Go Back   Askaboutmoney.com > Campaigns, consultations and financial debates > The bailout, the banking crisis and other economic issues

Reply
 
Thread Tools
  #1  
Old 18-03-2012, 08:29 PM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 22,376
Default When did Morgan Kelly first identify the property bubble?

This arose from this thread about Ronan Lyons' lecture on property. I have always wondered when the economists first forecast the bubble.

It appears to be McWilliams in 1999 and Morgan Kelly was as late as 13 December 2006 Does anyone else have an earlier report for Kelly?

McWilliams spoke about it as early as 1999.

(The heading says 1999 - I presume that this is correct?)

Gay Byrne: Do you think it's going to crash?
McWilliams: There is no doubt about it. Possibly over the next 18 months/24 months
The property market is a classic speculative property bubble
The media says "It's all about the labour force" but the labour force is rising by 2% while property prices are rising by 40%.
Byrne: Is that a sure fire indication that the bubble is about to burst?
McWilliams: absolutely.
Byrne: and there will be a lot of weeping and gnashing of teeth and negative equity and people stuck in mortgages?
McWilliams: In all these cases, someone is left holding something they have paid too much for.
Byrne: I don't want to dwell on this, but how come every other economist is saying. "No. We are fine. It's boom time,"
McWilliams: In 1995 , when I was working in a Swiss bank, it seemed to me that Ireland was going to grow very strongly and I wrote that we would grow at 3 times the European average [Didn't answer why no other economist was making the same prediction]
Reply With Quote
  #2  
Old 18-03-2012, 09:11 PM
ajapale ajapale is offline
 
Posts: 7,756
Default

Im not sure about morgan but tedd posted here in 2002 about a property buble.

Is the investment property boom the next dotcom bubble?
Reply With Quote
  #3  
Old 18-03-2012, 10:15 PM
Sunny Sunny is offline
Frequent Poster
 
Posts: 2,947
Default

Williams was still years out with his prediction. He would have cost his clients a lot of money. He also didn't predict the global financial system meltdown. I can tell you now that there is a bubble in gold prices. It will go down. Publishers can PM me to discuss book deals.
Reply With Quote
  #4  
Old 18-03-2012, 10:31 PM
jhegarty jhegarty is offline
Frequent Poster
 
Posts: 2,874
Default

Was there a bubble in 1999 ?
Reply With Quote
  #5  
Old 18-03-2012, 10:33 PM
becky becky is offline
Frequent Poster
 
Posts: 895
Default

Quote:
Originally Posted by Sunny View Post
Williams was still years out with his prediction. He would have cost his clients a lot of money. He also didn't predict the global financial system meltdown. I can tell you now that there is a bubble in gold prices. It will go down. Publishers can PM me to discuss book deals.
Very good sunny.
Reply With Quote
  #6  
Old 19-03-2012, 07:06 AM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 22,376
Default

Quote:
Originally Posted by Sunny View Post
Williams was still years out with his prediction. He would have cost his clients a lot of money.
Hi Sunny

I remember when dot.com shares were overvalued, telling people this. They rubbished me for getting "only" 10% returns on my bricks and mortar shares such as CRH, IAWS, AIB, etc.

At the time I believed that markets were efficient, so it was odd telling people that the market had overpriced those particular shares.

People whom I had told to sell off their shares gloated for a very long time as the shares went from being overvalued to bubble to complete madness, but it seemed to last a long time.

Assuming that McWilliams first advised people to stay out of the market in 1999, would his clients not be significantly better off on average? I think that someone who bought in 1999 would have paid cumulatively less rent than interest on a mortgage. Prices are probably back to 1999 levels.

I think he was wrong that it was a bubble back then, but he was not far wrong.
Reply With Quote
  #7  
Old 19-03-2012, 07:29 AM
RichInSpirit RichInSpirit is offline
Frequent Poster
 
Posts: 275
Default Gold

Folks

Please stay on track. Sunny made a point about gold in passing. If you want to discuss the price of gold, do so in the gold thread.

Thanks

Brendan
Reply With Quote
  #8  
Old 21-03-2012, 08:46 AM
DerKaiser DerKaiser is offline
Frequent Poster
 
Posts: 1,449
Default

Quote:
Originally Posted by Brendan Burgess View Post
Assuming that McWilliams first advised people to stay out of the market in 1999, would his clients not be significantly better off on average? I think that someone who bought in 1999 would have paid cumulatively less rent than interest on a mortgage. Prices are probably back to 1999 levels.

