The Irish went from being abnormally poor to being abnormally rich. They didn’t accept any signs of an overheating economy, and prices were growing sharply. And then they reached the ceiling; the property bubble boomed and the Irish banks found themselves in a deep crisis. Ireland’s progress was as overwhelming as was its fall.
The Rise of the Celtic Tiger
Ireland, the third-largest island in Europe, is the second country that needed a bailout following Greece. However, before the crisis, it was one of the most affluent countries in Europe!
By the start of the new millennium, Ireland was one of the world’s fastest growing economies. It had transformed from an agricultural country to a modern economy dependent on services and high-tech industries. The real estate market was an even better investment than banking for a while, and new, shiny towers rose over all over the country. Housing prices tripled between 2000 and 2006. Since 2000, the Irish have built about 75,000 units every year.
Instead of the emigration that was so common in the past, a lot of immigrants have moved to the country. Ireland attracted international corporations due to a highly educated workforce and low corporation taxes and quickly became heavily reliant on foreign investors. Ireland was called “the Celtic Tiger.”
The Fall of the Tiger
The real estate market was highly overvalued. Prices were growing rapidly, and speculators entered the market believing that the property market would remain a safe and profitable investment. However, demand fell in early 2007, and prices decreased as a result. That was just the beginning of Ireland’s crisis, which has no precedent in history. The property bubble burst in 2008, accompanied by the Irish banking crisis.
There were various signs that the economy was overheating, but the warnings (such as that of Morgan Kelly, professor of economics at University College Dublin) were ignored or even suppressed. And when the predictions came true, the Irish government was forced to take radical steps — cutting public spending, raising taxes, and ushering the nationalization of the Anglo-Irish bank in January 2009.
However, it was too late: the economy shrank 7.1 per cent in 2009, the deficit grew to 14.3 per cent of the GDP, unemployment rose close to 14 per cent (an almost 10 per cent growth since 2005), and the Irish have started leaving their homeland once again. In March 2011, Patrick Honohan, Central Bank Governor, described the crisis as “one of the most expensive banking crises in world history.”
Ireland decided to save the banking sector at all costs, but it couldn’t manage that alone. In November 2010, the government accepted a package of €85 billion from from the monetary fund and the European Commission. Ireland had to agree to one of history’s harshest austerity programs. The government is set to cut spending by €4.5 billion and increase taxes by €1.5 billion. Moody’s reacted almost immediately and downgraded Ireland’s economy five notches, to Baa1 from Aa2, with a negative outlook.
“The mood in the country is for an election and the people want a new mandate — that much is clear,” said Joan Burton, deputy leader for the Labour Party after the bailout was accepted. Elections took place in February of this year and the Irish ousted the old government.
In its latest quarterly review, the central bank said it expects Ireland’s economy to grow by 1 per cent of GDP this year — more than the 0.8 per cent foreseen in July — and the Irish government remains on track to meet its bailout targets but still has much to do because weak consumer demand will continue to complicate Ireland’s path to recovery.
The Housing Market Today
By the second quarter of 2010, house prices fell by 35 per cent compared to 2007 and the number of housing loans fell by 73 per cent, and Ireland’s property market is still in serious trouble. Massive tax hikes and sharp spending cuts contributed the most to the weak property market.
“Doubts about the Irish economy and the troubles in the Eurozone have led to Ireland’s commercial property returns falling to their lowest point since September 2009,“ the Investment Property Databank said in July 2011. The national average price of residential properties was €210,000 in Q1 2011, down 43 per cent from its high of 2007. The latest figures by the Central Statistics Office showed that prices fell by 0.8 per cent in July compared to 2.1 per cent in June and house prices in Dublin are about 47 per cent lower than in 2007. Analysts expect that the price falls will begin to get slower now.
The housing market collapse also devastated the rental market, but the situation is now stabilizing because debt-holders have just two options: renting or emigration. The number of rental properties rose from 6,200 units in August 2007 to more than 23,400 in August 2009.
Another problem is oversupply. It was estimated at 17.4 per cent of the housing stock in 2010 by University College Dublin. Due to the falling prices and high rate of oversupply, the housing market may already be undervalued. S&P’s expected undervaluation by about 12 per cent in June 2010.
“We will visit the banks to examine very closely how they are handling distressed mortgage holders and to check that they have the appropriate framework and adequate resources in place to look after their distressed customers properly and to meet their statutory requirements under the code,” promised Professor Honohan in September 2011. The Irish will have to took a long and challenging journey toward economic recovery.