by Shane Ross
In the same November 2007 report McLaughlin forecast a ‘recovery’ in GDP growth for 2009 to 5 per cent. The most up-to-date independent forecasts suggest that, far from growing, our 2009 GDP is set to dive by 8 per cent.
The storm was coming, but all was calm at the Bank of Ireland.
McLaughlin was not alone in his cheerful outlook. Other banks’ economists took a similarly upbeat line.
Austin Hughes, the in-house economist for IIB Bank, refused to share the gloomy mood in the property market as 2008 opened. According to Hughes, ‘The Irish housing market faces a tough start, but should see a steadier finish to 2008 as lower borrowing costs and reduced supply help return the market to balance… While a sharp turnaround may be unlikely, a lot of bad news is now “priced in” to Irish property values and less threatening news could underpin sentiment as 2008 progresses.’
In 2008 the main Irish housing index fell by 9.1 per cent.
Pat McArdle, chief economist of Ulster Bank, was another economist with his head in the sand. In March 2007 he had a brainwave. He blamed the weather for a slowdown in housing activity. His singling out of the rain and the wind bore echoes of the luckless Bank of Scotland chairman and fallen C&C boss Maurice Pratt, who blamed the weather for a failure of C&C’s marketing of Magners cider in the UK. Both had unearthed a novel scapegoat.
McArdle was gung-ho about the construction industry in March 2007 – just as the property market began to decline:
Fears that the construction industry would struggle to absorb a housing slowdown are not borne out by recent Purchasing Managers Index reports. Housing activity, possibly influenced by bad weather, has contracted modestly in each of the past four months, but total construction activity has accelerated to an eight-month high, influenced by a surge in commercial. The pace of the acceleration in the latter is striking – we have not seen the likes since mid-2005. No surprise then that employment, which had tailed off, is again growing strongly and that confidence remains high. While factory closures and associated job losses in other sectors are making headlines, there is no sign that job shedding in the construction sector is imminent.
Twelve months later there were 26,800 fewer people working in the construction industry.
One or two of the bankers’ economists struggled with the housing bubble. AIB’s John Beggs warned in April 2006 that the ‘Irish housing market has become a hot house’.
Almost in the same breath he made a prediction that his bosses would have found easy to reconcile with their own love affair with property: ‘We do not foresee a sharp fall in house prices but a protracted period of stability could follow beyond 2007.’ AIB could hardly claim to ‘foresee a sharp fall in house prices’ at a time when its lending machine was cranked up, frantically competing with Anglo to lend money to property developers.
Ireland’s bankers had a line to investors through their stockbrokers and to the media through their economists. Their tentacles were everywhere. Such bullishness was one of the forces that turned a boom into a bubble.
As if that was not enough, the two major banks had powerful investment arms. AIB had Allied Irish Investment Managers (AIIM) while Bank of Ireland had Bank of Ireland Asset Management (BIAM). Even Irish Life had Irish Life Investment Managers (ILIM). These were among the biggest fund managers in the country. They managed company pension funds, large and small. They managed ordinary investment funds of all sorts. Control of these funds gave the banks huge firepower in the Irish stock market. AIIM, BIAM and ILIM all had chunky holdings in their own and each other’s parent banks. Co-operating with other fund managers, they formed a cosy little association called the Irish Association of Investment Managers (IAIM). It was a lobbying group for the managers but did little to enforce high standards in the industry.
The shares which banks held in each other fostered the clubby atmosphere in the banking world. The IAIM did nothing to remedy the effects of incestuous cross-holdings. Whatever the controversy, whatever the merits of a director, whatever the wrongdoing, the banks never upset the apple cart at each other’s AGMs. Invariably the pension funds controlled by their investment arms voted in favour of re-election of their rivals’ board members. They cast millions of votes on behalf of pensioners whose sentiments in many cases were probably directly opposed to the managers’ stance.
