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2007 – The year the housing bubble bursts?

Joe Craig

15 January 2007

There are three areas above all else in which the global success story of the Irish economy has been a failure.  Even when we set aside the existence and growth of inequality and super-exploitation, especially of immigrant labour, plus the chronic transport problems that mean travelling by train is slower now than 20 years ago and car journeys are a nightmare, these failures remain. The three areas of failure are in health services, child care and housing.

That these very fundamental needs of human existence remain intractable problems in a society hailed for its unprecedented prosperity say it all about the priorities which drive the capitalist economy.  The first two are obvious examples where provision for profit is a failure.  By their nature when people are sick their commodity value (in terms of labour power) is much reduced and their worth to capitalism is reflected in the way the system addresses their needs.  The labour force also cannot be reproduced capitalistically which is why child care has been a problem for years.

Housing, the need for shelter, is equally fundamental but at first sight might not seem to fit the category of failure.  Record numbers of houses have been built and prices have surged, making many people moderately or even extremely rich, at least on paper.  But housing is a failure.  Large estates have been built far from services including shops, schools and work, leading to traffic congestion and social atomisation.  The pattern of residence and how housing is conceived is closely related to problems of child care.

Increasing prices have left many with no hope of getting a home and the numbers of first time buyers has fallen.  Many of those who have bought are in enormous and precarious debt.  They are faced with increased service charges, which they shouldn’t have to pay in estates with no services.  Housing is therefore a problem both for those with a mortgage and those without.  The latter, 50,000 on the waiting list, are often too poor to qualify for social housing!

The flip side of all this is a small group of builders and property developers who have corrupted much of political activity and made fortunes.  Irish society has long been characterised by such parasitism, and rentiers have been a feature of society for centuries, but now it has ballooned.  Companies are bought and sold not because of the profits from the application of their productive resources but because of the value of the land that they sit on.  On Friday it was reported that the company that had bought the local fuel business of Shell for €160 million had recovered half of this purchase price from selling filling stations in Dublin and Wicklow to property developers.

For the last ten or so years we have been assured by the experts that the housing market was not overheating and that there was no problem with affordability.  But with prices rising and rising it began to be obvious that if everything was OK three, four or five years ago, how could it still be OK now with prices having exploded in between?  Anyone believing Bertie Ahern’s assurances last year that everything was fine is a candidate for the State’s non-existent mental health services.

Now it is predicted that the housing boom is about to collapse, with prolonged falls in real prices of perhaps around 40 to 50 per cent, with consequent effects on the construction sector.  With the latter accounting for a fifth of the economy, a quarter of all jobs created in 2006, and a third of the increase in total taxes over the last two years, this would in all likelihood induce a serious recession.

The occasion for this speculation is the apparent plateau which prices have reached.  While over the last year they increased by 11.5 per cent the price of new houses fell for the first time in October, while in November house prices in general rose by only 0.1%, the lowest in almost five years.  There was a fall of 0.4 per cent in new houses, and the sixth successive decline in the monthly housing price index.  This partly reflects six interest rate rises since December 2005 with two more forecast this year.

According to one economics lecturer this could herald not a levelling off in prices, or even a ‘soft landing’, but a precipitous fall.  In an article in ‘The Irish Times’ he gives two examples – Holland in the 1970s and Finland in the 1990s - of what he regards as similar situations, with warnings as to what might happen in Ireland.  (Kelly, ‘The Irish Times’ 28/12/06)  Credit inflation, involving low interest rates and relaxed lending criteria, have stoked a bubble which must eventually burst.

The rise in prices in Ireland is often held to reflect economic fundamentals, that is, population growth and rising incomes as a result of the boom propelled by US multinational investment.  But Holland also had a booming economy, not one simply based on speculative credit, because of the discovery of natural gas.  It too was then the wonder of Europe, like ‘Europe’s star’ today, as ‘The Irish Times’ now calls the Irish State.

For Kelly there is an iron law that the more house prices rise relative to incomes and rents, the more they subsequently fall.  The current relationship between them show that the boom in Ireland’s housing market is therefore facing the threat of this ‘law’, and that the rise in prices is not a reflection of some economic fundamentals that protect against the possibility of fall.

