Same circumstances, different response.

cremeegg

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It seems to me that there are many similarities between the external circumstances facing Ireland today and those of the early 2000s.

Our economy is growing well, we have nearly full employment, there is little emigration, we have immigration.

Interest rates are set by the ECB for the Eurozone as a whole and are therefore lower than they would be if set based on Irelands economic situation alone.

Both then and now the effect of this situation was felt most keenly in the housing market.

25% of the entire existing Irish housing stock was built between 2001 and 2011 (presumably most of that between 2001 and 2008). 2% was built from 2012 to 2017. https://www.irishtimes.com/business/economy/just-2-of-irish-homes-built-in-last-five-years-1.3038929

In the early 2000s the banks borrowed heavily from abroad to fund a housing boom. Huge numbers of houses were built. When the financial crash came all that borrowing was difficult to sustain for many.

In recent years the CB has prevented a recurrence of the borrowing boom. This has meant that far fewer houses have been built. People struggle to find a place to live and rents are very high.

There is no doubt that the policy response is different. There have been winners and losers under both approaches. I feel that personally I have benefitted under both approaches. I was of an age to buy property when that was easy after 2000, I am now a landlord benefiting from a high rental income.

However I do not believe that the country as a whole is benefiting from the present response. There was at least an upside to the boom, we built lots of nice houses. Today I see no upside, there is none at present for people needing somewhere to live, and when a downturn comes people who loose their jobs will not only unemployed but also homeless.
 
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RETIRED2017

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I would say they Central Bank is doing a very good job at present, The one thing they are doing a very good job of is not allowing people to borrow beyond there income ,

In the past they allowed Banks/people to transfer short term debt into long term loans like mortgages on the back of soaring value of there homes increasing the risk to both lenders and borrowers in a down turn,


The best news I heard in a long time is the Central Bank are making the banks sell on Loans once the repayments were modified even where there is plenty of equity in the homes due to increase values at present,

Lots of people who should know better don't understand why the Central Bank are doing this it goes out over there heads I understand why?


Long term this will stop the banks from repeating the same mistakes of the past,

When I bought my first house in the very late seventies I think interest rates were very high if i remember correctly ,


Don;t forget past reckless lending is keeping Interest rates high just like it would be if Ireland could set there own interest rates,
 
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PMU

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Interest rates are set by the ECB for the Eurozone as a whole and are therefore lower than they would be if set based on Irelands economic situation alone.
Normally interest rates are set to maintain price stability, i.e. low inflation. Inflation in Ireland since 2008 has been low and negative on occasions. So I don't see how you can say Ireland's economic situation at present requires higher interest rates.
In recent years the CB has prevented a recurrence of the borrowing boom.
Correct. If the government wishes to reduce house price inflation it can either introduce a tax on mortgages or introduce quantitative restrictions. Quantitative restrictions as the CB has introduced are probably the better way.
It seems to me that there are many similarities between the external circumstances facing Ireland today and those of the early 2000s.
My own take on this is that it's not external circumstances that represent a threat but our own foolishness when it comes to money, i.e. the national finances. We have slightly more government expenditure now than in 2008, i.e. 7,600 million EUR today against 7,400 in 2008. https://tradingeconomics.com/ireland/government-spending. But Government debt is now 68% of GDP, in 2008 it was 42% https://tradingeconomics.com/ireland/government-debt-to-gdp. Government debt in 2008 was 50,000 million EUR; today it's 214,000 million EUR. https://tradingeconomics.com/ireland/government-debt. So we are spending more and we owe more both in absolute terms and as a % of our GDP/GNP/GNI*. While our GDP is higher today, if you strip out the effects of globalization, our GNI is about the same today as in 2008. https://www.indexmundi.com/facts/ireland/gni-per-capita. So I'd say we're screwed if interest rates increase which they most probably will if / when European inflation reaches the ECB's 2% limit.
 