Frequently, small shareholders would vote against the board at an AGM while their pension fund manager would do exactly the opposite with his or her pension fund votes. The system was anomalous. Through their investment arms Bank of Ireland, AIB and Irish Life all joined in a mutual support operation guaranteed to frustrate small shareholders and preserve the power of their masters, their parent bankers.
As the banks’ investment arms held so many Irish banking shares, Ireland’s pension funds suffered disproportionately when the Irish market tanked in 2007 and 2008. It would have been a brave dealer at Bank of Ireland, AIB or Irish Life who, viewing his parent bank’s shares as overvalued, risked depressing the price by dumping millions on the market.
Instead, bankers had created a spoofers’ paradise. Spoofers flourished among their stockbrokers, among their employee economists and among their wholly owned fund managers. Full-time spoofers helped to hype the markets for too long.
Bankers’ poodles were not the only spoofers hyping the property market. As spoofers go, they faced fierce competition. Indeed they were shaded in the spoofing stakes by their allies, the estate agents.
Ireland’s estate agents were probably unique. To become an estate agent no qualifications were necessary. An applicant for a licence merely needed to pay a visit to the District Court. Provided an applicant was not a criminal he was almost always admitted to the industry by the judge. Then he or she could head off into the property jungle in search of victims, take booking deposits and hold auctions. I should know. I did it.
It was a doddle. And I have as much idea of how to value or sell an Irish home as an African elephant. But I can puff a property or prop up a fading boom as well as the next man.
In December 2006 I decided to find out if any old bluffer can easily secure an estate agent’s licence. I filled in my application and appeared in the District Court in Bray accompanied by my solicitor. I was obliged to put a notice in the Bray People to warn the locals that they were about to embrace another menace in their midst! Then all I needed was a deposit of €12,700 or an insurance bond, and a tax-clearance certificate.
I gathered the necessaries and encountered no opposition from the local Gardaí, nor from an agreeable judge. All the pieces were in place. There was no requirement to be able to read, write or show evidence of numeracy. I was (and still am) an estate agent, entitled to buy and sell houses for other people, to value them and to hype their prices until kingdom come.
Each year I reapply for the licence. Each year the application sails through. I no longer bother to employ a solicitor, but turn up myself to renew the licence. If my career as a journalist or politician is ever prematurely ended I too will be able to plunder the pockets of the vulnerable people who have been exploited by estate agents for so long.
Estate agents were responsible for much of the hype surrounding the property explosion.
Many estate agents ran mortgage brokers as a sideline. First, the mortgage arm decided how big a loan a prospective buyer should be approved for. Then the auctioneering arm of the same firm sold the property to the same buyer. An RTÉ Prime Time Investigates programme in December 2006 revealed that some auctioneers acting for sellers were in collusion with mortgage brokers acting for the buyer. Information on the financial strength of the buyer was available to the seller. The programme also highlighted the widespread practice of planting fake bidders in the auction room.
A leading weapon in estate agents’ sales campaigns was the quoting of nonsensically low ‘guide prices’ in order to entice potential buyers into the auction room. Often the guide price was well below the reserve price at the auction itself. It was a device for encouraging
buyers to go to their surveyor at vast cost, to seek a loan and to consult a solicitor. Before buyers were aware of it, they were knee-deep in a transaction well beyond what they could afford. Either they wasted all the money on professional fees prior to the auction or they borrowed more than they could afford from their indulgent banker, as the bidding invariably rose far above the guide price.
In 2004, more than two years before the property boom climaxed, estate agents Lisney excelled themselves. They had published a ‘guide price’ of €2.5 million for a large house in Dublin’s Cowper Road. The house was eventually sold for €6.275 million. Lisney was again the culprit on a sale of 51 Terenure Road West in the same year. Once again they had guided €2.5 million. The house sold for €5.2 million. Others were at the same game. No one cried ‘Stop’. The practice was not discouraged by either of the two toothless auctioneers’ bodies, the Irish Auctioneers and Valuers Institute (IAVI) and the Institute of Professional Auctioneers and Valuers (IPAV).
