Sins of the Father (7 page)

The problem is that much of the welcome activity is seen by many as illusory, being confined to financiers and other shufflers of paper. Abstract ‘paper’ growth has yet to make an enduring impact on unemployment, the Republic’s most pervasive economic problem. Until that happens here those filing into labour exchanges can be forgiven for regarding the ‘Celtic tiger’ as more of a paper tiger.
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Meanwhile, the march into property carried on.

The strong level of institutional investment in property was borne out by Jim McMahon, associate director of the Investment Bank of Ireland (IBI), who said in October 1994 that the bank ‘uses investors’ funds to purchase office, retail and industrial sites’, including ‘outlets in Dublin’s main shopping areas such as Grafton Street and Henry Street, in suburban shopping centres and along Cork’s Patrick Street.’ He described these retail premises as ‘very secure investments … suitable for pension funds’.
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AIB, for its part, also invested in retail, industrial and office property, and for reasons mainly due to the IFSC, property speculation and the Morgan Stanley report, the Irish economy was attracting attention from overseas investors. The
Irish Times
journalist Justin Comiskey wrote that it was assumed that Ireland would experience ‘growth rates of between 5 and 6 per cent for a number of years to come [and] as property values generally rise on the back of an improving economy, it is easy to appreciate the sense of anticipation which many property investors are now experiencing’. Furthermore, Ireland was now dubbed the Celtic Tiger ‘by overseas investors’. A single report by Morgan Stanley, one treated with surprise and scepticism by Irish share traders less than two months previously, had now become plural in authorship, and objective in its assessment.

The urban renewal tax havens and increased international investment in Irish banking fuelled greater demand (and supply) for mortgages and loans.
The Irish Times
reported in 1994 that the previous year ‘7,700 new home buyers injected £516 million into the Dublin housing market’.
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It noted that around 25 per cent of these sales were under Section 23 tax relief, and that nearly 3,100 of the purchases were apartments. Overall, there were 16,230 home loans approved that year, which was an increase of 25 per cent on the figures for 1993. House completions – and here ‘house’ includes apartments as well – also increased by 25 per cent. This had an effect on the unemployment figure, which dropped to 14 per cent, having been at over 15 per cent for the previous two years.

The amount of financial investment surrounding the construction industry, including land speculation as well as commercial and residential completions, meant that by the end of 1995 the two largest companies on the Irish Stock Exchange were AIB and Bank of Ireland. Financial shares had ‘come of age’ and were continually outperforming industrial shares such as those of Smurfit. International financial corporations were investing in Irish banks, which were investing in property, which was being subsidised by the taxpayer, who were buying the houses with finance provided by the banks, the shares in which were rising due to investment via international financial speculation. And due to this hermetically sealed universe, mortgages just kept on rising.

At the same time, almost 40 per cent of all private rented dwellings were in receipt of rent allowance. It cost the government £115 million (€146 million) in 1999 in payments. Ten years previously, that figure was £6.1 million (€7.7 million).
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By 2005 it had risen to an estimated €380 million.
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The State had gone from a policy of eradicating slum dwellings in the 1930s, to actively subsidising private landlords and sub-standard dwellings. The expansion of the private rental market was official government policy. It was, after all, one of the criteria for Section 23 relief. The Irish State had encouraged the expansion of landlordism. It had privatised public housing so that the funding which would have gone to local authorities now went to private individuals and businesses.

In the 1990s, the banks and building societies changed the criteria from householder’s income to household income. This meant that a mortgage application could be based on two incomes. Almost overnight, financial institutions could double the amount they could demand for a mortgage. By the time the Rainbow Coalition government left office in June 1997, the average house price was around £80,600 (€102,400), over five times the average industrial wage of £15,211 (€19,318). This was the highest wage:house price ratio since 1980, and a serious danger to the health of the economy. The reason was affordability. In 1967, the Department of Local Government issued a booklet entitled, ‘A House of Your Own’. It said that when buying a house, ‘The amount which you borrow should not be more than the 2½ times your annual income (excluding overtime, bonuses and the income of your wife and of any grown-up children’.
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The building societies usually limited loans to an amount which ensured that mortgage repayments were between 20 to 25 per cent of the person’s income. The reason for such a criteria was to allow the household to maintain itself while meeting repayments. In normal times, the wage:house price ratio of 1997 would be seen as a sign that a bubble had formed in the property market, but these were not normal times. The Irish State was deep into a period of financial exuberance surrounding construction, armed with little more than a bag of myths and a tiger for a sound bite.