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RETIRED2017

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Normally interest rates are set to maintain price stability, i.e. low inflation. Inflation in Ireland since 2008 has been low and negative on occasions. So I don't see how you can say Ireland's economic situation at present requires higher interest rates.
Correct. If the government wishes to reduce house price inflation it can either introduce a tax on mortgages or introduce quantitative restrictions. Quantitative restrictions as the CB has introduced are probably the better way.
My own take on this is that it's not external circumstances that represent a threat but our own foolishness when it comes to money, i.e. the national finances. We have slightly more government expenditure now than in 2008, i.e. 7,600 million EUR today against 7,400 in 2008. https://tradingeconomics.com/ireland/government-spending. But Government debt is now 68% of GDP, in 2008 it was 42% https://tradingeconomics.com/ireland/government-debt-to-gdp. Government debt in 2008 was 50,000 million EUR; today it's 214,000 million EUR. So we are spending more and we owe more both in absolute terms and as a % of our GDP/GNP/GNI*. While our GDP is higher today, if you strip out the effects of globalization, our GNI is about the same today as in 2008. https://www.indexmundi.com/facts/ireland/gni-per-capita. So I'd say we're screwed if interest rates increase which they most probably will if / when European inflation reaches the ECB's 2% limit.
I agree ,the only thing I would add is the banks and the Government pushed up house prices It was all for nothing because the Central Bank are still making the Banks sell off most of there loans no longer in negative equity once they had to be restructured , The people who kept paying there loan don't really care if they were in negative equity once the original loan was approved on there ability to pay from annual income ,
 

BilliamD75

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I said I would not comment on asm as I cannot comment on Los section but this is very important issue and needs addressing. In this part of our economic cycle we're we have massive economic growth in the last few years, we as a nation are still borrowing..
In normal circumstances we would have currency inflation to go with asset and demand inflation with increases in interest rates, however we have 0%interest rate at the moment so when the rates rise we will be entering a recessionary period putting massive massive pressure on government finances with increasing interest rates on the roll over debt, debt to gdp and inflation rates will not matter as we do not own our own currency. The Irish government are going broke before our very own eyes, the velocity of money which the government depends on for taxes is also irrelevant but that's for another day. The government have already taken money from private pensions before . There is massive cash available on deposit belonging to the Irish citizens, is this going to be safe.
100k guarantee can change over night? Government will try to eliminate cash and limit withdrawals so no more bank runs, our last bastion of economic freedom will be gone, its on the way so get ready. I hope i am wrong.
 

Leper

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I like this thread. I'm learning something new. But, when I listen to informed people in the media informing us that we are nearer to the next recession than the last, I get concerned. We've endured recessions since I was born (1950's); is there something I don't know about and recessions are necessary?
 

cremeegg

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Normally interest rates are set to maintain price stability, i.e. low inflation. Inflation in Ireland since 2008 has been low and negative on occasions. So I don't see how you can say Ireland's economic situation at present requires higher interest rates.
I take your point that inflation has certainly been low over recent years, and (unforeseeable Brexit implications aside) does not look like going higher. There are however other indications of an overheating in the Irish economy. Which if we had an independent currency might require a higher interest rate than we have at present. We are benefiting from the stability of the core Eurozone economy, something a small open economy of 5 million people could never match.
 

cremeegg

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If the government wishes to reduce house price inflation it can either introduce a tax on mortgages or introduce quantitative restrictions. Quantitative restrictions as the CB has introduced are probably the better way.
I would agree with this, but while the policy appears to have been at least partially successful as regards house price inflation it does rather create other issues, lack of new building and rental price inflation.

My suggestion is that the current policy response while it may be heading off the problems associated with the previous bust is creating other and I suggest worse issues this time round.

I would rather struggle to pay a mortgage while living in my new house that struggle to pay rent while living in rented accommodation.
 

cremeegg

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I like this thread. I'm learning something new. But, when I listen to informed people in the media informing us that we are nearer to the next recession than the last, I get concerned. We've endured recessions since I was born (1950's); is there something I don't know about and recessions are necessary?
Happy Christmas Leper, I have the ham on and the trifle made so I have earned some time off.

Given that we are 11 years on from the start of the last recession, it is probably true that we are "nearer to the next recession than the last" but it is a bit of a stopped clock argument.

The last recession was caused by a vast amount of over borrowing and a liquidity crises. What might cause the next.

A normal recession is caused by the economy expanding faster than is productive capacity can sustain causing inflation and lack of resources to continue. While we are certainly seeing a lack of sufficient housing to support the labour market, there is little evidence of any other factor that might tip Ireland or the wider world into recession


Of course there could be a political recession. There are certainly some clouds on the horizon such as a US China trade war and a bad Brexit, but neither of these things have happened yet.
 
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