I think he was wrong that it was a bubble back then, but he was not far wrong.
I think the following situation would be far more likely if you initially took McWilliams advice in 1999.

It's December 1999 and I'm 30, getting married and we want to settle down in our own place. We're interested in a house worth €200k. The bank will give us a €160k mortgage and we could pull the rest together. I listen to DMcW (he's convincing) and persuade the other half to wait a few years.

Come December 2002 we start getting impatient as things are turning out quite the opposite, our target house is now €290k. Surely there will be an even bigger fall quite soon?

Roll on December 2004 the same house is up to €355k. Very frustrating.

It's Christmas 2006. 7 Years on from initially thinking about getting a home. We're 37 have a couple of kids and haven't saved much as we always seem maxed out on credit cards, but hey, everyone is in the same boat. The house is now worth €440k, but we're doing OK with a couple of jobs and the bank will lend us €400k. We take the plunge...

If we had the stength of conviction to wait 12 years from McWilliams initial prediction we might have fared as well as if we had bought the place to begin with. But that could be a very frustrating course of action and would require us timing our entry to perfection - and that's a very big & unlikely assumption to make.
Reply With Quote
  #9  
Old 21-03-2012, 09:49 AM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 22,376
Default

Hi Kaiser

That indeed would be a disaster, but I don't think you can blame McWilliams for being right for so long.

I remember during the dot.com bubble, Warren Buffett was severely criticised for underperforming the market for some long period of time. He was able to withstand the pressure though.

Brendan
Reply With Quote
  #10  
Old 21-03-2012, 09:55 AM
Bronte Bronte is offline
Frequent Poster
 
Posts: 8,677
Default

All economists will at one time or another be right, most of the time they are wrong. But they do not have a crystal ball no more than anyone else.
Reply With Quote
  #11  
Old 21-03-2012, 10:09 AM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 22,376
Default

Apparently Isaac Newton invested in the South Sea Company and made a lot of money by selling out early. But he bought back in again and lost £20,000 - I think his entire wealth at the time.

Quote:
Sir Isaac Newton, scientist, master of the mint, and a certifiably rational man, fared less well. He sold his £7,000 of stock in April for a profit of 100 percent. But something induced him to reenter the market at the top, and he lost £20,000. "I can calculate the motions of the heavenly bodies," he said, "but not the madness of people."
It's not clear if he was trying to second guess the market, or felt like Der Kaiser's friend that the market must be right.

If one had a family, it would have been difficult to stay out of the property market since 1999. And it would be difficult enough to know when to go back in.

Ronan Lyons spoke of some people he knew who correctly anticipated the property bubble and sold out, only to invest the proceeds in bank shares.

It's not enough to get one part of the forecast right. One has to get it all nearly right.


Brendan
Reply With Quote
  #12  
Old 21-03-2012, 10:49 AM
Duke of Marmalade Duke of Marmalade is offline
Frequent Poster
 
Posts: 1,131
Default

House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment. That tallies with my own experience. I bought back in 1988. For the 90s it was fairly pedestrian but by late nineties it had increased to about 200%. By the height trades in our area were valuing my house at 10 times what I paid for it. I guess its back to about 5 times.

McWilliams was getting it spectacularly wrong even way back then.
Reply With Quote
  #13  
Old 21-03-2012, 10:53 AM
jhegarty jhegarty is offline
Frequent Poster
 
Posts: 2,874
Default

Quote:
Originally Posted by Duke of Marmalade View Post
House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment. McWilliams was getting it spectacularly wrong even way back then.
Add to that you would have 12/13 years paid of a mortgage.

If you had a 20/25 year mortgage you are over half the way there.
Reply With Quote
  #14  
Old 21-03-2012, 02:26 PM
staff staff is offline
Frequent Poster
 
Location: Dublin
Posts: 63
Default

I bought a house in 1999 for what would be considered a very modest sum by today's standards but if it comes down to percentages I paid 50% more than the person who owned it previously and they had only bought 18 months earlier. I would consider that quite a jump - and even though the prices have fallen quite considerably over the last 4 years they have still not reached 1999 levels - not yet anyway....
Reply With Quote
  #15  
Old 21-03-2012, 03:51 PM
clownie clownie is offline
Frequent Poster
 
Posts: 118
Default

In some part of the country they have reached 1999 prices and in some cases even less when you convert the present price back to punts. The realistically priced houses on daft or myhome are around 1999 prices (we bought our house that year so know the prices for Dublin and Meath back then).
Reply With Quote
  #16  
Old 21-03-2012, 05:28 PM
DerKaiser DerKaiser is offline
Frequent Poster
 
Posts: 1,449
Default

Quote:
Originally Posted by Brendan Burgess View Post
It's not enough to get one part of the forecast right. One has to get it all nearly right.
Exactly.