‘It reminds me of Islington in the 1980s.’
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The relationship between house prices and Irish wage levels lost any sense of reality under the 1997 Fianna Fáil/PD government. Soon, house prices were close to eight times the average industrial wage. ‘In today’s property market place couples at least have an edge because they have two incomes’, wrote
The Irish Times
in February 1998. ‘Single people need to be earning unusually high incomes to purchase even apartments, much less houses.’
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And despite numerous warnings, the government, with Charlie McCreevy as Minister for Finance, continued to stimulate the property market via tax relief. One such example was the Rural Renewal Scheme, which covered all of the counties of Leitrim and Longford as well as certain areas in counties Cavan, Roscommon and Sligo. The scheme was intended for commercial, owner-occupied, and rental residential properties, and was one of three urban and rural rental schemes which formed part of the 1998 Finance Act.

Under the terms of the scheme, 50 per cent of capital expenditure could be used as tax relief for both owner-occupiers and lessors of the buildings constructed or refurbished under the two schemes, ‘with the remaining 50 per cent being written off at 4 per cent per annum over the next thirteen years’.
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McCreevy wanted to give 100 per cent tax relief on capital expenditure, but this was rejected by the EU Commission, who gave belated permission for the scheme in June 1999. There were other dissenting voices closer to home. The Chief Executive of the Western Development Commission, Mr Liam Scollan, said that it had ‘not been thought through and appears to be more appropriate for Temple Bar than Carrick-on-Shannon’.
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Both the Development Commission and the Heritage Council pointed out that almost half the schools in Leitrim and Roscommon were in danger of losing teachers due to falling numbers. They said that ‘The area is in desperate need of people, yet [the Rural Renewal Scheme] will do nothing to encourage owner-occupancy but will assist developers who build for the rental market’.
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These sentiments were in line with those of the Department of Finance, which also raised serious concerns, all of which were ignored by the Minister.

In 1999, the Department of Finance produced a tax strategy group paper on the urban and rural renewal schemes. It was critical of the fact that the objective of the scheme was to provide tax relief for investors, with construction once again the conduit rather than the actual objective. It also questioned the desirability of providing investment incentives via tax relief during a time of high economic growth. What encouragement does expansion need when expansion is already taking place? According to the report:

… the majority of the beneficiaries of property tax relief schemes are high-net worth individuals or corporate investors. The introduction of further tax incentive schemes even in times of exchequer surpluses does not assist the policy of continuing to lower tax rates and widen the base from which taxes can be levied. The possibility that tax incentives for property development have contributed to the emergence of asset price inflation cannot be discounted. Such reliefs may not be the most appropriate and cost effective way of promoting the development of an area or promotion of an undertaking given the present economic climate with record growth and increasing construction costs.
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The strategy group had highlighted the tax relief measures as a serious flaw within the scheme. However, the whole point of the scheme was to create a tax haven for investors and developers. And as this was the intention, it was no surprise that the Minister and the government declined the group’s advice and allowed the scheme to run its course, with devastating results for the affected towns. The Shannon area was about to drown in a sea of concrete and decking. As to who would benefit from such an outcome, on that the strategy group was quite clear: high net-worth individuals and corporate investors.

