The Start of a Tough Year

Ireland Calling with John Spain

The Start of a Tough Year

January 3, 2008

by John Spain

TIME to get the glass ball out here and look into the future. No one knows exactly what’s going to happen in 2008, of course. But even though I say it myself, this column has a pretty good record in predicting what’s coming down the tracks. So listen up, as you like to say over there.

The first thing I can say with absolute certainty is that we are at the start of a year that is going to be a difficult one for Ireland. The preferred word in political circles here is “challenging.” But the terminology is not going to change the reality.

And the reality is that 2008 is going to be a dog of a year in Ireland. It’s going to be a year when a lot of Irish people — and especially “new Irish” people — are going to find life in the Emerald Isle much less comfortable and enjoyable than they have over the past four or five years.

Let me start with a story about the property market here. This is a story that made the front page of the Irish Times in the first week in December, reporting that a developer in Dublin had slashed the price of apartments by ?100,000 in a desperate effort to make sales. The 27 two-bedroom apartments involved were the latest phase in a major development called The Crescent on the north side of the city.

When the first phase in the development was launched in October 2006, the apartments were priced between ?405,000 and ?460,000. The new part of the development, with apartments that are exactly the same, went on sale in December 2007 with prices from ?335,000 to ?360,000. That’s a cut of between ?70,000 and ?100,000 per apartment.

That gives you some idea of how difficult the market is here now and of the depressed mood among developers. Everyone knew that the property boom was coming to an end and that builders would be slow to start any new developments as house prices began to fall. But the speed of the contraction in construction here has taken even the experts by surprise.

Property prices have not collapsed. But houses and apartments are much more difficult to sell now and prices are slipping back all the time as a result.

It had to happen, of course, because the building boom here had reached levels that were unsustainable. House completions in Ireland reached an all-time high in 2006 at 88,000 units (relative to our population size this was a multiple of the level of home building in the U.K. or U.S.) Last year (2007), as the slowdown started, that fell to around 75,000. And the predictions for 2008 from both the government and the main research body in the country are that the completions figure will fall again to 55,000 this year (although the Construction Federation has said it could be as low as 45,000. and a lot of those will be houses which were started in 2007).

Another way of saying this is that the level of construction here has fallen by half as developers try to sell the unsold stock they have and wait to see if prices stabilize. Prices fell by around 15% in 2007, and most experts are predicting that they have at least another five points to fall before the slide might stop.

In one way that may not be a bad thing. We all know that house prices here had reached crazy levels, and too many people could not afford to get on the property ladder or were putting themselves into enormous debt to buy a shoebox.

But the problem for us is that so much of the Celtic Tiger boom in recent years was driven by construction. And for that reason, the collapse in construction will have serious knock-on effects right across the economy.

Already we have seen the effects of the slowdown in the fall in the value of shares on the Irish Stock Exchange (ISEQ). After four years in which gains in the ISEQ averaged 24% a year, 2007 saw the ISEQ lose over 27% of its value.

The reversal was a swift, sharp shock. Losing that much in a year made the ISEQ the worst performing stock exchange in Europe in 2007.

The main stocks to lose value were in the construction sector, not just those directly involved in building but those involved in building supplies (like cement) and utility services. The knock-on effect went right across the board, hitting furniture, kitchens, flooring and so on.

More seriously, it also badly hit the share value of the financial institutions, including the two main bank groups, which are heavily exposed to a property slump both in terms of loans already out there and their reliance on the property sector for a large part of profits now and into the future.

The problems in the construction and financial sectors here came at a difficult time for manufacturing industry as well, as we continued to lose jobs to low cost countries.

And the hard time we were having was made even worse by the sub-prime lending crisis in the U.S. and the global credit squeeze. The international downturn has hit us more than most since we have such an open economy and are more dependent than most on multi-nationals with bases here.

In spite of all this, however, the Irish economy did manage to grow by a few points in 2007, and the forecast for 2008 is for growth to stay above 2%. But the warning signs are there, and the dramatic slowdown in activity hit the state’s tax revenues hard. So the budget in December reflected this by cutting the rate of growth in state spending in all areas for 2008.

Which brings us back to why I predicted at the start of this column that 2008 will be a lot less comfortable for Irish people, and particularly for the “new Irish”. There’s no election in 2008 so the politicians will not try to minimize the pain as the readjustment in state spending is made.

Better to get the hard part out of the way now, when the government is at the start of another five-year term in office. So despite the complaints about hospitals, schools and other services, there will be little improvement in 2008.

On the jobs front, it’s going to be particularly tricky for the new Irish, many of whom work in construction, shops, hotels and services. In building, jobs are already being lost in huge numbers, but as spending slows down the downturn will also hit jobs in shops, sandwich bars, hotels and so on where so many of the new Irish work.

What’s going to happen then? Will the new Irish go home or go on welfare? Will Irish bosses sack high cost Irish employees or low cost immigrant workers? And what will the downturn do to social harmony here?

Ironically the prospect for a difficult 2008 has become clear just when we were digesting the latest population figures from the Central Statistics Office (CSO). These show that in the year to April 2007, the population grew by 2.5% to 4.34 million people, meaning that Ireland (the south) has the fastest growing population in Europe.

This is the third year in a row in which an annual population increase of over 2% was recorded here (the U.S., in spite of all the angst there about immigration, has an estimated population growth for 2007 below 1%.)

What the CSO figures also reveal is that two-thirds of this population increase was accounted for by migration, with the remaining one third explained by natural population increase (although there is a relatively high birth rate among immigrant women).

The statistics also showed that in the year to April 2007, the total number of immigrants into the country was higher than for any year since the CSO began keeping migration figures in 1987. About half of these immigrants came from the 12 Eastern European accession states which joined the EU in the last few years. And most immigrants by far came from Poland.

The CSO figures show that Dublin has the highest proportion of non-Irish nationals at 13% of its population. But few people here believe it is as low as that.

And a footnote says that the figures exclude those “who did not give their nationality or who consider themselves to be Irish.” The actual figure for those normally resident in Dublin who were born outside Ireland is 17%, according to the CSO, and given the fear among many immigrants about revealing who they are, it’s probably much higher even than that. That’s some footnote!

As this column has already pointed out, that 17% (the official figure) is not evenly spread across Dublin. Immigrants, like immigrants everywhere, tend to stick together, and they now make up 30% or even 40% of the population in several inner city electoral wards in Dublin in the most deprived areas.

None of this seemed to matter too much when we were expanding fast as the Celtic Tiger economy. But the social tensions and problems it will bring as the slowdown sets in and services are trimmed to meet budgets will be a real test in the future.

On a wider level, the slowdown will be felt by everyone here. Some sectors of the economy are still performing well and there is no reason to be alarmist about the future yet.

But the combination of the property slowdown and the international financial uncertainty is going to affect us more than most. It’s going to be a real drag in both senses of the word.

The slowdown started here seriously in the second half of 2007. So far we have been able to ignore it. But it will be a different story in 2008.

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