Richard Curran: I warned of a property crash in 2007 – will it happen again?
They say the past is a different country. And 16 years ago was a very strange time in Ireland. Everything looked bright, shiny and new, but in fact the country was in the throes of a massive national property Ponzi scheme which had become an unhealthy obsession.
ouse prices were hugely overvalued and in the spring of 2007 they clung at the top of a high precipice. Suspended. About to begin the big drop.
Now, after years of soaring prices, figures from the Central Statistics Office this week showed that house values have begun to drop again. Close observers of the property market are wondering if we are facing another collapse. Or are we facing a different type of crisis?
Back in early 2007, I’d been working on an RTÉ television documentary for six months. It went out on April 16 that year. It was called Future Shock: Property Crash.
What I remember the most was the aftershock — not of the crash itself, that came later — but of the broadcast of the programme itself.
This was a time before the term “social media pile-on” had been invented and “cancelled” was something that happened to concerts or sports events — not reputations. I found myself at the centre of the story.
I was shocked to be hit by a traditional media, property industry and political “pile-on”. I had given a view and posed a question through the very powerful medium of television that was received by a wide audience in the throes of a property myopia.
The view expressed was simply that there was a very real danger of a property crash. I posed a question of what a crash might look like if we had one.
It was all too much for some. Taoiseach Bertie Ahern went on national radio describing it as “irresponsible and inaccurate” and he “disagreed with almost everything in it”.
Estate agents, bankers, private sector economists and media commentators lined up to attack the premise of the programme. Even opposition politicians were afraid to float the possibility that it could all go wrong.
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Bertie Ahern described Richard Curran’s RTÉ documentary as “irresponsible and inaccurate”. Photo by Niall Carson/PA Wire
In truth, I was far from alone in suggesting that we needed to talk about a crash. I had started working on that documentary in October 2006. Others had warned about one before me, including RTÉ economics editor George Lee and academic economists Morgan Kelly of UCD and Alan Ahearne of NUIG, then UCG.
In the aftermath, lots of people pointed out how the issue of a crash needed to be aired. These tended to be older people, many of whom had come back home after living in London in the late 1980s and had seen first-hand what a property crash looked like.
Younger people who had just bought an over-priced house with a massive mortgage had no advice or exposure to the idea that prices could fall. To them, it was simply inconceivable that their home could devalue by as much as 30pc. Prices ended up falling by over 50pc.
Of all the conversations, discussion and downright abuse, the smartest thing anybody said to me was the postmaster of my local office in Dublin’s Berkeley Road, where I lived at the time. In a brief chat, I had suggested to him that some people, many with vested interests, were angry because they didn’t like to hear that there might not be a happy ending.
“No, that’s not it,” he told me. “People get really angry when you tell them something that deep down inside they know is true.”
Maybe he was right, but it wasn’t obvious at the time, unless you stepped back and took a look at the facts. Few really wanted to do that. They were too invested.
House prices had exploded in the years leading up to the crash. In 1994, the national average price of a house was just €73,000. By the turn of the century it was €169,000.
By 2003, the average price of a first-time buyer house was €223,000 and a second-hand home was €241,000. These figures would peak just three years later, around the end of 2006/early 2007 when the average price of a house hit €311,000.
The problem was that the sharp rise in house prices from 1994 to 2000 had been underpinned by genuine economic growth. Ireland had gone from ‘poorest of the rich’ on the cover of the Economist magazine in 1988 to “Europe’s shining light” by 1997.
What happened after 2000 was different. It was turbo-charged madness.
But it was a madness that so many people wanted to indulge in. Policy changes could have put the brakes on the hubris in 2001. But 2003 can be identified as the year when everything spiralled out of control.
It was the year when the value of banks’ lending exceeded 120pc of what they had on deposit from customers. It was also the year when property loans accounted for more than 40pc of all bank lending. It would continue to grow to 60pc of all lending by 2006.
This was also the year when the models used by economists to value house prices went off the charts. It was like a point of no return. There would be no happy ending after 2003. No soft landing.
These flashing red warning lights were visible to bankers, regulators and politicians if they had asked. Nobody wanted to see them.
A handful of academics who could understand the significance of these metrics spoke out. UCD economics professor Morgan Kelly provided a cold independent analysis in 2006. Former US Federal Reserve employee and later UCG academic Alan Ahearne could also see the danger signs.
The problem is the more vested you are, the more blinkered your interpretation of reality becomes. Almost everyone had a reason to see things the same way.
It was later described as a herd mentality or “groupthink” in studies of the crash.
Bankers were earning huge bonuses. Developers were becoming billionaires on paper at least. Construction and property didn’t just account for 60pc of all bank lending in 2006 — more than one in eight workers in the state were employed in construction.
