Irish Luck had ran out – But are we on the same route to disaster?
October 26th, 2009 | 
Author: By Damon Yeo, Business Correspondent
Earlier this year, a joke conjured up by some twisted economists became popular online. It goes something like, “What is the difference between Iceland and Ireland? An alphabet and about six months.”
This joke surfaced just months after the entire Icelandic economy and banking system collapsed on the weight of the financial crisis. With the power of hindsight, it can be said that while Ireland’s collapse was never as spectacular as Iceland’s, the Irish economy is still one of the worst hit in Europe.
This article is not going to identify the differences between the Icelandic and Irish economy, rather, it will attempt to retrace the Irish path to disaster and highlight the similarities between current state of the Singapore’s economy and that of Ireland just before its crash to ground.
A Spitting Image
Historically, Ireland and Singapore both share a British colonial past. Both were equally important to the British at the height of her empire. Ireland was key because of her close proximity to the British Isles, while Singapore was important as a trading port and as a symbol of British might in the Far East.
The economic miracle of the Republic of Ireland began in sometime during the 1990s. A period of unprecedented growth during the decade earned Ireland the nickname “Celtic Tiger”.
The nation suffered a slight blip in terms of economic growth in 2001 as it felt the pain of the internet dotcom burst. Recovery was brisk for the tiny republic of 4.46million as growth rates returned to an average of 5% up till 2006. It adopted the Euro in 1999 and the currency soared against all major currencies, appreciating almost 41% to reach €1 to US$1.58 in April last year.
Without the abundance of natural resources, the growth of the Irish economy was by and large driven by the high-tech and services sector. With development funds from the European Union and Foreign Direct Investment (FDI), the government invested heavily in education and the nation pride herself as one of the most highly educated in Europe.
By 2006, GDP per capita was US$41,000 in Ireland, making her one of the richest nations in the world. Despite the meteoric economic bloom, the rich-poor divide in the country widened dramatically. The Gini co-efficient reached 30.4, just slightly lower than the Organisation of Economic Co-operation and Development (OECD) group average.
The economic miracle of the Republic of Singapore began sometime during the 1980s. A period of unprecedented growth during the decade earned Singapore the nickname as one of the four “Asian Tigers”.
The nation suffered a slight blip in terms of economic growth in 1998 as it felt the pain of the Asian Financial Crisis. Recovery was brisk for the tiny republic of 4.98million as growth rates returned to an average of 5% up till 2008. The Singapore Dollar soared against all major currencies, appreciating almost 21% to reach S$1.36 to US$1 in April last year.
Without the abundance of natural resources, the growth of the Singapore economy was by and large driven by the high-tech and services sector. With budget surplus and FDI, the government invested heavily in education and the nation pride herself as one of the most highly educated in Asia.
By 2008, GDP per capita was $52,000, making her one of the richest nations in the world. Despite the meteoric economic bloom, the rich-poor divide in the country widened dramatically. The Gini co-efficient reached 48.4, just slightly higher than the global average.
The Irish Boom
As Ireland rode on its newfound prosperity, trouble was brewing in the background but no one could care less. A property bubble had been building up in Dublin and no one felt the need to apply the brakes. Between 1993 and 2007, residential property prices increased year-on-year. Between 2000 and 2006, house prices in Dublin actually tripled.
There are many schools of thought on what actually drove these surge in house prices. One of most undisputed theories was the “feel good factor”.
The fact that property valuations were steadily increasing tended to create a systematic feedback loop, where rising prices affected the psychology of market participants, causing further increases in prices.
Over this period of time, the Irish also government implemented a competitive pay structure for all civil servants, benchmarking their pay to the private sector. This only added to the feel good factor as more entered the property market with wads of cash and ready to splurge.
Windfall earned by Irish citizens through selling of property prices at record prices enabled more of them to participate again in the property market, snapping up new properties in hope of making quick profits.
As early as 2000, the IMF had noted that Irish properties were wildly overvalued. Leading economists and even the Irish officials admitted that the housing boom was probably unsustainable, but the Irish government did almost nothing to curb this trend, as they depended on the large amounts of the property tax for revenue.
The Irish Aftermath
Of course, it all came crashing down for the Irish in mid-2007. House prices first showed signs of reaching a plateau, before experiencing a monthly dip of 0.3% in March 2007. The house price index in Ireland has not recovered since and by the first quarter of 2009, property prices had slipped by 23% and loan approvals for home-buyers had fallen by 73%.
Like every recorded asset bubble burst, this has far-reaching effects on the economy. Unemployment shot up to 11.4% by mid-2009 as many construction projects froze.
