A strange headline from an Irish newspaper: “Buyers queue for ghost estate sale as homes go for half price”. Ghost estate? No, not an outbreak of the supernatural, just a reflection of the new normal in post-boom Ireland.
From the early 1990s up to just a few years ago, Ireland enjoyed an extraordinary run of economic growth, transforming itself from one of western Europe’s poorest countries to one of its richest. But during the 2000s, the Celtic Tiger’s boom gave way to a bubble as the economy became increasingly reliant on property. In the 12 years or so up to the peak of the market in 2006, house prices almost trebled. Construction came to account for more than a fifth of Irish GDP – getting on for double the EU average – and employed more than one in eight workers, or twice as many as in the mid-1990s.
It couldn’t last. From their peak, prices have now plunged – estimates vary from between about 37 and 42% – with even steeper falls in the capital, Dublin.
Those declines may well continue, in part because Ireland has a huge stockpile of empty houses – the so-called ghost estates. Again, estimates vary, but a figure of more than 300,000 vacant or abandoned houses is widely cited. To put that in context, Ireland has a population of just 4½ million.
Why did property prices explode in Ireland? In reality, it wasn’t alone. As a paper by the OECD’s Christophe André discusses, many OECD countries experienced what was effectively a synchronised property boom beginning in the mid-1990s. The boom was unusual for a number of reasons: It was very long – at about 12 years, it lasted for was about twice as long as previous price upturns; and it was very deep – prices rose by about 120% on average, more than double the 45% rise seen in previous property booms.
So, Ireland wasn’t unique, but it was unusual. While the financial crisis and recession that struck most OECD countries two years ago had its roots in the global economy, Ireland’s woes were – in the words of one official inquiry – largely “home-grown”. As another inquiry report explains, there was an excess of “budgetary measures aimed at boosting the construction sector” – in effect, tax breaks for property developments.
Irish banks played a major role, too, embarking on a lending binge to developers fuelled by cheap money borrowed on international markets. As the Financial Times reports, “[a]t the height of the lunacy, around three-quarters of the total lending by Irish banks – €420bn or about two and a half times the size of the economy – got bound up in property, construction and land speculation of one sort or another”.
This combination of policy incentives and easy lending can be blamed in part for another curious legacy of the Irish property bubble – the zombie hotel. Thanks in part to those generous tax breaks, a rash of new hotels opened over the past decade, and today there’s an estimated excess of 15,000 rooms. In a normal market, many of those empty new hotels would simply shut their doors. But to continue availing of allowances and tax breaks, they need to stay open. As a result, room rates have plunged, and are now back levels last seen in 1999. Good news for tourists, if no one else.
The lingering burden of such a property hangover would be heavy enough for any economy. But in Ireland’s case, the problem is exacerbated by the scale of its banks’ exposure to devalued property assets. To prevent collapses, the government has had to nationalise one financial institution, Anglo Irish Bank, and provide substantial support to another.
To cope with banks’ broader problems, the government has also set up a “bad bank” – the National Assets Management Agency, or Nama. This has already begun the process of transferring around €80 billion in devalued property assets from banks, which – in theory at least – will free their hands and allow them to begin lending again. The idea is controversial: The government says establishing Nama is the best way to restructure the country’s banking system; critics argue it’s forcing taxpayers to pick up the tab for banks’ recklessness.
Whatever it succeeds or not, Nama has already added another word to the lengthening lexicon of Ireland’s property bust, joining “ghost estates” and “zombie hotels”: The FT’s David Gardner spoke to one local who pointed to one of Dublin’s best-known hotels and told him, “That building there, it’s just been Nama-ed.”