Wednesday 22 August 2007
Five things to hate about Property Booms
Before considering the negative effects of the Irish property boom you need to understand its scale. You need to appreciate that for the last few years we have been building 6 times more houses per capita than Britain. That the Irish construction sector now employes more than the entire manufacturing sector. That over 20% of GNP is dependant on construction. That we are completing something in the region of 90,000 units a year.
So the downsides. Here goes...
1.Capital gets diverted from other purposes. The construction industry snowballs into a massive destination for investment. Capital that might have been employed in other ways - like building tramways, bridges, factories, or schools, is channelled into property. About 2/3 of the Irish construction activity is in residential or retail. The National Competitive Council said that the frenzy of investment in residential is "crowding out" investment in manufacturing and exporting.
2.Labour gets diverted from other resources. The boom drives up wages which sucks people away from other activities, including ones that might have more long term benefits or which are more strategic. Even the so called knowledge economy gets hit. As the wages in some construction areas hit the sky even highly qualified people choose manual labour over a job that involves their brain power. Today's indo leads with a piece describing how some kids with over 500 points are snubbing their white collar work for the hod. What effect will this have long term?
3.Ideas to build sustainable communities gets steamrolled. When the snowball gets so big it just rolls over anything in its way. The priority shifts from 'better' to 'more'. Our political system in Ireland proved incapable of controlling development in a more sustained way. One-off housing directives got queitly dropped. Cities spread further and further out into ever increasing commuter belts. Consideration for commutes times, viable concentration for vital services, or for greenhouse emissions, were simply drowned out.
4.The boom gathers so much momentum that it starts becoming the only game in town. Our ISEQ is now (to our peril) dominated by stocks depending on the building boom - Banks and Construction Firms. Our national eggs are piling into one big brittle basket. Add to this the 'wealth effect' - where people (or investors) who have seen their property prices rocket are now spending or investing more on the back of it. This had tearful consequences elsewhere when the big snowball turned to slush.
5.The return on residential and retail not only draws in investment from other economic activity (as in point 1), it results in the destruction of other pieces of infrastructure. In Dublin, pubs and petrol stations have been converted and bulldozed respectively in order to make way for residential - such was the mark up on the latter. The most spectacular example of this is the destruction of two historic and prestigious hotels in Ballsbridge to make way for .... flats. What is this doing to the social infrastructure of the city? ( I concede that this phenomenon may be the smallest and most transient of the five, but if sustained is concerning nonetheless.)