A recovery built on rising rents

A man who can only be described as a smug bastard laughed at the ridiculous reaction of the Irish to the National Asset Management Agency (NAMA) when it was established in 2009. He beamed at the five minutes of fame he enjoyed as he travelled from London to Dublin to help set up the agency: a time when outraged protestors kept NAMA in the headlines. He could care less about the naïve Irish journalist who sat opposite him. A journalist who knew this man epitomised all that was wrong with the capitalist world. A world where banks and bondholders were happily served by socialism.

As it turned out, he was not the only Londoner I came cross who oozed a sense of superiority over the gombeen Irish. Though I suspect he was the type of man who oozed superiority over most people. But between him, and the handful of ‘gentlemen’ who thought it apt to describe the Irish as more ‘Southern European’ than ‘Northern’, it is little wonder I became frustrated with my identity. My country. And above all else, the little London bubble I was living in.

Yes, Ireland was part of the PIIGS. And maybe it was true that Irish businessmen preferred to get the ‘boring bit’ done by lunchtime so they could knock back pints in the afternoon. I have no idea. That was never my world. But I’ve been to Spain, Portugal, and Italy. And I’ve lived with Greeks. And I have no problem with being likened to this ‘Southern European’ community. These are wonderful, happy-go-lucky people. So the comparison is complimentary as far as I’m concerned.

Parting from the PIIGS

Yet there is a divergence occurring between Ireland and the other PIIGS. We are the fastest growing economy in Europe. We underwent GDP growth of 9.3% year-on-year in 2015*. That’s the type of growth you currently see in emerging economies like China – not ‘modern developed western’ economies. Our GNP growth – which is a better measure of how well Irish businesses fare – was 5% year-on-year. So while foreign firms are benefitting off the back of our low corporate tax environment, domestic businesses are getting a share of the wealth too.

But all this good news jars with two serious, and interlinked, social problems: homelessness and the housing shortage. Indeed, the outgoing government recently failed to convince the electorate to “keep the recovery going”. This is presumably because the recovery has not been widespread.

The homelessness crisis is a consequence of the property crash. People are literally being turfed out of their homes and onto the street because they cannot keep up with the rent. A cynic would say the banks waited for property prices to improve before taking this tough stance. In the interim, they even gained a little credibility for showing compassion. But no more.

Still, we need to be wary of the recovery. It is built on a lot of conditions which could change overnight – low oil prices and a weak euro. The figures also stem from a low post-crisis base.

Inflation and interest rates are basically zero too. This means prices are static and the cost of borrowing is very low. And let’s not forget how much blame was laid at the doorstep of the ECB for creating low interest rates pre-crisis. All this low-cost credit has the potential to be incredibly destabilizing once rates move up. Albeit, there are signs that low rates have not been passed on to ordinary borrowers. This perhaps points to the recovery being concentrated where there is already the most wealth.

Priced out

In any case, the big issue facing Irish policymakers right now is housing. Like a lot of capital cities, normal Joes are being priced out of Dublin. The latest figures from the Private Residential Tenancies Board (PRTB) showed apartment rental prices in the capital have surpassed their 2007 peak. All rental prices in respect of housing and apartments across the country are getting closer to pre-crisis levels. It’s not surprising for an economy experiencing another boom. But again, it’s potentially destabilizing and a cause for concern.

The two governments of the past ten years failed the Irish electorate by selling off our assets for far less than they were worth. This was, and is, being done through NAMA. And it’s a tricky dynamic because a fire sale – where assets are sold at discounted prices in an effort to earn quick cash – has been necessary to pay off creditors. (You can argue the merits of agreeing to pay bondholders all you want, but the deal has long been struck). NAMA, which has already seen total cash flows of over 30 billion, is still selling assets.

A lot of questions also linger over the ethical behavior of the agency and indeed the Irish and Northern Irish politicians involved in its dealings. But what we are seeing now in the property market is soaring prices amid a supply/demand mismatch. Listening to the radio, you hear stories of hopeful tenants lining up outside properties to bid on renting them. And so, the highest bidder wins.


As the economist David McWilliams recently wrote in The Sunday Business Post, US vulture funds are lurking in the background. They bought the property debt from NAMA, taking advantage of the weak euro against the dollar. Like all half decent investors, they buy low and sell high. And they may be in for a double whammy as they procure not only property from the hands of the indebted owners, but any collateral used against the purchase of that property i.e. small businesses.

And this brings us back to our impressive GDP (and GNP) growth. Because what does GDP actually refer to? The value of all goods and services produced in a period, including rent (since the renter is buying a housing service from a landlord). GDP also includes the market rent for a house if it were rented. This hypothetical rent is considered part of the homeowner’s expenditure and income (as if they were paying rent to themselves). In short, there is a reason why the recovery is coinciding with a rise in rental prices. And rental prices are being driven by US vulture funds, who plan to sell once they make 30% profit.

The electorate has been smart to rebuff the previous government’s claims of a recovery. We need it to be broad-based, not property driven. Yet the myopic approach of governments means they rely on quick fixes. But we need a government of compassion, and with a backbone and a vision. The type of government that eludes most countries around the globe today. In the meantime, we cannot be complacent about the so-called recovery. It may be the very tool stoking the next crash.


*Capital formation accounted for about 28% of the growth in GDP last year. That’s significant. (Capital formation essentially refers to investment in new factories, equipment, infrastructure, and housing, rather than in existing capital). 




About natashabrowne

Natasha is a freelance journalist and aspiring economist.
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