I admire the Buffet approach when it comes to investment - if I don't understand the fundamentals I'm not interested. It will help you avoid costly mistakes.

Knowing the fundamentals, however, is often dwarfed by the "madness of people". House prices may very well have reached a point at the end of 1999 where they were overvalued. Understanding this was effectively worse than worthless, however, unless you had 13 years to kill whilst waiting for them to return to their fundamental value.
Reply With Quote
  #17  
Old 21-03-2012, 08:08 PM
johnnyjb johnnyjb is offline
New User
 
Posts: 8
Default

Quote:
Originally Posted by DerKaiser View Post
Exactly.

I admire the Buffet approach when it comes to investment - if I don't understand the fundamentals I'm not interested. It will help you avoid costly mistakes.

Knowing the fundamentals, however, is often dwarfed by the "madness of people". House prices may very well have reached a point at the end of 1999 where they were overvalued. Understanding this was effectively worse than worthless, however, unless you had 13 years to kill whilst waiting for them to return to their fundamental value.
On a personal, non economical level i think if your able to wait 13 or so years to buy a house you probably are not too pushed in buying or are really trying too hard to catch the market out.

Unless its an investment property imho
Reply With Quote
  #18  
Old 22-03-2012, 07:33 AM
Bronte Bronte is offline
Frequent Poster
 
Posts: 8,677
Default

Quote:
Originally Posted by DerKaiser View Post
House prices may very well have reached a point at the end of 1999 where they were overvalued. Understanding this was effectively worse than worthless, however, unless you had 13 years to kill whilst waiting for them to return to their fundamental value.
Or if you ignorred McWilliam in 1999 and bought then and listened to Kelly in 2006 and sold.

.
Reply With Quote
  #19  
Old 22-03-2012, 09:07 AM
ashambles ashambles is offline
Frequent Poster
 
Posts: 308
Default

In my opinion there were two separate bubbles. So someone could express an opinion about the first one that didn’t necessarily carry through to the second. It’d be like predicting a stock price to collapse for one reason, but it doesn’t, but then it does collapse several years later for some another reason, so you can be accidentally right.

In McWilliams case he was absolutely correct when he called the second bubble in the 2000s, the earlier one - maybe, it’s not as clear-cut.

Bubble #1 finished around 2001-2, after a very strong dollar and the dot com bubble had ramped up salaries across the MNC and related sectors. This briefly allowed workers in these sectors compete for housing against the clique of traditional Irish higher income earners. It was finished off by a combination of factors, 9/11, the dot com bust, weaker dollar and changes to tax relief due to the Bacon report.

However bubble #1 was never allowed deflate beyond a couple percent, there was construction industry/“Galway Tent” panic that prices hadn’t simply stopped rising but were dropping, so the tax relief changes were reversed and massive government spending was carelessly applied to the economy.

Unfortunately then the sight of people who’d been predicting the demise of bubble #1 being seemingly being proved wrong seemed to instil in the social partners a feeling of invincibility. If you’re “right” for 10 years it’s hard to think that you may just be lucky.

To see that first bubble end, you might notice the little stutter on the graph around 2002, the only dip from 1996 to late 2006. http://www.statusireland.com/statist...ince-1996.html.
Reply With Quote
  #20  
Old 22-03-2012, 09:19 AM
Brendan Burgess Brendan Burgess is offline
 
Location: Dublin
Posts: 22,376
Default

Quote:
Originally Posted by Duke of Marmalade View Post
House prices increased by 60% from 1999 to today (source tsb/CSO). Now given that this is tax free for own residence, it really is hard to imagine a better investment.

McWilliams was getting it spectacularly wrong even way back then.
I had it in my mind that house prices were back to 1999 levels. From looking at the graph, they seem to be back to "just" the 2002 levels.

So McWilliams was way too early and people would have lost out by following his advice. And, of course, this is not just a financial loss. They would have been renting for the past 13 years instead of living in their own home.

Brendan
Reply With Quote
Reply

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

Forum Jump


All times are GMT. The time now is 02:58 AM.