IRISH HOUSING AND WAGES, 1977 to 2006: PORTRAIT OF A SCAM
Jun 8th, 2010 by Conor McCabe
There’s a comment often bandied about when it comes to housing in Ireland: ‘our parents got through it, so can we.’
Well, our parents didn’t get through this, because our parents never faced what Ireland is facing now - at least in terms of housing debt.
The sheer level of theft which has taken place - and I’m not even talking about NAMA - is completely unprecedented.
The tsunami of debt which is the Irish mortgage market has yet to hit us, but when it does there will be very few cards on the table as the government played most of them in setting up NAMA in order to save the architects of this Celtic Babel.
And this was orchestrated. Note the date when things really go crazy, i.e. just after 1997 and just after Fianna Fáil gain power.
Best practise has house prices at 2.5 to 4 times the average industrial wage.
Once this ratio is broken, we’re into bubble territory.
The CSO lists the Average Industrial Wage back to 1977 for those in the manufacture of transportable goods.
Taking that as the base wage, and taking the average price of a house as the average between the price of new and second/hand houses, we get the figures above, and the affordability ratio below.
It shows us that apart from the recession years of the mid-1980s, housing in Ireland has been overpriced for the past 33 years.
However, it only goes completely nuts after 1997, when Charlie McCreevy is made Minister for Finance and implements the various tax breaks and incentives as outlined here.
The figures belie the current myth of the ‘Good’ Celtic Tiger which ran up to around 2002, and the ‘Bad’ Celtic tiger which ran from 2002 to 2007.
In 1979, on the cusp of Ireland’s last major recession, the house affordability ratio breached 5.0.
In 1997, house prices once again breached 5.0, and just kept on climbing.
By the time the ‘Good’ Tiger ended in 2002, the affordability ratio stood at 8.17. In 2007, at the end of the ‘Bad’ Tiger, it stood at over 11.
And these figures for affordability are based on the average industrial wage (transportable goods).
In 2006, when that yearly wage was, gross, €30,000 Euro, the median income in Ireland was €25,000, and 2/3 of ALL incomes were below €30,000.
It is hard to know what will be left of the Irish economy once this government leaves office.
[House prices going back to 1975, adjusted to Euro, are available here.
The Average Industrial Wage(Transportable Goods) for years 1977 to 2006 is available in the yearly Statistical Abstract/Yearbook of Ireland, published by the CSO.]
Superb work Conor.
Thanks Garibaldy. I spent a couple of days working on the figures, and then double-checked them today in the national library, and I have to say, when the graph came out I was gobsmacked. The scale of the con perpetrated on the Irish people is stunning.
I wonder how similar figures would look for the north. Probably not as bad but still desperate.
And yes, total con. Amazing how easily the culture was penetrated with this home owning as main aim in life business.
I second Garibaldy. The first graph is shocking. I think, as well, you’ve nailed the two emerging myths which will serve to re-frame the debate. ‘Our parents got through it’ is being used to soften the austerity programme and its use will intensify as things, inevitably, worsen. Second, the good/bad Celtic Tiger dichotomy you mention pushes the ‘rebuilding competitiveness’ of the pre-2001 Tiger economy of low wages, reduced public spending and, paradoxically, prolonged unemployment.
I’ve only had a quick look at the figures for NI, but what I found interesting was that up to 1982 owner-occupancy stood at 61%, but by 1991 it had risen to 71%. no great surprises given the Thatcherist policies of that period, but 10 years behind Ireland, which had owner-occupancy of approx. 61% in 1971 and low-seventies by the 1980s.
I really was taken back, CMK, by the figures once I graphed them, and thing is, I’m giving the estate agents and banks/building societies a lot of leeway here by working off the average industrial wage, and not the average wage of mortgage-holders, which is a lot lower. And even though they were conning us in the 1970s and 1980s, the scale of what took place when Fianna Fáil regained power in 1997 is nothing short of theft. They stole 40 years of a nation’s earnings by getting the citizens to mortgage it away to FF’s friends in the banks. Fucking unbelievable.
While I can’t argue with the statistics, you have to consider the impact of low interest rates. When house prices were low, interest rates were high (as far as 18% I believe), so the percentage of monthly income was roughly the same (OK, it was 1/3 versus 1/2 or so). And you also have to consider that in bygone years there would only have been one earner, so while average industrial wages might have been 30K, average household income might be double that. Add to that lower taxes and you see that it is about affordability. I don’t think its a conspiracy, just a badly managed economy. At the end of the day, it was Irish people that bought and sold houses as commodities rather than dwellings that largely caused the spike.
“At the end of the day, it was Irish people that bought and sold houses as commodities rather than dwellings that largely caused the spike.”
Have you any evidence for that, Ken, any figures to back up that statement?
Also, regarding this:
“When house prices were low, interest rates were high…”
When were house prices low? The figures show that Irish house prices were consistently overvalued from the late 1970s onwards. Again, give me the figures.
“I don’t think its a conspiracy…”
Neither do I. Economic class relations are not conspiracies, they are how the machine works. And what we are looking at here is the slimy trail of one particular class over another.
Thanks for this Conor.
Do you have a graph for the years to present, the data you’ve plotted appears to stop in 2005.
Morgan kellys work indicates that bank lending is the major contributor to house prices. i.e. 100% mortgages and lending at 9 times income, with interest rates a lesser factor.
Though I would like to hear your opinion on ‘cheap money from europe’ factor? and on other social factors e.g the ‘women now working and not staying at home’ factor.
Thanks again,
CP.