From 1999 to 2006, a total of 6,452 housing units were constructed in Leitrim. The 2006 census showed that the number of households in the county had risen by 1,547 since 2002. Almost 22 per cent of all housing in Leitrim was vacant. A similar pattern occurred in Longford, with 5,842 houses built under the scheme up to 2006, a household increase of only 1,736, and a vacancy rate of 22 per cent. Overall, the census found around 216,000 empty housing units in the State – this did not take into account holiday homes, of which there were 49,789. Fifteen per cent of all housing in the country was empty. In 2010, the website Life After NAMA, which is run by academics based at NUI Maynooth, concluded that there were 302,625 empty housing units in the State, and again this figure was exclusive of holiday homes.
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Large swathes of Ireland, entire communities, were being used solely as tax avoidance by investors, who had been encouraged for decades to do so by successive Irish governments.

By 2007, it was obvious that the Irish property bubble was about to burst. In an article for
The Irish Times
, the UCD economist Morgan Kelly wrote that ‘The question is no longer whether the Irish property market will have a soft landing or a hard landing but what kind of hard landing it will have
^’
.
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He pointed out the high level of vacant houses in the State, and that ‘almost none of the 70,000 or so new units built this year have been sold’. His was a pessimistic, yet entirely realistic, assessment of the situation, and as such was roundly criticised and dismissed by the economic experts who were brought in to undermine any realistic attempt to understand the true dynamics of the Irish economy. The chief economist with IIB Bank, Austin Hughes, said that ‘The proportion of unoccupied dwellings here is slightly below the EU average’ and that ‘a surge in spending power that made ownership of holiday homes and accommodation for children at college almost commonplace is one element in this rise in so-called “empty” homes’. In July of that year, the Taoiseach, Bertie Ahern, told a conference of the Irish Congress of Trade Unions that he was fed up with those who spoke of serious problem within the Irish economy. He said that ‘sitting on the sidelines, cribbing and moaning is a lost opportunity. I don’t know how people who engage in that don’t commit suicide, because frankly the only thing that motivates me is being able to actively change something.’ Fourteen months later, the Irish banks would need the largest bail-out in the history of the Irish State, and the property market was on its slide towards disaster.

The 2002 census contained an interesting statistic. Irish owner-occupancy levels had dropped in the 1990s, from a high of 79 per cent in 1991, to 77 per cent ten years later.
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By 2006, owner-occupancy stood at just under 74 per cent. In EU terms, Ireland was eighteenth in homeownership levels, out of twenty-nine nations listed by Eurostat.
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Ireland was bucking European trends with a declining level of home ownership, yet the popular narrative has Ireland with the highest rate of home ownership in Europe and, unlike the rest of Europe, obsessed with owning their homes. It does not matter that seventeen other countries – Spain, Italy, Greece, Portugal, Norway, Cyprus, Malta, Iceland, Latvia, Romania, Lithuania, Poland, Bulgaria, Estonia, Hungary, Slovenia and Slovakia – all have higher rates of home ownership than Ireland or that the EU average rate is 76 per cent. Never let the facts get in the way of a story.

On 8 June 2006,
The Irish Times
printed a report by John Holden which perfectly reflected the blend of dinner-party philosophising and lazy assumptions that has come to characterise so much of the public narrative on Irish housing. He stated that Ireland, ‘at 77 per cent has one of the highest rates of home ownership in Europe,’ that ‘home ownership is by no means an international preoccupation,’ and that ‘The Plantation, Land Wars, and the famine years are certain to have had some impact on every Irishman wanting his own plot’. He made the argument for a historical obsession with land after interviewing P.J. Drudy of the Centre for Urban and Regional Studies, who said that Irish people buy their dwelling as ‘there is not great incentive to get into private rental accommodation. The standard is not good enough, particularly at the lower end, and the rents are as high as average mortgage repayments.’ Michael Dowling of the Independent Advisers’ Federation said that ‘Irish people have seen the returns on property and so continue to keep the market buoyant’ and that ‘other European cultures are less interested in property [as an investment]. They tend to invest more in business and enterprise.’ Professor Musterd of the University of Amsterdam told Holden that home ownership in Europe isn’t all related ‘to a history of oppression or landlessness’. All to little avail. The factual myths and pseudo-historical analysis carried the day.