Another Crisis? Blame the Workers!


We have a housing crisis.  90,000 on the social housing waiting list of which 60 percent have been waiting for two years or longer.  The private rental sector is not fit for purpose for many household types (and, in any event, is a highly fragmented, mom-and-pop operation).  There are over 100,000 in arrears and that doesn’t count buy-to-let mortgages.  The planning system is unreformed and we are stuck with inefficient and costly suburban sprawl.  And there is a major supply problem in the main urban areas, especially Dublin, where rents are experiencing double-digit inflation.

So what’s the answer?  Blame the workers, of course.

Prime Time had a feature on the housing crisis followed by a panel discussion.  And what comes up?  The alleged high cost of labour in the construction sector.  There were two parts of these assertions.

Hubert Fitzpatrick of the CIF claimed:

House prices today are approximately 50 percent of where they were seven years ago but the cost of actually building those houses has not fallen by the same extent.  

Economist Ronan Lyons stated:

The Government needs to be very forensic in saying if we have labour costs in construction that are 25 percent higher than in West Germany, why?  Is there a reason for that?  Can we get our labour costs in line with Eurozone partners? 

We have had a spectacular roller-coaster ride in the property market, fuelled by speculation, non-regulation, massive capital inflows and, then, outflows – and we come back to ‘wages are too high’.  You really would weep.

How valid are these assertions?  Not very when you look up some basic facts.

First, it is true that property prices have fallen substantially.  It is also true that building costs haven’t fallen by the same extent.  But during the boom period house prices rose at an exponential rate compared to building costs.


Between 1994 and 2007, new house prices more than quadrupled.  Construction costs didn’t even double.  If house prices were to fall back in line with the cost of building a house, they’d have to fall even further, by more than a third.   If there are problems in investment returns or margins, it’s not coming from the cost of building a house – of which wages are a significant component.

What about the claim that construction labour costs are 25 percent higher than West Germany?  Here is the latest data from the European Labour Force Survey which measures labour costs per hour.

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Welcome to the New Poverty – Insolvency Poverty

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Today the new insolvency service goes live.  Today is the beginning of a new kind of poverty – insolvency poverty.

Our rulers, giving deep consideration to the problems posed by household debt, have designed a solution.  Does it write down the debt caused by the financial institutions?  Well, er, not exactly.  The solution requires that men, women and children undergo poverty-line existence for up to six years – and to do so publicly by having their names published on a register.  Included in this regime is the creation of a new professional class – Personal Insolvency Professionals – who will assist people to navigate their poverty experience and in many (most) cases will get an upfront payment.  Insolvency poverty and insolvency poverty professionals -you really couldn’t make this stuff up.  But they did.

When people apply for debt relief their living standards will be based on the Insolvency Agency’s ‘reasonable living expenses’.   According to the Insolvency website, reasonable living expenses are defined as:

‘. . .  the expenses a person necessarily incurs in achieving a reasonable standard of living, this being one which meets a person’s physical, psychological and social needs.’

The insolvency regime sets down a schedule of such expenses:  food, clothing, household goods, utilities, personal care. It will be for the creditors to approve the reasonable living expenses regime applied:

‘ . . . the decision on the reasonableness or otherwise of living expenses will be a matter for the creditors to determine on a case-by-case basis . . .’

Imagine the scene:  creditors sitting around a conference table in a corner office overlooking the Liffey, ticking off all the expense boxes for John and Mary, discussing whether this item or that constitutes ‘reasonable’.

But the Insolvency Service is anxious to prove that their expenses regime is ‘reasonable’.  They claim that their numbers are based on the model developed by the Vincentian Partnership for Social Justice.  The VPSJ has done tremendous work in ascertaining the minimum level of expenditure that constitutes a living standard that no one should have to live below.

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The Property Market: Money Flows to the Top

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I usually don’t do too much work on property prices. However, an article in the Sunday Business Post regarding the sale of high-end residential properties got me interested.  If there is a pick-up in residential sales, where is it occurring; what can this tell us about the state of the economy and, just as important, the impact on different income groups?

