Finding Reason in the Irish Real Estate Market

“My friends and family warned me. They thought I was making a big mistake by not buying a house.”

An Irish friend tells us what it was like for a renter during the great housing boom.

“The idea was that housing prices always went up. Ireland is a small country. There were new people coming in from Eastern Europe. There were also a lot of Irish people coming back from overseas. We were the ‘Celtic Tiger,’ after all. The land of opportunity.

“So people thought housing prices could only go one way — up. And you had to get on the escalator as soon as possible. Otherwise, you would be left behind. You had to buy a starter home…like one of these new apartments.”

We were driving by a housing development, almost in the shadow of the Wicklow mountains. On the right hand side was a very new apartment complex.

“See all those apartments. They’re empty. They can’t sell them. They were just a little late to the party, I guess. They probably started construction in 2006 and by the time they were ready to sell, the lights had already been turned off.

“You had to buy a starter home when you were in your 20s so that you could trade up to a family home when you were in your 30s. Prices were rising all the time, so if you didn’t have a starter home to trade in you’d never have the money to buy a family home. I guess that meant you couldn’t have a family and your life would be ruined.”

The Irish real estate market has gone bust. But looking in the window of a real estate agent, it appeared to your editor that the boom-time spirit had not been completely crushed. Prices — based on US equivalents — seemed reasonable.

But reasonable is what you get in the middle, not what you get at the top or the bottom. At the top, the house might have sold for twice what it sells for today. At the bottom, it should sell for about half.

In order to reach a real bottom, investors — and ordinary people, for that matter — need to repudiate the idea of the boom itself. That is, they have to come to believe that the premise that drove prices up is false. That is why it is so hard to be a real contrarian investor. It is one thing to recognize that prices go up and down. It is one thing to believe that you should buy when things are cheap and sell when they are expensive. But the person who can resist the logic of a major market trend is rare.

The idea that Ireland’s property was destined to rise was just such an idea. Was it not true that Ireland is a small island? Was it not true that its economy was growing — thanks to integration with the rest of Europe? Was it not true that Ireland had the most attractive business tax rates in all of Europe? Was it not true that people were moving to Ireland by the planeloads…and that they needed a place to live?

Of course it was true. It was irrefutable. Until it wasn’t true anymore.


Bill Bonner,
for The Daily Reckoning