The Sins of the Few
I recently returned from Ireland. I was in Dublin and then spent some time on the West Coast. The last time I was in Ireland, 5 years ago, the Celtic Tiger was roaring, and everyone was driving around in SL600’s and owned vacation homes on the Spanish coast; now there’s over 14% unemployment in the country and over 300,000 homes sit vacant.
Ireland is in a tough spot. The previous government’s (Fianna Fail) perilous decision to cover all bank assets (not only deposits, but bonds and debt) during the onset of the financial crisis has put the country severely into debt, which resulted in a joint EU-IMF bailout of the country in November of 2010. The government has had to drastically cut services and public sector wages and raise taxes, further hampering a recover. Most major banks at this point have essentially been nationalized, including AIB, Anglo-Irish, Irish Nationwide and EBS. Furthermore, a recent stress-test found further capital shortfalls in the banks, with more capital injections likely being needed.
There will be no luck for the Irish economy, but there are sectors that are doing well. There was 1.3% increase in GDP in 1Q2011, due largely to exports, which are booming; however, domestic consumption is still down. Looking at GNP, which excludes Irish-based multinationals, it was down 4.3% from the prior quarter; overall, GDP is off 18% from peak. Tourism appears to be doing ok – it’s anecdotal, but every place I went was mobbed by tourists, and the hotel where my sister was staying was completely booked up. Google recently purchased the largest office building in Dublin, a sign of a long-term commitment to the country, and other tech firms and pharmaceutical companies have announced than plan to increase hiring in coming months.
The country will probably see a slow improvement in the economy over time if the ECB keeps interest rates low (many mortgages in Ireland variable and are tied to ECB rates), and if the IMF extends extra credit to the country if it is needed. However, the real thorn in the side of the Emerald Isle is the remains of its housing bubble. A recent report by the Urban Environment Project at University College Dublin (UCD) puts the number of vacant homes in the country at 345,000 or 17%, of the housing stock. This is even higher than the report by the National Institute of Regional and Spatial Analysis figure of 300,000. Some of these homes may be vacation homes, but regardless, in a country of 4.4 million people, it will take years, if not decades to clear this inventory.
While on average, real estate prices have fallen by over 50% nationwide, land values have dropped by 75% or more. Near the peak of the bubble, a disproportionate amount of loans, in terms of euro-value, were given out to just a handful of developers; now NAMA, the organization created to handle the distressed assets, is forced to dispose of this land at a massive loss. The average Irish citizen will be paying for this mania for decades though increased taxes, and lower wages. As my uncles, who had to close one of his businesses put it, “the many are having to pay for the sins of the few.”
The only Green in Ireland.
This blog-post also appears on my companies blog: Commercial Grade