Well done! The use of banking and the money machine to impoverish the lowest to enrich the wealthiest is a common feature usually buried by the MSM.
It is in fact, income and wealth inequality first deriviative, an indicator that the bubble exists and is about to burst.
Such stats are not gathered in oligopolies, for obvious reasons, but the UK and America do publish them. Thos who indulge, buying property or amassing pension funds that eventually fund mal investments, are sent down the snake while those in on it ascend the ladder. Natuyrally there is no conspiracy ….. it is entirely natural, just like the French Revolution!
Celtic Phoenix, thanks for the comment. Morgan Kelly is of course correct in showing that banks helped fuel this scam, but I think myself that the 100% mortgages is talked-up a lot in the media. Altogether it was a lot more subtle. The stats show that house prices were 6.45 times the average industrial wage in 1998, and just kept climbing. 100% mortgages, which were an act of desperation on the part of the banks, weren’t brought in until c.2005/2006. I talked about this three years ago, the link is here: http://dublinopinion.com/2007/08/18/irish-housing-watching-a-fat-man-dance/
One scam was the shift from mortgage lending based on wage income to household income. This took place some time in the 1990s, and even though the effect of that was to allow prices shoot up even further, fuelling this insane bubble, we still get people like Ken Carroll (and he is by no means alone here) talking about household affordability, as if the present crash is not linked in any way to this con game.
I mean, what is the effect on the wider economy when you have two household incomes, not just one, being sucked up by mortgage repayments? It depresses demand for goods and services in the rest of the economy. The mortgage repayments just hoover up the cash. But, the way that was papered over during the past 15 years was more credit. Now, this wasn’t just an Irish phenomenon. The role of credit in fuelling demand while wages are suppressed is well-documented - check out David Harvey on this - but it’s economic insanity. It cannot go on for ever, so it hasn’t, and it will destroy economies, which it has.
no property was overpriced in Ireland but not nearly as much as your article says! Most analysts say that at the most it will fall by another 10% before it reaches its real value.
Yeah? Any evidence for that? Would you like to provide actual analysis instead of just saying “most analysts” and leaving it at that?
“At the end of the day, it was Irish people that bought and sold houses as commodities rather than dwellings that largely caused the spike.”
A great read is John Kenneth Galbraith’s ‘The Great Crash 1929: The classic account of financial disaster’. He states that you know you have a bubble when the underlying asset class becomes irrelevant.
Some people were buying 5 / 6 apartments at a time, off plan, and flipping them 6 months later. If this isn’t an example of the ‘underlying asset class being irrelevant’, I don’t know what is…
I think the Irish Times did one of those summer “filler series” in the late 1990s (I’m guessing 1998 or 1999 +/- 1 year) in which they looked at the price of houses compared with salaries between — if I recall correctly — the time the article was written and the 1950s. My mother told me that the husband of a cousin of hers inherited some houses on Marlborough Road in Donnybrook in the middle of the C20 and sold a pair of them a year apart, with a huge increase in the price over that year.
A young person ambitious to launch out into life can be vulnerable to overcharging on housing. (I remember!) There was a time when such a person’s ambition/desperation was limited. In the early 70s the building society formula was that loans were for 75% of the price and the loan amount was calculated thus: 2.5(Annual salary 1) + Annual salary 2.
Take two people on good incomes setting up home in the early 70s. Say, Salary 1 = 1.5K and Salary 2 = 1K. This gives: 2.5(1.5) + 1 = 4.75. That is to say, these two young people could borrow up to 4.75K as 75% of the house price. The house price then comes out at 6.3K. Guess what? In 1970-71 Gallagher’s were selling 3 bed semis in Lucan, Tallaght and Raheny for a tenner less than 5K.
Let’s try this calculation with Euro and today’s incomes. What would be good incomes for two young people today? Well, let’s assume that equality has made strides and that it is two young people on the same income. How about 35K each or a “household income” of 70k?
Here goes: 2.5(35) + 35 = 122.5. That would be a 122.5K mortgage as 75% of the house price. This would give a present day price of 163K for a 3 bed semi in the Dublin “commuter belt”.
I accept that these calculations ignore many variables. They’re rough! However, they indicate that an affordable 3 bed semi with gardens to which two Dublin residents on good incomes might aspire should be about 160K. The price today - AFTER all the reductions of the past year or so – is still in the 220 to 300k range.
The scam was worked by abandoning the 2.5(X) + Y formula and giving 100% + mortgages to people made desperate by incessant talk about the “property ladder”.
Thanks for the comment, Colum, and the figures. Most helpful. Cheers.
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Fascinating bit of analysis - so simple and yet so telling. Makes you wonder how they didn’t see it coming? I don’t suppose anyone has come across a decent pre-crunch article highlighting these concerns? It would make very interesting reading I think.
Wow, and I thought we Americans were getting screwed. So what’s in the water that every country’s bankers and politicians have been drinking? Shit, I’m sooo glad I’m still in school, hopefully things will be a little worked out in 3 years. Probably not though.
Brilliant work Conor and an excellent intelligent discussion. I find it flabbergasting Irish people’s lack of inclination to discuss anything of substance when it comes to moral or fiscal responsibility (though we have been forced to do so by the circumstances). If you brought up a subject like this during the Celtic Tiger era you would have been branded a wierdo or lunatic.
The Irish are happy to go along with whatever is moving in the “right” direction economically. e.g. the use of Shannon by the US War Machine.
We Irish like to think of ourselves as a wonderful people. In reality we are as crooked as the worst of them, most especially when we can’t see the results of our actions.