Ireland: a reality check

Eavesdropping can sometimes be part of a journalist’s armoury – but this was one conversation I rather wished I had not overheard.

I was sitting at the bar of Dublin’s Shelbourne hotel while, nearby, two locals were engrossed in the Irish Times property supplement. “Look at the crazy price some poor punter paid for this,” one said, pointing to the photograph of a modest, three-bedroom terraced house in south Dublin. “They’ll never get their money back.”

I was that poor punter. It was 1994 and I had just arrived in Ireland. Whether it was the adrenalin rush of the auction room or my Irish friend egging me on, I had outbid two other buyers and paid what was, at the time, a record price for a property on that street.

My heart sank as I listened to them rubbish my investment decision. But today, as I prepare to leave Ireland after 17 years as the Financial Times correspondent, I reflect on my double good fortune at having bought before prices went mad and having sold before the crash of 2007.

Not everyone was so lucky. An estimated third of Irish households with mortgages are in negative equity today, the size of the borrowing exceeding the value of the property. Debt was the rocket fuel behind Ireland’s property boom, but even the prudent investor who kept money in bank shares lost almost everything when holdings were diluted as the government took over the main lenders.

Good businesses, too, suffered in the fallout, starved of working capital as banks, under pressure from the regulator, rebuilt their shattered balance sheets. Indeed, every family is paying indirectly for the crisis through higher taxes and cuts in public services, as Ireland meets the terms of the €85bn ($116bn) rescue agreed with the International Monetary Fund and the EU last November.

Ireland is experiencing what might be called a wealth effect in reverse. In leafy, middle-class Dublin, golf clubs are slashing membership fees. Private gyms are closing as office workers join exercise “boot camps” in the public parks. Fee-paying schools have taken to advertising on bus shelters as hard-pressed families withdraw their children.

“People are making the best of a humongous situation,” says Ivan Yates, a former government minister I buttonhole at the Dublin Horse Show, a key event in the social calendar. This year, the week-long festivities drew record crowds, but Yates, who has also worked as a bookmaker, cautions against reading too much into this. The Irish, he says, will always “put a little aside for fun purposes”, whatever their financial circumstances. “But don’t be fooled, they’re grieving in private,” he says.

Historically, the picture the Irish present of themselves is of a people not much interested in the pursuit of material things. But recent events have shattered that image. During the boom, Ireland was taken up with brash consumerism as a “get rich quick” mentality took hold.

From his office with its views over the dunes to the Irish Sea, Damien Offer, manager of the Malahide marina, north of Dublin, had a good vantage point to watch the impact of this sudden explosion of wealth. He recalls that many of the big developers bought expensive boats, most of which have now been repossessed by the banks that financed the developers’ business empires, or sold by specialist brokers to pay their owners’ debts.

Offer says Ireland’s coping classes – owners of small businesses, the professionals and the self-employed – also overextended during the boom and now face a fight for financial survival. “The feeling was, if you’re in a place where the sun is shining every day, it makes sense to go out and buy yourself a pair of shorts,” he says, describing the effect of a property bubble, where prices seem to rise inexorably and the banks are ever ready to lend.

“This was a love affair with property,” says Ray Tilson, who heads a Dublin fund management group. “People thought it was a one-way bet, that prices could only go up.”

The building boom saw a dramatic increase in office and apartment construction in Dublin, while around every mid-sized town farmers got rich selling land for shopping centres and housing, much of which has been abandoned in the crash. Half-built and derelict, they have become Ireland’s ghost estates. But during the boom years, success at home encouraged some developers to take on more debt to replicate the model in the fast-growing markets of eastern and central Europe.

Latterly, some started buying pieces of prime property in London. Their acquisitions were reported in the Irish media as a matter of national pride.

Every social class got caught up in the euphoria. At the height of the boom, McInerney Homes, Ireland’s largest housebuilder, was outbid on one site in Cork by a group of local dentists. McInerney has since gone into receivership. There is no record of what happened to the dentists.

Almost every taxi driver you spoke to seemed to have an apartment in Bulgaria, usually bought without even visiting the country. In rural Ireland, too, there was a splurge of holiday-home development.