Why were estate agents allowed to continue with such practices for so long? Probably because they carried huge political clout. Many TDs were part-time auctioneers. In 2007 at least nine out of just sixty senators were estate agents. Several TDs and scores of county councillors – responsible for planning decisions – had acquired estate agents’ licences.
Collectively, the estate agents not only misled the public in good times with bogus guide prices; they also misled the public in bad times with bogus sale prices. In 2008 it emerged that certain auctioneers had been supplying the Irish Times with sales results figures higher than the actual price achieved. The intention, presumably, was to prop up the sagging property market: publishing higher prices gave the impression that the sharp falls were not as bad as they seemed. It also encouraged potential sellers, seeing prices holding up, into putting their houses on the market. It was a typical auctioneer’s stunt.
Alan Cooke, the abrasive head of the IAVI, told RTÉ that he had no idea that some of his members were misleading the readers of the Irish Times. The toothless National Consumer Agency called both auctioneers’ outfits in for a chat, but no prosecutions were taken. The leaders of the two groups promised to insist that their members behave better in future.
Like the banks and the stockbrokers, the leading estate agencies employed in-house economists. At the beginning of 2007 the Irish Independent asked estate agents’ economists for their forecasts for the year. Down at CB Richard Ellis they employed nothing less than a ‘Head of Residential Research’. Aodha O’Brien was up front: ‘Activity in the housing market will remain strong in 2007, albeit less frantic than in recent years. On the back of strong economic and demographic fundamentals, we expect that prices will continue to rise.’
Asked what he would do with €80,000 he replied that he would ‘gear up to buy a residential property’. In other words, he would advise clients to borrow buckets to buy property: exactly what the bankers wanted to hear, and exactly what they facilitated.
Sherry FitzGerald’s ‘Chief Economist’, Marian Finnegan, predicted that ‘the national second-hand market rise is likely to be in low single-digit figures with a slightly higher figure achievable in the main cities such as Dublin’. Marian’s findings would not have displeased her masters in the blue-blooded firm, which is headed by Mark FitzGerald, son of the former Taoiseach Garret FitzGerald.
Alan Cooke, the head of the hapless IAVI, predicted ‘modest growth in the residential sector, due in no small measure to interest rate increases’.
Bankers were in unison with auctioneers in forecasting that prospects for eternal salvation lay in the property market. Austin Hughes of IIB Bank predicted house prices would rise by 6 to 7 per cent in 2007. Hughes rounded up all the usual suspects to support his crystal ball: ‘the healthy economy, favourable age profile, supportive Budget, maturing SSIAs and strong employment growth should underpin prices’.
Other estate agents’ economists were equally happy to puff the market. Paul Murgatroyd of Douglas Newman Good thought it might be worth ‘taking a punt on an investment property along the proposed Metro north line’. Overseas, he liked ‘safe European countries like France and Germany which in my view are good areas for speculation’. Geoff Tucker of Hooke & McDonald said that ‘residential property is still your best bet. The rental market is thriving and there is huge demand for good-quality, well-located accommodation. Sandyford, Kilmainham and Dublin’s Docklands are my top picks.’
One wonders how many of these geniuses followed their own advice.
The other important collaborator in the property frenzy – with the banks, the developers, the stockbrokers, the estate agents and the government – was the media. As the boom heated up, property advertising became a vital revenue raiser for newspapers and magazines. Property supplements glamorizing the whole sector were published weekly by most newspapers. These supplements never carried critical commentary on any of the houses or estates reviewed. Glowing editorial pieces about a new housing estate were often miraculously accompanied by a large advertisement plugging the same estate. Unfavourable coverage of developers and auctioneers in other parts of the newspapers was regularly met by implied threats from property interests that advertising could go elsewhere.
