What happened in Ireland:
Cheap credit available on very easy terms for a prolonged period of time (EU membership = German banks seeking margin lending money to Irish market) combined with genuine economic growth (due to liberalisation of economy + educated workforce + EU membership + proximity to US + cheap corporation tax= attracts inward investment etc) leads to property price growth.
Property price growth + media reporting + easy cheap credit = increased interest in property investment = more property price growth.
Increased activity in property market = large bank profits + big stamp duty bonanza for government.
Banks start to compete more for market share = lower lending standards to individual borrowers and developers (greater than 100% mortgage common - i.e. mortgage plus personal loan for stamp duty etc, insane lending to developers - I had clients who borrowed 100% of the land costs + 100% of the development costs + about 20% extra based on pre-sales).
Government increases spending to match new larger income based on temporary stamp duty bonanza.
Government becomes concerned about property market but cannot adjust interest rates which are controlled by EU Central Bank, and set to suit large stagnant German and French economies = very low interest rates. Is also addicted to stamp duty income so stamp duty reform becomes political football - one party wants to reform it to discourage property speculation, but this is not popular so drops the idea very quickly.
Bank regulation in Ireland is poor because banks and big 5 accounting firms pay higher salaries than the regulator. Banks are also very effective lobbyists. Combination of poor bank regulation and low interest rates = very cheap, easily available credit and some dodgy dealings.
At this stage many years of rising property prices conflict with the reported opinions of many economists who have been warning of bubble for years - the ordinary person is more convinced by what they have seen happening around them. Irrational behaviour becomes more irrational. Developers engage in sharp practice to feed the hype (pre-selling to friends at lower price so that they can claim 'X development already gone up Euro 15,000 in first week!!' etc etc). People buy at prices they cannot afford because they are convinced prices will always go up. and they are afraid to miss out. Developers grow in confidence - they are making a fortune and some grow in the belief that this is due to their hard work and good decision making, rather than extraordinary economic circumstances = they put their money back on the roulette wheel = more property deals, higher prices, more hype.
Sub-prime crisis hits in the states. Banks are suddenly afraid and credit is frozen. The easy cheap credit available is suddenly cut off. Irish bank that has engaged in dodgiest lending practices to developers (Anglo) caught with its pants down. Other major banks also grossly over-exposed. Banks lie to govt about extent of the problem = Irish govt guarantees the debts of Irish banks - i.e. the tax payer must now pay all the unsecured bond holders of Irish banks.
Credit is completely withdrawn from the market - nothing available at any price as banks retrench. Construction comes to a screeching halt. Massive lay-offs result. Govt cuts spending everywhere = more job losses throughout the economy. Govt cuts benefits increases taxes across the board. Economy hit again as consumer spending drops through the floor. More job losses.
Property prices collapse. No-one knows what anything is worth because there is no market but min 60% drop in property prices country wide.
Large proportion of the population now has negative equity (in some cases 60% negative equity), either major salary cut (40% in many cases) or no job. Cannot sell their home.
If you are Irish chances are at least one member of your family has now lost everything - family home, savings, all assets, and job. In some cases multiple family members. Younger people emigrate in large numbers (mostly to the UK, US, Canada and Australia) - well worn paths for the Irish.
A cautionary tale ...
Cheap credit available on very easy terms for a prolonged period of time (EU membership = German banks seeking margin lending money to Irish market) combined with genuine economic growth (due to liberalisation of economy + educated workforce + EU membership + proximity to US + cheap corporation tax= attracts inward investment etc) leads to property price growth.
Property price growth + media reporting + easy cheap credit = increased interest in property investment = more property price growth.
Increased activity in property market = large bank profits + big stamp duty bonanza for government.
Banks start to compete more for market share = lower lending standards to individual borrowers and developers (greater than 100% mortgage common - i.e. mortgage plus personal loan for stamp duty etc, insane lending to developers - I had clients who borrowed 100% of the land costs + 100% of the development costs + about 20% extra based on pre-sales).
Government increases spending to match new larger income based on temporary stamp duty bonanza.
Government becomes concerned about property market but cannot adjust interest rates which are controlled by EU Central Bank, and set to suit large stagnant German and French economies = very low interest rates. Is also addicted to stamp duty income so stamp duty reform becomes political football - one party wants to reform it to discourage property speculation, but this is not popular so drops the idea very quickly.
Bank regulation in Ireland is poor because banks and big 5 accounting firms pay higher salaries than the regulator. Banks are also very effective lobbyists. Combination of poor bank regulation and low interest rates = very cheap, easily available credit and some dodgy dealings.
At this stage many years of rising property prices conflict with the reported opinions of many economists who have been warning of bubble for years - the ordinary person is more convinced by what they have seen happening around them. Irrational behaviour becomes more irrational. Developers engage in sharp practice to feed the hype (pre-selling to friends at lower price so that they can claim 'X development already gone up Euro 15,000 in first week!!' etc etc). People buy at prices they cannot afford because they are convinced prices will always go up. and they are afraid to miss out. Developers grow in confidence - they are making a fortune and some grow in the belief that this is due to their hard work and good decision making, rather than extraordinary economic circumstances = they put their money back on the roulette wheel = more property deals, higher prices, more hype.
Sub-prime crisis hits in the states. Banks are suddenly afraid and credit is frozen. The easy cheap credit available is suddenly cut off. Irish bank that has engaged in dodgiest lending practices to developers (Anglo) caught with its pants down. Other major banks also grossly over-exposed. Banks lie to govt about extent of the problem = Irish govt guarantees the debts of Irish banks - i.e. the tax payer must now pay all the unsecured bond holders of Irish banks.
Credit is completely withdrawn from the market - nothing available at any price as banks retrench. Construction comes to a screeching halt. Massive lay-offs result. Govt cuts spending everywhere = more job losses throughout the economy. Govt cuts benefits increases taxes across the board. Economy hit again as consumer spending drops through the floor. More job losses.
Property prices collapse. No-one knows what anything is worth because there is no market but min 60% drop in property prices country wide.
Large proportion of the population now has negative equity (in some cases 60% negative equity), either major salary cut (40% in many cases) or no job. Cannot sell their home.
If you are Irish chances are at least one member of your family has now lost everything - family home, savings, all assets, and job. In some cases multiple family members. Younger people emigrate in large numbers (mostly to the UK, US, Canada and Australia) - well worn paths for the Irish.
A cautionary tale ...