FEBRUARY 04, 2011
Ireland is a financial basket case. Yet only a few short years ago they were the envy of Europe. Ireland was dubbed the 'Celtic Tiger'. Strong economic growth had much of Europe caught in awe and envy. Ireland enjoyed budget surpluses. The good times were projected to continue indefinitely.
In late November they received a bailout: An EU lifeline to protect them from creditors who increasingly viewed them as a default risk.
It's a marvelous tale of riches-to-rags. I would never suggest that we will follow in their footsteps, as many of the excesses seen in their boom times make us look like prudes. Nevertheless, we would be remiss to gloss over their story without gleaning the relevant applications to our current Canadian economy...particularly their over-reliance on real estate, consumer spending, and debt to generate economic growth. I examined this in an earlier post:
Now we see that Vanity Fair has written a fantastic (and lengthy) article on the Irish real estate experience....hat tip to NDG for the link:
There are too many good quotes to recap in one post without rehashing the bulk of the article. But I will re-post a few that caught the attention of some of our readers who posted them in the comment section of another post. As you read them, consider our current situation in Canada. The parallels will jump off the page at you:
"...And they were all saying the same thing: ‘We’re going to have a soft landing'."
"The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that, if his former students were cast on Irish TV as financial experts, something was amiss."
"The comparisons that sprung to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s and Finland in the 1980s, but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they subsequently fall.”
"There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it."
I'd encourage everyone to read the VF article as well as my previous post on the Irish experience. History may not repeat itself, but it certainly rhymes. We've witnessed numerous countries succumb to the excesses of consumer indebtedness and misallocation of capital into the ponzi-dynamic that has become the housing market in most Western countries. How far down that path we've already traveled may be up for debate, but the end destination is well mapped.