopilot.
There is concern about competitiveness of the Irish economy and it's usually wage costs are highlighted while housing and other commercial property costs are usually treated as if they are the product of what philosopher-economist Adam Smith termed "the invisible hand."
In the late nineties, the then Minister for the Environment Noel Dempsey commissioned reported from economists Peter Bacon to review measures to make house purchases more affordable for first-time house buyers in particular.
At the same time, the Minister for Finance was throwing oil on the hot housing market by extending and widening generous tax incentives for investment in residential property including holiday homes and he reduced the capital gains tax from 40% to 20%. So-called "designated areas" for urban and rural development were extended to every political constituency in the country.
The reduction in the capital gains tax rate to 20% compared with a top income tax rate of 42%, in a market that was being promoted as being underpinned by the word "demographics" that became a short-hand for the most economically illiterate in the country to rationalise that the promised land had been reached.
In January, the Irish Auctioneers and Valuers' Association said that there are 40,000 vacant apartments in Dublin - equivalent to more than half of the Irish housing units that were built in 2007.
Minister of State for Housing said last week, that he welcomed a "sustainable" housing market. That's the current mot du jour and who knows what it will be in a year or two?
Taoiseach Bertie Ahern is likely to welcome "sustainable" conditions soon.
In April 2006, he said that had listened for seven years to warnings and arguments about difficulties in the construction sector."I think you have to look at the asset. This is the question: if you are borrowing 'x', if you sell the asset, if there's a bit of a downturn, will you get 'x' back in return? That's the issue. At the moment, there doesn't seem to be an indication [of difficulties].
"I mean quite frankly, if you had taken the advice a year ago you would have lost a lot of money. Everybody said we're going to see a huge downturn in 2005 linking into 2006 - they were entirely wrong.
"Really we should have an examination into why so many people got it so wrong. My view is there's not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year."
In April 2007 he said: "On the other side of the election we'll get back to normality. And I think that normality will be the soft landing. The construction projections were that we will move from something like 93,000 houses to 80-something. Now that's not going to create any kind of a difficulty."
In July 2007 he said:"Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide because frankly the only thing that motivates me is being able to actively change something."
In September 2007 he said: "But there is no place for negativity. No need for any pessimism. Above all, there is no place for politically motivated attempts to talk down the economy and the achievements of our people across all sectors."
In 1973, a report known as the Kenny Report recommended that development land should be priced with a 25% mark-up on agricultural land prices.
In 2006, in The Sunday Independent, its then Political Correspondent Joseph O'Malley wrote: Six years ago, Bertie Ahern asked the Committee on the Constitution to examine the issue. In 2004, it concluded that Mr Justice Kenny's recommendations could be introduced by legislation, and without amending the Constitution. Two-and-a-half years later, still no legislation, but last week the Taoiseach was hopeful "we can do it by legislation". He was awaiting a final report from the Attorney General.
Besides farmers, developers had been making a killing from development land in a rising market.
Economist Jerome Casey, who is editor of the Building Industry Bulletin in a report in 2003, said that site costs account for 42.5% of the cost of a house nationwide. Casey said that typically in the mid 1990s, Durkan Brothers sold apartments off O'Connell Street for £35,000 to £40,000 (€44,440 to €50,790) for which the site cost was £5,000. Currently, both the Irish Council for Social Housing and private house builders are reporting city house site costs at up to 50% of the house price. Outside the cities, site costs can represent up to 40% of the house price. For the country as a whole, site costs may now constitute 42.5% of the house price, an increase of almost 30 percentage points on the pre-boom position. In Dublin that increases to 50%. Overall the Irish figures are grossly out of line with the rest of the developed world.
In the US land accounts for 20% of the total cost of a house. In Denmark the figure is similar while in Portugal the land factor drops to 15%.
It is similar for the rest of Europe. Casey estimated that the 30% differential between land prices for houses in Ireland accounted for about €6.6 billion of the total new and second hand housing market, estimated to be worth €22 billion in 2002.
By applying the 30% margin on the cost of land, Casey said the amount of surplus profit for the key landowners was estimated at €300 million. In his report Casey said the major issue was that just 25 individuals or companies controlled more than half of the housing development land in the Fingal area. That includes Balbriggan, Lusk, Donabate and other well- known areas targeted for development on Dublin’s expanding north side.
Casey's conclusion means that up to eight years in the life of a normal 25 year mortgage now goes to pay for the excess in the price of the site.
In November 2004, Minister for Finance Brian Cowen said that 28% of the average price of a new house in Ireland is collected in taxes and levies by the State.
The creation of an artificial scarcity of land is one of several factors that impact competitiveness in the Irish economy but the system will not be changed by the current generation of politicians.
- -The reference to 36 years, relates to growth from 1971 on the base year 1970.
- - Information on the country sources of the BIS house price data is provided in the US Federal Reserve paper: House Prices and Monetary Policy: A Cross-Country Study
- -Construction accounted for 23% of Irish GDP in 2006 - about double the EU average.
- -Employment in the Construction Sector grew from 126,000 in early 1998 to 282,000 in December 2006 compared with 240,000 in Industry.
- -Irish investment (equity and borrowings) in commercial property - principally overseas - in the period 2001-2007 amounted to €50 billion. This compared with venture capital investment in Irish business in the same period of €1.2 billion.
- - Besides a significant dependence on the Construction Sector in 2006, Foreign-owned firms - overwhelmingly American - were responsible for 90.2% of Irish exports in 2006 - including both merchandise goods and internationally traded services.
Dr. Garret FitzGerald wrote in the Irish Times in 2006 that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors - both of which were essentially temporary in character.
The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1 per cent of Europe's population, attracted up to 25 per cent of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4 per cent annual increase in output per worker at national level, ie productivity.
The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from "home duties" to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here.
Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation.
FitzGerald wrote that the huge increase in the proportion of our population engaged in work, and the consequential drop in our dependency ratio - more rapid than had ever previously been seen anywhere in Europe in peacetime - accounted for more than half of the improvement in our living standards. But that extraordinary combination of productivity growth and reduced dependency, which distinguished the 1990s in Ireland from any other decade, was a temporary phenomenon.
“In future, our standard of living is likely to rise much more slowly than we became accustomed to during the 1990s. However, I don't think that with most people this particular penny has yet dropped,” FitzGerald wrote. “Since the end of 2003, output per worker in Ireland has been almost static. It seems to have risen by only 1 per cent in 2004 and not at all in 2005. Even if the CSO was in due course to revise upwards its current estimates of economic growth in those two years - which is quite possible - any such revision is unlikely to be on a scale that would show any appreciable rise in productivity…. in the absence of improvements in output per worker, the current spending spree, financed by borrowing, could not continue indefinitely. And, on top of the uncertainty created by our huge growth in dwelling construction, this new factor introduces a further element of uncertainty into our economic prospects in the latter part of the current decade.”
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