Since 2000 house prices have risen 30 per cent more than income.  If shortage of houses lay behind this then rents would also be rising but compared to income rents have been falling!  This shows that the housing boom is a bubble.  When it bursts prices will fall, not remain static.  This is because investors have been buying houses and apartments not for rents, which have fallen relatively, but for capital gains i.e. selling the property for a big profit after you’ve bought it when prices have risen further.  If prices stop increasing this can’t be done; why would an investor then hold on to empty property?  It would make sense to cash in the investment and seek gains elsewhere rather than pay a mortgage while the value of the property isn’t rising and rents are relatively low.

For those with no property it also makes sense not to buy but to rent.  Kelly compares what you would get paying €2,000 per month in a mortgage to what you would get paying the same amount in rent; a ‘something in a muddy field on the wrong side of Cellbridge, without nearby shops or schools and a two-hour commute to Dublin’ versus a ‘house in south-east Dublin, close to the Dart line and surrounded by good schools.’

When investors start selling and potential buyers aren’t buying then prices won’t remain still, they will fall.  When they start falling other investors will sell up and potential buyers might hold off to see how far prices drop before buying.  A vicious spiral kicks in and just as prices rose too high in the boom so might they drop too low subsequently.  Kelly estimates a fall of 40 to 50 per cent, but this is relative to incomes which does not result in a 40 to 50 per cent fall in absolute prices; a big hit nevertheless.


In Holland real prices fell by 50 per cent while in Britain fifteen years ago they fell by an average of 10 per cent, but by 40 per cent in East Anglia.  Thus prices for the worst housing, in the worst places, suffer the worst falls and this will include those who have stretched themselves most to get a house and are least able to pay increases arising from increased interest rates.  Large levels of personal debt - private sector borrowing is already two and a half times the euro-zone average - will make debt difficult to service.  This fall in demand will be amplified by job losses in construction as house building falls and Government revenue shrinks as house purchases fall.  Banks will foreclose on those unable to keep up mortgage payments and bad debts may force more restrictive lending, further weakening economic growth.  Those companies who have made investments mainly or solely for property gains will find their position weakened, further contributing to recessionary tendencies.

The housing boom in Ireland has mirrored that in the US, but it is being estimated that the fall in the housing market there will shave 1 per cent off growth in the economy as thousands of building workers are laid off.  It is also estimated that nine months worth of apartments and seven months of family homes are on the market and that prices could fall by ten per cent.

It might be argued that the housing boom may continue as speculators can feed off each other by continuing to push prices higher.  This is already true.  The question is, can it continue indefinitely?  The answer is no.  Such demand has only prompted increased supply and for the upward spiral to keep going would require yet more speculative investment putting prices further and further out of the reach of people who actually want to live in the houses they buy.  Speculation cannot increasingly replace this demand.  Interest rate increases; increases in general debt – of the order of 30 per cent in 2006,or falls in demand due to price increases, as first time buyers are already increasingly unable to afford to buy (1), could all precipitate the fall in house prices.  Speculators might accomplish this fall themselves as other options become more attractive when house price increases fail to grow as expected and they put their money elsewhere.  Inflation is forecast to rise to 6 per cent in 2007 while unemployment may again be increasing, both of which could contribute to stretching the gap between incomes and prices to breaking point.  Finally any downturn in the US dollar, due to its own imbalances, could, it has been estimated by the ESRI, lead to growth in the Irish State being cut in half.  What is least likely is that prices can grow as they have in the past.

So 2007 is the year it all goes bust?  Well, we don’t know.  Perhaps the maturation of 1.1 million SSIA accounts and the doubling of mortgage interest relief in the budget will postpone the day.  But it will only be postponed.  Perhaps also some other object of speculation will prevent recession, just as property around the world supplanted shares for some looking to make a fortune by not working, and allow the credit fuelled capitalist economy to continue to grow.

What we can say is that bursting the bubble will leave casualties, primarily workers, who will learn, like Eirecom shareholders before them, that what is good news for capitalists is not necessarily good news for them.  The capitalist economy is inherently unstable and only those with most power can at least partly protect themselves from its ravages.  Workers lose most from its erratic and irrational fluctuations.