Everybody was getting a piece of it — from “wideboys” flipping apartments before they were even built to the person selling the construction workers their breakfast rolls.
Anyone who had just forked out €400,000 for a relatively modest Dublin apartment needed to believe that property would keep soaring in value.
The last thing anybody wanted to hear was that it was all going to end badly.
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Unfinished homes on a ghost estate in Keshcarrigan, Co Leitrim, after the Celtic Tiger crash. Photo by Aidan Crawley/Bloomberg via Getty Images
What happened after that is history. House prices fell by over 50pc. Around 300,000 householders ended up in negative equity. The banks collapsed and the IMF was called in.
But now the same questions are being asked again. The rise in house prices since 2012 has been staggering. They have risen by over 127pc. Rents keep rising as the scramble to find a suitable and affordable roof over your head has worsened.
Despite the enormous rise in house prices in recent years, there are some genuine reasons to say that this time is different.
It doesn’t mean that house prices will not or cannot fall, but prices are at least underpinned by some better fundamentals — even if the social cost of the crisis is greater.
Inevitably, house price rises will ease and it seems quite likely we will see a levelling off or even some price falls. This would not be a bad thing. External shocks or surprise global events can never be ruled out: a US war with China over Taiwan; a massive collapse in international sovereign bond markets that would put the euro under pressure; or it could be the discovery of a new piece of global financial engineering in banks that exposes them and their ability to lend.
Such scenarios are all possible, but not very likely at the moment. So what is different this time round?
For one thing, the Central Bank has imposed tighter lending restrictions on mortgages. During the last boom, the mortgage market was on fire. In 2007 there were nearly 90,000 mortgages drawn down. Last year there were 50,000.
House prices have now breached their previous highs of 2007 but the average mortgage back then was for €271,000. Now it’s about the same, but nobody is borrowing 100pc of the value of the house.
These lending restrictions mean a house price fall of 10pc or even 15pc would still cushion most people from falling into negative equity as they had to contribute some of their own money. This time round, people have higher earnings and more savings.
At the height of the last boom, total national household debt was 200pc of disposable income. Now it is just under 100pc — half of what it was. We’re not nearly as indebted as we were.
Perhaps the biggest factor continuing to support house prices in Ireland is the growing population and the fact that a reasonable number of people have earning power to meet the banks’ stricter borrowing rules.
Ireland traditionally built about 2pc to 3pc of its national housing stock every year, even in the 1950s when the country was broke.
Between 1991 and 1996, the population grew by around 100,000. And 100,000 new homes were built during that period.
Post-crash, in the dark days of the recession between 2011 and 2016, the population grew by nearly 200,000. Yet the country built only 10,000 new homes. In the recovery and new boom years between 2016 and 2022, the population grew by 350,000 but only about 125,000 new homes were built.
The demand for somewhere to live is growing much faster than supply. Our policymakers have continuously underestimated the growth in population. This is its own crisis.
Demand for housing on its own isn’t enough to support what are incredibly high property prices. However, as long as there are enough people who can raise the money to buy at close to current prices, they will be able to support the current house values.
Higher interest rates are a real danger in this scenario. As they continue to rise, the affordability of housing moves further out of reach for more people.
In the UK today, houses are the least affordable they have been in 150 years, according to finance house Schroeder.
Rising interest rates are also a drag on building houses too. The higher the rates go, especially in a time of construction inflation, the more developers will ease off on supply. Fewer houses being built means house prices stay high, a conundrum for policymakers.
Huge wealth generation in Ireland in the last decade has seen more people use the “bank of mum and dad” to enable them to secure a mortgage. It’s now estimated that this is contributing €1bn a year towards first-time buyers.
It creates a self-perpetuating two-tier society where owning a home, and the higher social mobility that goes with it, is preserved for a particular group.
Other differences between last time and now include better banking regulation, no 100pc mortgages, new tracker mortgages are gone and banks are not exposed to property developers in the same way.
Another massive difference is “groupthink”. Ireland today is much more open to a divergence of views. People will listen and weigh up warnings that seek to break through the hubris of the day when things are going well.
Our greatest property threat today is not the risk of a house price collapse. It’s the real possibility that we will fail to build anything close to the number of new homes the growing population needs.
Trinity professor Ronan Lyons believes we need 42,000 to 62,000 per year or 50pc to 100pc above the policy target. We haven’t a hope of making that number.
This will result in huge social pain, stifled economic growth, rising inequality and Ireland will miss out on the huge opportunity that exists now to fulfil its economic potential.
We had a real window of opportunity in the last few years, but it already looks like a failure to develop housing properly will hold us back for many years to come.
That is the real future shock we now face.