The Residential Property Price Register gives some useful insights.  Here are some global numbers for the first six months of the year:

  • The number of residential sales in 2012 (first six months):  9,559
  • The number of residential sales in 2013 (first six months):  10,151

So the number of residential sales rose by 6.2 percent.  How much money was spent on residential properties?

  • The amount of residential sales in 2012 (first six months):  €1,807.7 million
  • The amount of residential sales in 2013 (first six months):  €1,983.0 million

Money spent on residential properties rose by €175 million, or 9.7 percent.

We have sales and expenditure rising. So what is the distribution of the money spent on these properties?  How much is being spent on high-end properties and how much on average-priced property.  This is where it is potentially interesting.

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REITs for the (Property) Czars

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Recently the rating agency Fitch highlighted the massive connection between shadow banking and mortgage REITs, a property investment vehicle that has increased hugely on the back of the collapse in the US property market. While REITs have been around for a while (first legislated for in 1960 by President Eisenhower ) they didn't make much of an impact, as other forms of investment through asset speculation dominated the stock market.

With a financial crisis on the back of a bursting property bubble however, REITs finally came into its own as it seemed that the financial collapse deflated values in property sufficiently to make them a worthwhile investment given that prices in certain markets (mostly major capital cities) would likely rise again. As one of the requirements of REIT is to disperse up to 80% of its profits to shareholders, it is considered to be 'safe' from a regulatory point of view.

However, the Fitch report was written to highlight the considerable risk that mortgage REITs might pose, as they are being financed through the shadow banking system.

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As a prelude to a more detailed discussion about the household debt crisis in subsequent posts, I’d like to present a few graphs that should become central to the debate. They come from the data in the Department of Environment’s Housing Statistics. The first measures the growth of average wages between 1991 and 2007 which covers the period of the boom years.


In this period, wages grew by 92 percent (seems like a lot but when inflation is factored in wages grew by about 30 percent, or less than 2 percent annually in real terms).

Now let’s overlay the growth in house building costs.


Interesting. The cost of building a house rose at almost exactly the same pace – 98 percent.

Now let’s overlay the growth in house prices.


Hmmm. House prices rose at the same pace as building costs and average wages up to 1996. After that the gap widens – exponentially. Over the entire period new house prices rose by 379 percent.

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NAMA: Speculating on CUI BONO

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One of the main criticisms of NAMA, and there are many, is that rather than dealing in the most effective way, both in terms of cost and social benefit, with the legacy of bad debt created by frenzied speculators during a credit bubble, it is instead designed to soften the losses for those who benefited substantially from that socially manufactured glut of liquidity and to reignite the property market speculation that got us where we are today.

Proving that or even making such a claim is not straight-forward of course, due to the opacity of the institution itself and the length of time that it is supposed to do its work, for the benefit, we are told, of those who live and work in Ireland.

However, I couldn't resist the temptation to provide a rough sketch of what appears to be going on at the moment. The following is a bit scrappy, so I apologise in advance if its difficult to follow my point, but these posts are often an attempt to work things out with a view to improving on them at a later date.

Of the original NAMA portfolio fifty-four percent are in Ireland, around 34 percent in mainland Britain and 13% in the rest of the world, which oddly includes Northern Ireland.

Around eighty percent of NAMA's sales so far have been in Britain.

This suggests that much of the UK portfolio has been sold off.

NAMA is viewed by international investors as having been a very good idea,” U.S. billionaire Wilbur Ross, whose WL Ross & Co. owns 9 percent of Bank of Ireland Plc, said in an e-mail. The strategy of focusing on U.K. sales first “provided near- term proceeds from a relatively stronger market while not flooding the Irish market before the sovereign had stabilized,” he said.”

So NAMA is now focusing on selling it's Irish portfolio as the market 'has found its floor'.


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