Is the Irish Property Market a giant Pyramid Scheme?

[mairteenpak]

Given the massive appreciation that has occurred in the property market, sponsored and promoted by a tax hungary Government, encouraged by the property porn sector, is it all just a doomed pyramid scheme.

After all someone some where must get burned!

As the scheme progressed the direct cost of the housing units became a smaller portion of the sale price of the homes. After all the direct cost of building per square foot a decade ago was about £40 per square foot.

The way the market operated meant that there was a dogfight to buy what land was released, and the market competed to spend as little as possible actually building the units. This meant poor amenity and very poor standards. There was no scope in the market to compete on quality.

We have seen the advent of the timber frame block of apartments which manufacturers supply for as little as €13 per square foot.

The Pyramid scheme collapsed when it could not suck in sufficient first time buyers

[Supermanpolitician]

Interesting analagy but not quite right. Pyramid schemes are based on the movement of money for something of little or no real value. However houses do have value, and always will. The great valiable is just how much. They were grossly over valued but there will be a certain amount of panic selling. After this ends houses will be undervalued...then there will be a realisation that they are under-valued and ...ok you can see where I am going with this.
There are many things which are sold are prices well above their costs. The main determinant is not cost itself but the supply and demand curve (of which cost is of course a major factor on the supply side).

Some people just lost the run of themselves, not helped by those who had most to gain.

[mairteenpak]

Expensive Housing is a huge millstone for our economy by way of the level of wages required to pay rent or a mortgage. A property boom is a great way of boosting the state coffers for a few years. Essentially it’s about transferring borrowing from the National Borrowing to Private Debt, and funding the exchequer by private debt as opposed to National Debt.

Our economy would have been much better served by a cheap competitive housing policy, which would have eased pressures on wages.

The Value of Housing is a notional issue largely dependent on the amount of development land zoned and the amount actually made available to be actually used.

Far from actually having a real relationship between the direct cost of housing and its price we have a property market driven by artificial land values.

Most development plans and Forward Planning Departments of County Council forecast demand for housing independent of the essential Supply and demand issues. Development plans do not make assessments of when land will actually be developed. In a rising market it makes sense to hoard land after you have made enough to cover most of the acquisition cost of the Land. Hoarding Land and carrying Debt in a falling market is a very risky business.

The mechanism of the Pyramid Scheme works well while there are streams of first time buyers who can afford the entry cost to buy or afford to pay rents that would support the mortgage repayments of "investors"

An Economy that cannot provide a quality Home that can be afforded by everyone who does an honest days work is flawed.

[mairteenpak]

It is looking more like a pyramid scheme each day that passes :mrgreen:

[Lennon]

The Irish property market has indeed been a gigantic pyramid scheme where the property developers, land speculators, estate agents, banks and the Government have entrapped large numbers of the population into being lifelong slaves to their property.

There is a mightly collapse in property prices in store and it has only just begun. In Japan house prices fell 70% in the late 1980's and prices have still not recovered.

Unfortunately many people were conned by the marketing mantra of the vested interests of the property market and foolishly believed that property prices always rise.

Negative equity and repossessions will be commonplace and the banks will be left holding large stock of unsaleable properties.

[Centurian]

All current indications are that we've seen nothing yet as regards the crash that's occurring.

So much for Ahern's "soft landing"........

[drjimryan]

must agree.....i can see the average 3 bed mid-terrace with on street parking in a 'high density' development on the citys outskirts , which is presently selling for €325 hitting around €285 in the next 9 months...returning to €330 by may 2010........and tahts where the problem currently lies............without new builds theese homes are the 'first time buy' and whilst they dont sell the 'trader - uppers' dont move and the ripple is felt right to the top........

[Lennon]

must agree.....i can see the average 3 bed mid-terrace with on street parking in a 'high density' development on the citys outskirts , which is presently selling for €325 hitting around €285 in the next 9 months...returning to €330 by may 2010........and tahts where the problem currently lies............without new builds theese homes are the 'first time buy' and whilst they dont sell the 'trader - uppers' dont move and the ripple is felt right to the top........

I also believe that average 3 bed mid-terrace with on street parking in a 'high density' development on the citys outskirts will fall in price. But I can see them dropping to around €200k. However I believe that the market will take some years (around 7 to 10) to climb again.

Is there any reason that you think that property prices start to increase in May 2010?

[rockyracoon]

I can see that denial is still in full flood. Btw, in real price terms, the value of a home barely outperforms the inflation rate. In other words, the underlying economic value of the an entire country has to rise for the price of home to rise, plus a very small premium price above inflation over the last 100 years or so in most of the western world. The idea that a home in the long term outperforms the overall economic market is a myth. So there was a semi-type of ponzi scheme at work in Ireland in which people were told and believed that a home price would keep outperforming our overall economy. When you add on the fact that for the last several years the growth in the economy was based largely on construction, you can see why the home value myth was built on quicksand.

[drjimryan]

well the way i see it is that over the past boom time...homes and houses and investments kinda got intermixed..................at peresent rents are rising because many couples are 'hangin on'.....this will only last for so long, people are still getting married .....so 'home buying' will return, remember this all satrted 2 years ago so by september 2009 it will be 3 years since a lot of pople started to 'hang on'......and thus my reasoning that by 2010 home purchases which are more long-term will resume with vigour at jan 08 prices..........