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Analysis/Comment Last Updated: Dec 19th, 2007 - 13:17:15


Comment: Irish Property Boom - It's easy to underestimate how much economic prosperity depends on it
By Michael Hennigan, Editor and Founder of Finfacts
Nov 6, 2006, 06:46

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Legendary American businessman Warren Buffett  is a rare specie. The billionaire who has decided to give away his fortune to the Bill and Belinda Gates Foundation, has lived in the same house in Omaha, Nebraska since 1958, and has recently earned a pay increase as his salary is equal to Berkshire Hathaway's share price, which on Friday closed at $105,000.

Besides his reputation for frugality, Buffett is also known for eschewing bs and spin. He recently commented on the third quarter bumper earnings:

Clearly, these are highly satisfactory 3-month and 9-month earnings for Berkshire. Just as clearly, our insurance business has benefited in a major way from the absence of catastrophe losses. This is due not to managerial brilliance but rather to good luck.

Luck is always a useful component of success but some Irish managers will only face their first real test of adversity when the property boom slows to a more stable pattern of growth.

It's rare indeed for people to attribute much of their success to the property boom, in the style of Warren Buffett, but if conditions change, so will the tune.

Contrary to the widespread general impression, of course many business people know that the business cycle has not been abolished nor has the free lunch been invented. Not every business is in clover. Price growth in manufacturing was almost zero in the year to September.

However, it can be easy to underestimate the overwhelming reliance of economic prosperity on property - direct property tax revenues amount to 17% of total tax revenues, which  could even exceed 30% when the indirect impact on income tax and VAT are included.

The Irish Times for example noted in its recently published results for 2005, that it is exposed to economically sensitive advertising revenues. Advertising revenues grew by 9.5% in 2005 and it is believed that 60% of its estimated advertising income of €76 million in 2005 was property related.

The Thursday Property Supplement has averaged about 60 pages in recent times - excluding editorial, that is about 50 pages of advertising at €12,000-€15,000 a page.

In the Sunday Business Post, Laura Noonan writes: Between 2002 and 2005, the amount spent on advertising Irish residential property soared by 157 per cent. The spending frenzy reflected a property market that was on a steep upward trajectory, with house prices rising to record highs.

Now, though, experts say that the property market is heading for a slowdown. This year’s price growth forecast stands at 13 per cent, but experts expect 2007’s rate to drop to between zero and 5 per cent.

In 2002, property advertising rose by 31 per cent, followed by 34 per cent in 2003, 46 per cent in 2004 and 29 per cent in 2005. The first eight months of this year, however, have recorded rises of just over 7 per cent.

There are many other sectors that have coasted on the property boom, including aviation, financial services and other business services and the test of managerial brilliance may be at hand, without any property crash.

In the Second Quarter of 2000, there were 165,200 directly employed in the Irish Construction compared with 262,700 in the comparable period in 2006. As the Construction Sector, in which residential housing accounts for two-thirds, slows over the next decade, there will be at least 100,000 direct and indirect job losses. As noted below, many of the 58,000 additional jobs in Financial & Business Services since 2000, are property related.

Average earnings in Construction at €40,000, are 29% above the average in industry. Even if workers in Construction who generally are not computer literate and do not have transferable skills, face earning cuts, it would be quite an adjustment. However, there have been 40,000 job losses in the Production and Agriculture, Fisheries and Forestry Sectors since 2000 and there is no potential for employment growth in these sectors.

The CSO reported last July that Irish Construction Output rose 80% in five years
 

  • In 2005, it is estimated that the value of output in the construction industry was almost €32 billion - i.e. 80% higher than the output figure of €17.6 billion in 2000. 
  • Ireland has the highest construction output per capita in Europe at approximately €7,600 in 2005. This is more than double the corresponding figure for the United Kingdom.
  • The construction sector in Ireland accounts for 23% of GDP compared to a 12% EU average.  

One eighth of workforce employed in construction; 1 in 5 of private sector workforce depending on construction

  • In the second quarter of 2006, there were 262,700 people directly employed in the construction industry. Approximately 1 in 8 people (13%) employed in Ireland work in construction. This compares with an EU average of less than 8%.
  • 17% of private sector workers are in the construction sector; Up to 330,000 Irish workers, whether they are in financial services or working for a newspaper, are likely dependent on construction.
  • Of the 258,000 net increase in total persons at work between 2000 and 2005, over 76,000 (or 30%, who were mainly males) were in the construction sector. Some 15% who were mainly females, joined the public service. 58,000 additional jobs (22.5%) were added in Financial & Business Services - many related to the booming property sector. The Wholesale & Retail Trade added 49,000 jobs; 21,000 jobs were lost in the Production Sector and 18,400 were lost in the Agriculture, Fishery and Forestry Sector.
  • It is estimated that there were over 25,000 non-Irish nationals working in the construction sector in the fourth quarter of 2005. They represented about 10% of the total number employed in construction. About 15,000 construction workers are from the former Accession States. 

Housing represents two thirds of total building and construction

  • Residential construction accounted for two thirds of total building and construction output in 2005.
  • Over 86,000 dwellings units were completed in Ireland in 2005. This compares to less than 50,000 in 2000.
  • New dwellings were completed at a rate of 21 units per 1,000 of population in 2005, adding over 5% to existing housing stock in Ireland. This is the highest rate of residential building in the EU.


