A short, sharp shock
The main benefit of looking back is to learn lessons, and not to forget the mistakes. Provincialism in time is as bad as provincialism in geography.
Property was Ireland's biggest asset class back in 1987, when FINANCE was founded. The other asset class was bonds - Government bonds, because there really were only two games in Ireland back then - Government funding - because the Government borrowed so much, there was none left for anyone else - and investment in houses, largely second hand, as the old housing stock, much of it Georgian and Victorian, became a scarce commodity. Reflecting the violent and frequent cyclical slumps in the money markets, even builders could not finance themselves with confidence.
Despite all the positive change of the past 20 years, the fact that housing and property has remained so big in the Irish investor psyche is a reflection of the fact that habits, especially investor habits, are slow to change.
This continued obsession with property is no longer called for, though, in the modern Irish economy. First, we are wealthy - we have built a huge housing stock and a huge office and retail stock (as John Mulcahy points out on Page 8, Ireland has the third highest proportion of first generation retail space per capita in Europe).
Because we are wealthy, we can, and should, diversify from property; this is what Modern Portfolio Theory says - diversify to manage risk. Secondly, as many writers have pointed out in this issue, notably our readers - the euro has had a dramatic influence. Thus not alone can Irish investors operate beyond the boundaries of the primitive and amateur Irish pound domestic markets of the late 1980s (remember the Irish 'hedge' market?), the globe (well lots of it, even including China) truly is their oyster.
Also, the financing techniques, and the corresponding financial instruments that have grown up in the euro market (and in the IFSC, where Irish investors, as professionals, can do it as a day job) mean that financial planning and investment possibilities now exist that then could only be dreamed of.
The bearish forecasts in this issue for property should not be seen as a downer for the Irish economy. On the contrary, they should spur a healthy reappraisal of the role of property in our portfolios (it of course will continue to play a key role, because property is, and always, will be important, and will be a mainstay of investment for longer than other things; the phrase 'as safe as houses' still applies). Better still, it should result in a diversification away from housebuilding activity towards more export oriented production (a balance of payments deficit and an Exchequer deficit are both currently raising their ugly heads again - as if to remind us of our 1980s past).
Irish competitiveness has deteriorated steadily in recent years, in tandem with the upward pressure on costs, through wage pressures, driven by the need for people to finance their housing needs at ever more expensive levels. A decline in house prices, and even the much feared 'crash' in prices would be positive for competitiveness, and jobs, and in turn for the longer term stability of housing. Thus, even the sharp shock predicted by 35 per cent of our readers in this month's poll, will, if it is short, as well as sharp, be a good thing that will lead to overall benefits, including for those whose timing was unfortunate if they were entrants to the market during the crazy first half of 2006, which as it now turns out, was the peak of the last house price cycle. |
