From Boom to Doom and Gloom

Ireland Calling with John Spain

From Boom to Doom and Gloom

July 10, 2008

Ireland Calling by John Spain

THE speed with which Ireland’s boom has turned into absolute doom and gloom is truly frightening.

Before I went on holiday a month ago, people here were talking about “a bit of a slowdown,” about the “inevitable end of the construction boom,” about a growth level of 1% or slightly better this year, about a soft landing for the economy. With an air of regret, people were acknowledging that the Celtic Tiger had finally run out of steam.

The boom was over and a bit of belt-tightening would be needed, people sighed. There was no fear or panic when this was discussed, just a rueful acceptance that we were back to normality.

Now, a month later, there seems to be real fear everywhere here, even panic in some quarters. The downturn is all people are talking about, whether they know what GDP stands for or not.

Such is the level of fear at the speed of the downturn that Taoiseach (Prime Minister) Brian Cowen last week called on people to stop talking down the economy. “We need to keep a perspective on this, “ Cowen said. “I think some of the talking down of the economy to the point where people were talking about Armageddon-type scenarios really needs to stop.”

And Cowen is right. There is no need for such a level of fear.

But that does not stop people being extremely concerned about the future, worrying about whether Ireland is about to slip back into the bad old days of mass unemployment and emigration.

The national crisis of confidence was palpable last week, whether it is fully justified or not. And consumer confidence matters a great deal, which is why Cowen was trying to get people to keep things in perspective.

The problem is that underlying the fear are some very uncomfortable facts. The number of people “signing on” (claiming unemployment benefit) increased by 19,000 last month, the biggest ever increase for the month of June since records began.

The seasonally adjusted figure was a less alarming 10,000, but even that is deeply worrying. Even though the total number of people out of a job is not too bad so far, with the figure now approaching 6% of the working population, it is the speed at which the figure jumped through the month of June that is scary.

Most of this was due to the severe slowdown in the housing market, with construction grinding to a halt on many sites and workers being let go. There is real concern that when workers come back at the end of August after the traditional holiday month in the building trade, many more will find that their jobs are gone. And the unemployment figures will shoot up even further then.

What is happening is that the banks have tightened up, putting pressure on builders with heavy loans to reduce their borrowings. These builders are cutting prices heavily to sell more of their inventory of houses and apartments.

But even with reduced prices, the properties are not selling because the market is at a standstill. Buyers expect prices to fall even further and are worried about their own jobs and about rising mortgage rates, so they’re in no hurry to buy.

As I have said in this column before, everyone knew that the property boom here was not sustainable, that the scale of construction was out of proportion even with our increasing population. It had to end some time. The trouble is that the end has been a short, sharp knock that has been much more severe than was predicted.

It has been made much worse by the international credit crisis, which has seen bank shares here collapse like everywhere else. This has made the Irish banks increasingly nervous about the massive amounts of money they have loaned out to the construction sector. They are taking a very tough line, forcing builders to generate cash flow wherever they can.

Last week, for example, one of the biggest developers in Ireland sold off a substantial holding of Aer Lingus shares at a less than favorable time, taking a loss of *25 million. There was no explanation for the fire sale, but reducing borrowing was probably the reason.

The crisis in construction came home to me on a more personal level also, because while I was away on holiday last month the builder who built my own home five years ago went into liquidation. In effect he has gone bust. And his case is a good example of what is happening.

I live on the north side of Dublin in Howth, a fishing village which is now regarded as a prestige location. The builder in question is someone I know pretty well since his son played on the same soccer team as my own boys.

He was the main builder in the area, specializing in bigger houses with sea views and all the latest design features. He and his staff of 30 built houses to order for individual clients (like me), and he also acted as a developer, buying sites, building houses on them and then putting them on the market.

Over the past decade or more, he built many spectacular houses in the area for high profile clients, as well as expensive apartment blocks around the harbor and stylish commercial developments. Given the location and the upper end of the market he was in, it would have been a fair assumption that he would be insulated from the slowdown.

Unfortunately, that was not the case. When he went out of business last month he had around a dozen major developments on hand, some of them finished houses and apartments, some of them works in progress.

What happened was simple — he could not sell anything. His houses, mostly in the million or two category, could not find buyers because the confidence crisis has hit the top of the market just as hard as every other level. His cash flow reached a crisis point, and one of his banks lost patience and pulled the plug.

Now the houses he had on the market are being sold off at bargain prices by the liquidator to pay the bills from suppliers and the revenue. Among them are the two houses you see in the picture on this page, in the Sutton area of Howth, close to the sea.

They were on the market at *1.3 million each a few months ago and that price has now been cut by the liquidator to *700,000 each. Which is as clear an illustration of market collapse as you will get.

The plunge in confidence has also hit the Irish stock market very hard. As I write this on Monday, Bank of Ireland shares are just over *5 on the Irish Stock Exchange. Less than a year ago they were over *15.

And there are no experts in the game. Last year the shares in Independent News and Media (who I work for) were as high as *3.72. They slipped down in the last six months, but just before I went on holidays a few weeks ago, Tony O’Reilly and Denis O’Brien were buying up truckloads of them at around *2.20 as the O’Brien takeover battle heated up. As I write this on Monday, the shares are at *1.40.

One of the big effects of the slowdown here is the fall in revenue for the government, as the economy slows and the tax take declines. The estimates now are that revenue for 2008 will be down about *3 billion on predicted levels of over *40 billion. It’s not a crisis, but it’s a serious fall off with nasty implications for state services in everything from health to education.

This week the government is going to tell us how they will cut back planned spending for this year by about half a billion. The rest of the shortfall will be covered by borrowing.

The reason the whole *3 billion will not be borrowed is that we have to stay within the EU borrowing guideline. But if present trends continue there will have to be much more severe cutbacks in state spending next year if we are to stay within that guideline, or else we will have to ignore the limit. One way or the other, there is lots of bad news on the way.

I’m just back after a couple of weeks on the Jersey Shore with the kids, and I can tell you that the roller coasters on the piers in Wildwood are only half as scary as the ups and downs of the Irish economy right now.

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