€117 billion Mortgage Debt

  • The total value of mortgage debt increased from €33 billion in 2000 to almost €100 billion in 2005.
  • The average size of a new mortgage was €102,000 in 2000 and €200,000 in 2005. In 2000, less than 5% of new mortgages were for more than €200,000 but by 2005 almost half (46.9%) of mortgages taken out exceeded this value.
  • The average price of a new house in Ireland was €166,000 in 2000 and just over €272,000 in 2005. The average price of a new apartment increased from €206,000 in 2000 to over €293,000 in 2005. More than a third of all dwellings sold in 2005 cost in excess of €300,000.

The Irish Central Bank reported on October 31st that the level of outstanding residential mortgages has doubled in just under three years. The September increase of €1.9 billion has brought the outstanding level to €117.1 billion. The underlying annual growth rate of residential mortgages (adjusted for securitisations and reclassifications) eased to 26.9 per cent in September, from 27.1 per cent in August. If residential mortgages were to increase in each of the remaining three months of 2006 by the same amount as in September, annual growth would continue to ease and the end-year growth rate would be close to 25 per cent.

The Taxation Bonanza from the Property Boom

A Davy Stockbrokers report says tax revenue from the property market - including VAT, stamp duty and capital gains tax - has tripled since 2002 and will account for almost 17% of tax receipts this year. It says the public finances are now exposed to a downturn in the property market.

In the year to October Stamp Duty accounted for almost 10% of total tax revenues.

The Government collects an average of €100,000 in taxes and levies from every new housing unit built in the State - amounting to about 30% of the cost- and this year, new house completions are up 22% in the nine months to September.

In November 2004, Minister for Finance Brian Cowen put the take in taxes and levies as a percentage of the cost of the new house at 28%:  The Construction Industry Federation says the percentage exceeds 30%.

First-time house buyers have to pay VAT to the Government while second-home buyers for investment can get an exemption from paying the VAT as a lump sum.

According to the Bank of Ireland's Irish Property Review, the consensus estimate for house completions in 2006 (85,000 – 90,000) is now too low. Completions in the first half of the year amounted to a 24% advance on the same period of 2005 and the conservative estimate for the year as a whole now looks set to reach 95,000, but could go as high as 100,000. The latter figure would represent around 24 completions per 1000 people, an astonishing figure given that the EU norm is around 5 per head of population. It seems likely that total completions will decline somewhat in 2007.

Each additional housing unit built is more manna from heaven for the public finances.

Property getting lion's share of investment

Property has made some Irish people very wealthy and Bank of Ireland Private Banking says that the Irish invested €30 billion (equity and borrowings) in local and overseas commercial property in the period 2001-2005.

Ireland has overtaken the United States as the single largest cross-border investor into UK commercial property, accounting for almost 22% of total overseas purchases in 2005.

In an extensive research report published last month, Bank of Ireland Private Banking shows that, in a survey of the top 8 leading OECD nations, Ireland is ranked the second wealthiest, behind Japan and ahead of the UK, US, Italy, France, Germany and Canada, showing an average wealth per head of nearly €150,000.

In contrast, private rent support has cost the Government €1.6 billion since 2000. At the end of 2000, there were 42,700 recipients. This had increased to 60,100 at the end of 2003 and then settled at the higher level.  Last week, the Department of Social and Family Affairs said that a record 79,000 people had requested assistance with the costs of sending their children back to school. 

National house prices have increased by 270% over the past ten years – compared to a total rise of just 30% in the consumer price index.

Meanwhile, as killings are made from the property bonanza, the industrial sector is contracting and this year less than €200 million in venture capital will be invested in Irish firms. The total monies invested since 2001 by the Enterprise Ireland Partnership Funds amounted to €183m in 99 companies.

In contrast, the Dublin-based Cosgrave Property Group family, has invested almost £500 million in UK property, in this year so far.

The Israeli IVC Research Center reports that:

  • Capital raised by Israeli VCs surged to $1.2 billion in 2005
     
  • Capital available for investment now at $2.3 billion
     
  • $1 billion projected to be raised by VCs in 2006

Big investment news in Ireland centres on property.

In recent weeks, Bank of Ireland Private Banking has announced that it has entered into a partnership with Hammerson and GE Capital Real Estate for the redevelopment of the Old London Stock Exchange building on behalf of private clients. The Bank paid €55.8m (£37.5m) for its 25% stake in the development.  Bank of Ireland Private Banking also invested €50 million (KRW60.5 billion) on behalf of its clients in the development of the International Finance Centre in Seoul (IFC Seoul), South Korea. Anglo Irish Bank bought two New York hotels for Irish investors in a $149 million deal; In September Anglo Irish Bank closed a $170 million deal in Boston for Clarendon Properties LLC of Dublin, the investment vehicle of developers Paddy McKillen and Tony Leonard.

West Cork investors bought a shopping centre in the German city of Hamburg for €65 million and Davy bought a prime retail site for  €28 million.

Dr David Fewer, Director of Ion Equity has warned that while the level of venture capital funding in Irish business in the third quarter was very positive, it is unlikely to set a pattern and that total venture capital investment this year is likely to be much the same as last year, when €200 million was raised.  - - small beer compared with the €5 billion that will be made by Irish investors in commercial property in 2006.

RELATED:

Global Survey: Cost of typical management level house in Dublin, Ireland, could buy 9 similar houses in Houston, Texas, 3 in Amsterdam, 2 in Sydney and almost two in Tokyo 


© Copyright 2007 by Finfacts.com

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