Several leading Irish banks ran into liquidity and solvency problems as many start to default on house loans granted to them just a couple of years back. This eventually forced the Irish government to provide state guarantees to many of their banks to restore confidence in the banking system. Overall, the economy contracted by an alarming 8.5% in Q1 2009.
Recovery is likely to be slower and more painful for the Irish compared to her counterparts in the Eurozone. Budget deficit in 2009 rose to 10% of GDP as the government struggles to match its expenditure and revenue. In mid-June, Standard & Poor’s downgraded Ireland to AA in debt rating – down two notches from its AAA-rating in less than a year.
The similarities between the Ireland just before the asset bubble burst and the current situation in Singapore need no further elaboration. Without government intervention, the difference between Ireland and Singapore will be the spelling of the countries’ names and about six months.
(All information sourced from Wikipedia)
Other articles by Damon Yeo:
>> The new Kallang Sports hub: To built or not to be built
>> Formula One: A gold mine or a gold-digger?
>> DBS and a series of ‘unfortunate events’
>> Sale of Chartered – An anatomy
About the Author:
Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.
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“the Irish also government implemented a competitive pay structure for all civil servants, benchmarking their pay to the private sector”
bootstrapping effect, is singapore listening?
check out a new prosperity index not just based on GDP alone
http://www.prosperity.com/country.aspx?id=SN
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This is a fine article, with a fine analysis. This is the kind of quality article that TR should strive to produce.
However, rather than sourcing information off Wikipedia, it makes if far more credible if Mr Yeo (if he were to use Wikipedia at all) used the references and sources on the Wikipedia articles themselves. Remember, while Wikipedia may be reliable and based upon hard sources, not all information within the article are derived directly from references. Many may be pure conjecture hidden amongst factual statements.
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Kudos on a very well written article again!
I wish some strategist in our government is seeing this too.
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The parallel seems uncanny and WORRYING. When economy here tank, property bubble stirred up by HDB supply restriction burst, the banks will wobble. Foreigners might then come in to clean up and take over the banks. After that, we might see the next meltdown actually melting down foreign banks (that took over Singapore banks) and take us down with them – ECONOMIC SOVEREIGNTY WILL BE GONE.
It is frightening – not impossible of happening and could be just over the horizon.
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Difference is that ireland compared to sg has much lower levels of immigration, hence supply of property probably exceeds demand.
Here it is still the opposite, massive numbers of recent immigrants and easy money has ensured that demand for property still exceeds supply here.
The problem is that this situation is clearly unsustainable, as evidenced by the ridiculous escalating ratio of house prices to income.
It is reasonable that the govt chose not to pop the bubble in 2008 2009 as the global economy – and by extension the sg econ was in shambles, continuing to allow the bubble to expand now when conditions are improving is irresponsible.
That said it may still be a while before this bubble truly pops, just reference the japanese property bubble where you had multi-generational mortgages, it may very well reach that point before everyone realizes that the emperor has no clothes.
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Fully agreed with the writer. Psychology is the right word.
Spore is primed for the coming bust in real estate as the real economy has turned down. What we are now seeing is the eye of the storm – dead calm. Note the Dow is about at 50% mark now, it could go higher but it is not going stay there. When the next leg drops, it is going to be worse than the drop from 2007 to Mar 2009. I think the DOW is going to test the 1000 mark. Don’t point to China for salvation because it is going to be worst than before for China economy. This one is for the long haul.
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WELL BAD HABITS ARE SIMPLY EASIER TO EMULATE?
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The falling US dollar seems to hold in recent day. Zero interest rate makes US$ cheap to borrow and invest in all classes of assets resulting in price bubbles.
http://www.cnbc.com/id/33477456
Falling US pushed up all commodities including metals, lifting inflation threats and maybe forcing US interest rate. When that happen, the unwinding could see another crash of asset prices.
For now, the Dow is happy. Falling US dollar helps exports but import costs deter consumers back home. It is a fine margin of balancing. Once foreign confidence in US dollars collapse and start dumping US assets, a steep fall of US dollar might also raise interest rate. People might be forced to sell assets to close their US dollar position.
As long as the underlying economy does not recover, asset pricing bubble will burst. It is inevitable.
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@DooDle – Agree with your comments. In future articles I will try to insert more direct citations.
My other intention here was to say that I do not even have to go far to find information on this – it is all on Wikipedia.
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With millions $ salary in the pocket every year, it has blinded all these elites and such articles, no matter how relevant, will never to considered, in fact, they will rebut it point by point.
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This article sends shivers down my spine.