“My vet became a builder,” says Jim Connolly, a Mayo farmer who used to supplement his earnings by digging up bog oak and selling the timber as garden ornaments to Dubliners en route to their hacienda-style villas in the west of Ireland.

Frank O’Dwyer, chief executive of the Irish Association of Investment Managers, says: “We went from being a country that said property was a safe investment to where we all thought it was a sure thing.”

How many rugby- or golf-club friendships, he asks, have ended because someone was advised to put money into a development that has since gone bust? “People were remortgaging their homes to invest in what? More property. That was madness and against all investment good practice,” he says.

The madness is documented in a recent paper in the quarterly bulletin of the Central Bank of Ireland. The authors, Mary Cussen and Gillian Phelan, calculate that in the 27 months to the end of 2010, Ireland’s net wealth declined by €281bn – equivalent to almost two years’ national economic output. They estimate the value destruction in Ireland was greater than the losses incurred by the US in the Great Depression of the 1930s, although less severe than the recession Japan suffered in the 1990s.

Irish bank losses alone are estimated at €50bn as lenders have transferred their rotten property loans to the National Asset Management Agency at heavily discounted valuations, while still having to repay the German and French bondholders who funded their loan expansions.

The collapse of property prices – down 40 per cent from their 2007 peak, according to the Central Statistics Office – accounted for the bulk of the value destruction. Pension investments also fell. The Irish Pensions Board says the losses of the typical pension investment in Ireland were greater than in any other member of the 34-strong Organisation for Economic Co-operation and Development group of rich countries.

Among households those most affected were the 30-somethings who borrowed to buy their first homes at inflated prices at the top of the market, and perhaps now have lost their jobs in the recession.

“There was no collective memory to help anticipate the crash,” says Tom Arnold, chief executive of Concern, the developing-world charity that has also seen its donations decline. “The boom had been going on so long, there were those in the younger generation who had experienced nothing else.”

Also hit are the elderly, many of whom would have been depending on the dividend income from their shares in Bank of Ireland and Allied Irish Banks, but who will now be living out their retirement without any financial security.

A report commissioned by Ireland’s central bank into the causes of the crisis identified the problems of “herding” and “groupthink” in the way bankers, regulators, financial advisers and individual consumers assessed risk.

In a paper for the Economic and Social Research Institute, a local think-tank, Peter Lunn, a behavioural economist, took the analysis further, suggesting that the Irish felt comfortable investing in property because they were dealing with an asset class they believed they understood.

The banks, in particular, were guilty of overconfidence. Lunn cites remarks by Willie McAteer, then the finance director of Anglo Irish Bank. He told a local newspaper in 2003: “We operate in greater Ireland. London is eastern Ireland. Boston is western Ireland and then there’s mainland Ireland. Culturally, they are very similar regions; it would terrify us to lend money in France, for example.”

Lunn says this sort of mindset explains “why so many wealthy Irish individuals who lost fortunes in the crash had such poorly diversified portfolios”.

Certainly the reputation of Ireland’s stockbrokers and fund managers has taken a battering. But the experience of Tilson, the Dublin fund manager whose company, Tilman Asset Management, was acquired by Brewin Dolphin, the UK investment firm, in July, suggests there are foreign investors who believe there is still some private wealth left in the country to be managed.

Conor O’Kelly, chief executive of NCB, another Dublin stockbroker, believes the crisis has taught many lessons. “What we’ve learned is that money needs to be professionally managed,” he says. “We need to look at preservation of capital. Before now, it was all about returns.”

The lesson many savers seem to have learned is that no bank or Irish institution is to be trusted. Indeed, much to the alarm of the government, savers are now spurning the local banks and opening deposit accounts offshore with foreign, particularly German, banks.

“There is no confidence in the Irish banks,” says a financial adviser who prefers not to be named. “And they’re worried the euro may not survive, and in that event they want to make themselves as safe as German depositors. They calculate there’s no downside and there could be an upside.”

Prudence is certainly the new investment watchword. But in other ways, how much has Ireland really been changed by its dramatic collapse? Today, among the drinkers in the Shelbourne, there are still those described approvingly as flaithiúlach, or generous with their money. Being broke in Ireland has never carried the social opprobrium it does in other countries.

Will the values of this older Ireland reassert themselves? The only real certainly is that the country faces a massive hangover before it finds out.