RTÉ also pandered to the national obsession with property, putting on programmes like House Hunters in the Sun, Show-house, About the House and I’m an Adult, Get me Out of Here. But it also commissioned a documentary that opposed the general euphoria.
The word ‘crash’ was virtually unknown to the national lexicon before 2007. Richard Curran, deputy editor of the Sunday Business Post, broke the taboo in a programme he made for RTÉ in April of that year.
Curran had no axe to grind. His career spanned RTÉ, the Irish Independent and the Sunday Tribune. Unlike the outspoken economist-journalists George Lee and David McWilliams, he was not well known for sparking controversy. The programme was dynamite. Entitled Future Shock: Property Crash, it outlined the dangers of a steep drop in property prices to Ireland’s economy. Curran spelled out the possible peril facing the country. Interest rates were rising; Ireland was too heavily dependent on the construction industry, while the United States was facing an economic storm and a weakening dollar.
Curran went to London to see if the Ireland of 2006 bore any parallels with the UK property boom of the 1980s, before the crash there. His interviews convinced him that the likenesses were alarming. The prosperous young Londoners of the heady eighties, spoilt by huge incomes from financial services, had gone property mad. Large bonuses had been spent on second and third houses. The bubble inevitably burst.
Ireland did not learn from London’s experience. The Irish nation of 2007, led by the bankers, just charged forward into the property abyss.
When Curran interviewed Ireland’s economists, the majority were in denial. Those employed by the vested interests nearly all spoke with their masters’ bullish voices. But at least one academic economist, Alan Ahearne of University College Galway, was ahead of the posse. In the autumn of 2005, shortly after returning from the United States, where he had worked at the Federal Reserve, Ahearne wrote an article in the Sunday Independent warning of a property slump. He hammered away at the same theme, against the consensus view, for several years.
Others’ predictions were almost universally optimistic. In February 2007 banker Niall O’Grady, the head of marketing at Permanent TSB, predicted – on camera – that property prices would enjoy mid-single-digit percentage growth every year for the foreseeable future. In the same year O’Grady won the ‘Marketer of the Year’ award from Marketing Magazine.
One or two of the less bullish forecasters pulled out of interviews with Curran. Others, fearful of their employers, laid down conditions for a piece on camera. Advance word about the programme spread rapidly in business circles. There was consternation among the bankers. An email circulated, warning that Curran was making a film about a possible property crash. The coded message was clear: shoot the messenger.
; Worse still, despite several efforts by Curran to get an interview with Patrick Neary, the chief executive of the Financial Regulator declined to participate.
The programme went ahead. It caused mayhem.
The government was furious. The programme appeared just weeks before the May 2007 general election, and the timing of its release was regarded in some political circles as an act of sabotage.
Taoiseach Bertie Ahern appeared on Today FM’s flagship Last Word programme with Matt Cooper, denouncing Curran as ‘irresponsible’. The Construction Industry Federation, the mouthpiece of Ireland’s builders, claimed that Curran’s documentary was politically motivated. Veteran Irish Independent property editor Cliodna O’Donoghue – a former colleague of Curran’s – wrote:
RTÉ’s Future Shock was very much a shock tactics programme and many within the property and construction industry have already labelled it irresponsible and wholly sensationalist… Even if only a few people took it at face value, the programme still did much damage to market confidence, which the presenter himself acknowledged as vital for the market’s health.
Business journalist Marc Coleman, who later that year would publish a book about the Irish economy entitled The Best Is Yet to Come, wrote in the Sunday Independent that the country needed Curran’s programme ‘like a hole in the head’ and asked: ‘The question is, why does RTÉ want to run down our economy?’
Even the independent economists were wrong-footed. David Duffy, of the lofty Economic and Social Research Institute, was outspoken in rubbishing the supposed doom-and-gloom brigade. At the time he said, ‘We are not on course for a property crash, unless we choose to manufacture one with irresponsible comment on the state of the market.’
Official Ireland had closed ranks against Curran in a chorus of disapproval.