The parallel between Singapore and Ireland
are striking, esp the the spiralling HDB and
real estate prices and Ministeral salaries
Looks like our leaders are operating in
denial mode as everything is still “affordable”
Or do they still believe we are in the “Golden
Period”?
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With the large influx of foreigners and not enough of foreign investment jobs to match, many of them including those Singaporeans who are still unemployed,will find the going to be very difficult.More so with the increase of the cost of housing!Not far down the road, the govt.will surely increase the value of the assessment of the houses and the
property tax will increase accordingly!
When the housing bubble was bursting at the seams,the govt. still said it was ‘healthy’.When the housing bubble finally
burst as in the 1990s, the govt.said they didn’t see it coming.This time around,they still did not see it coming!
I wonder how many will withstand the Bang when it happens!
As it is they still tell you the houses are ‘affordable’
and the sky is still bright and sunny!Let’s see how long this will last.
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The collapse of commercial property prices will occur first before residential properties. Banks will likely force sell secured properties in 2010 for commercial property loans with LTV breaches. There are over 780,000 sqm of office space to be completed over next 3 years. This huge supply is not met by demand and falling office rents.
Public housing market is likely to be held up by tight supply and strong demand from PRs. A long period of moderate decline is more likely than an outright collapse.
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@Googler
Why a long period of moderate decline for public housing?
My (admittedly limited) understanding of home price is that they are stubbornly sticky and usually require strong demand shocks to truly impact prices downward.
In our current climate of open foreign ownership, high rates of immigration, easily available credit and low unemployment. I believe it is likely that prices continue to rise rather than drift downward as sellers would have little reason to sell at a loss when they perceive still growing rental/purchase demand and are themselves employed (no pressure to sell).
Barring a headline like “GLOBAL GDP DECLINES IN 2010″ or “TRADE WAR” there seems to be little reason to expect declining prices.
However, if any of following conditions are met we may see a correction.
1. Jump in umemployment
2. Dramatic pull back in immigration (hah)
3. Bank tightening (again hah)
I believe prices are more likely to plateau or drift higher rather than lower, but am happy to hear why you think otherwise.
Also why are commercial property prices likely to collapse?
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i guess the way to avoid any house price collapse would have to fall on MOM’s laps.
MOM needs to ensure steady or at least marginally increasing
employment.
Even an influx of FTs or their cousins,fw(foreign workers)-not my coined-up differention,though-will not be able to contain any imminent housing bubble!
Just look and learn fROM AMERICA-land of ever-flowing FTs.
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Hello qussl3,
My personal opinion is that the current prices for public housing and mass market segment, which are at all time high, are not sustainable if the job market does not improve. Since a mass exodus of foreigners is not expected and public housing supply remains tight, prices should stay flat (as you mentioned) or dip slightly. The government will also ensure prices do not collapse by pulling back land plots from Confirmed List to Reserve List (as seen during the 6 months post Lehman collapse) should economy stalls.
During the good old days pre-Lehman, some funds have overleveraged to purchase commercial properties. Capital values have fallen steeply and the loans are in default due to loan to value covenant breaches. Demand for office space has fallen as banks downsize. Office rents have fallen from S$18 psf/mth to some S$6+ psf/mth in Raffles Place today. Vacancies are expected to hit 15%+ when the new supply gets completed from 2010.
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Hi Googler,
Do you happen to have sources for the dip in office rents?
If what you say is true something definitely isnt right with CapComm REIT’s recent rise in share prices
I agree that in the end FDI and employment are probably the most important factors, as even with increasing supply, our govt has demonstrated that favorable tax and labor policies have still been able to attract MNCs (more recently financial institutions) to locate here, with that in mind i’m really curious to see whether our PM’s recent note that the govt is looking to pare back immigration will actually materialize or is just more lip service.
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Consumer confidence in US is still falling. US dollar this weeks is staging some rebound paring down a bit on commodity prices relieving some fear of inflationary threat. But the US stock market are easing downward – ominious signs. The Dow Transportation index recently double-top and all the other major indices DJIA, SPX and Nasdaq has topped over and sliding faster the last week.
The economic indicators now suggest the recovery faces a wall of increasing uncertainty accompanied by signs of asset bubbling in Asia and even if recovery takes hold in US, it is going to be modest. The UK is struggling badly. Soluth Korea is stronger as China powered ahead adding fear to asset bubbles inside China and Hong Kong.
But China and South Korea are investing heavily globally in natural resources area and that is NOT relevant to us. FDI from US and EU coming to Singapore is unlikely given their economic climate prevailing. Unemployment is unlikely to improve for Siingapore next year.
If commercial property fell, that would indicate likely zero growth in employment prospects from business investment and residential will follow suit as well.
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