These facts make a nonsense of the theoretical constructs of economists who hold the capitalist system to be the most efficient possible.  Their theories of demand and supply leading to equilibrium are made ridiculous by the speculative bubbles in shares and housing.  Any notion that these involve the most rational and efficient allocation of resources is simply laughable.

Two questions might arise from all this.  Firstly, isn’t this speculation a rather un-Marxist exercise in crystal ball gazing, especially when such predictions are notoriously unreliable and more often disproved than confirmed?  Secondly, the question might be – so what?  What difference to Marxists would it make if house prices did not collapse but simply levelled off?


Let’s be clear about what is being said.  It is not being predicted that the housing bubble will burst in 2007, simply that a bubble exists and that it is most likely to burst, with the effects mentioned.  Precisely when that happens is a secondary matter.  If we believe this to be the case it would be strange not to say so, not to tell interested workers that the economic boom lauded by the hired propagandists of the capitalist class contained within itself not only the glaring inequalities they can see but also the potential for crisis.

Marx himself was not averse to making predictions on the possibility of crisis and in fact it arises almost automatically from any analysis of the capitalist economy.  If capitalism did not involve economic crisis then it would not suffer the contradictions analysed by Marx and nor would it open the possibility of social and political upheavals that he, at least at one point, asserted were associated with it:  ‘With such general prosperity . . . there can be no talk of a real revolution.  Such a revolution is only possible in the periods when both these factors, the modern productive forces and the bourgeois forms of production, come in collision with each other. . . . A new revolution is possible only in consequence of a new crisis.  It is, however, just as certain as this crisis.’ (The Class Struggles in France)

Once again, to be clear; it is not suggested that the housing bubble will spark an economic crisis that will put social revolution on the agenda.  It will not because the working class is neither organised enough nor contains the level of consciousness of its mission as a class to even address, never mind successfully complete, this task.  Part of creating such consciousness is to make workers aware that the problems they face are inextricably bound up with the capitalist system and that no particular reforms will prevent such speculative bubbles threatening their economic and social security.

Such speculative booms are inevitable under a system in which private property in the means of production allow a tiny class of property developers and builders to set prices with no relation to cost or landlords to set rents for properties which have been bought and paid for long ago.  Attempts to provide market solutions that are based on private production and ownership of housing simply give more incentives to capitalist speculators to make even more money.  Three useless Bacon reports into the problem have proved that no capitalist solution exists outside of crises that suddenly and forcibly realign prices to more sustainable levels.  This unplanned and chaotic method of economic allocation is the hallmark of capitalism.  Not to point out its contradictions and potential threats is to fail too follow through on what even very summary analysis would lead one to conclude.

The housing crisis is not only an indictment of the government and of property developers and builders, now widely discredited through multiple revelations of corruption, it also exposes the trade unions, which held up the provision of affordable housing as one of the requirements for social partnership. 

So what difference does it make to Marxists in anticipating a housing crisis?  Well, let us suppose that, despite the evidence and argument, no precipitous price fall occurs.  This is not of course excluded even if we think it least likely.  If it happened however it would be important to register it, to seek to explain it, and to take on board any lessons for future analysis.

In terms of political practice so much of what the Marxist left does is limited to propaganda, to seeking to raise awareness of, at present, limited numbers of workers, so that the difference it makes is mainly in term of propaganda. The housing question is an important one however, to which Marxists must give answers, in order to demonstrate the irrationality of capitalism and its crisis prone tendencies.  Pointing out after the fact that capitalism is riddled with tendencies to crisis after one has just occurred is less convincing.  Of course this leaves one open to being proved wrong but if Marxism is a necessary means of analysing society then it should still be able to account for new developments.

In terms of what Marxists say it is important to declare that a one way ticket to increasing wealth is not available, and ever rising house prices do not exist, just as ever rising share prices have been shown not to obtain.  Even the financial services industry is compelled to state that prices can go down as well as up.  Marxists explain that it is the erratic and irrational nature of capitalism which means that the price of housing, in common with other prices, will go down as well as up. 


(1)First-time buyers accounted for less than 21% of buyers of all property last year from 24.4% the previous year and about one third of buyers of new houses in 2006 from more than one half in 2004.


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