Blowing Bubbles: That time when house prices fell 75 percentage points in Dublin

Dublin experienced one of the most pronounced housing crashes in European history in 2007-08.

Dublin experienced one of the most pronounced housing crashes in European history in 2007-08.

The housing market killed the Celtic tiger, stuffed it, and mounted it. John Edens reports for the Blowing Bubbles series.

Markets in Ireland, Northern Ireland and the United Kingdom have been showing signs of recovery, but it's been a long slow climb from the depths of recession and an unparalleled housing boom and bust cycle.

What happened may ring a few bells for some New Zealanders.

To understand the origins of the Ireland (and Northern Ireland) bubble, cast your mind back to the early 2000s, a time of relative economic prosperity.

In the late 90s and early-2000s, Ireland was being lauded for its economic heft, while post-peace process Northern Ireland was on the up.

These were the boom times, and Ireland was at the top of The Economist's quality of life index. There was a construction boom, incomes had increased, unemployment dropped, banks were lending, and interest rates were low.

So, what went wrong?

Ireland's "Celtic tiger" economy boomed in two cycles in the 1990s and 2000s, new houses were built at a rate of up to 90,000 a year, incomes went up and unemployment declined. Lending, for credit and mortgages, and investment increased, and this unrestrained expansion of the credit market fuelled a construction and house price boom.

Low interest rates encouraged people and businesses to borrow, builders to build, and banks to lend, which let the genie out of the bottle for house prices to climb so rapidly they doubled in around five years.

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By the time everyone realised what was happening, it was, of course, too late.

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Economists and analysts now broadly agree on the causes of the Ireland housing crash - mainly easy credit and declining standards in lending, an increase in the housing supply, and a hyped-up market.

New Zealand, a country with a similar population and a high rate of home ownership, shares some similarities with Ireland and the UK, although the mortgage lending environment is very different in 2016 compared to 2006.

Tighter loan-to-value lending restrictions have been imposed by the Reserve Bank in a bid to combat rampant growth.

The things typically cited for New Zealand's growing prices include a lack of supply, a growing population, low interest rates, and a rise in housing as an investment. 

Investment analyst Brian Gaynor - who has lived in New Zealand for 40 years and hails from Ireland - says there are similarities and differences between Ireland and New Zealand. 

New Zealand has had a prolonged increase in property prices - but is it a bubble?

New Zealand has had a prolonged increase in property prices - but is it a bubble?

New Zealand and Ireland have similar populations and high rates of home ownerships, but the permissive lending environment and the rate of over-supply in the early 2000s was much more pronounced in the latter country.

After adopting the Euro in 1999, Ireland started setting interest rates imposed by the European Central Bank. In the mid-2000s, these rates were low enough to encourage a binge of borrowing that stretched the limits of the economy. There were also tax incentives for developers to build and a surge of foreign investment, especially from the United States.


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Unlike New Zealand, there was no attempt by central authorities to curb the environment, Gaynor says.

The media also has a role in the public's perception of housing. Some argue the media in Ireland helped sustain the bubble, others say they missed what was happening entirely. Gaynor says the media here also have a role in pumping up the market, filling summer newspaper supplements with housing articles and features.

But New Zealand is more considered, he says.

"For us here I'm not saying there won't be a collapse [but] there won't be such an over-supply. New Zealand builds about 30,000 houses a year. It's completely different.

"The media beat up the housing market with articles about where the best suburbs to buy are. That does influence people.

"It's a buoyant market [in New Zealand]. In Ireland it was right across the board. It was mania. There's a lot of fervour to it here but it's more restrained."

Population and net migration also influence housing markets and there has been record migration here in the last couple of years, adding to pressure on the rental market and driving demand for mortgages.

Gaynor says a sudden net migration loss, if Kiwis started moving back to Australia in large numbers for instance, could spell economic trouble. Banks were moving to restrain the market but lending was still up nine per cent in the last Reserve Bank household credit snapshot.

But comparable conditions to those before the 2007 crash were a long way off, he said.

"Mortgage lending is still growing quite strongly. In the end bankers will always find ways to loan money.

"We're a long way from being in over-supply [nationally]. Auckland is bursting at the seams and is in short supply. We're certainly in a housing boom but has the boom turned to a bubble? That's debatable."

Gaynor says the effects of lending restrictions should be clearer next year, after the traditional Kiwi home selling summer season.


In Ireland, it was a double-whammy.

What everyone now knows is that the housing crash coincided with a global financial shock, which rippled from country to country, starting in the United States and then hitting Ireland, the first Eurozone country to slide into recession in 2008.

Prices started to drop in late 2007, dived throughout 2008 and a full-on crash hit in 2009, coinciding with the onset of a global recession, itself triggered by the collapse of the sub-prime lending market in the US and the demise of banks such as Lehman Bros.

Newly built houses in Ireland were left standing empty, leading to the so-called "ghost estates", later bulldozed. At one point, there were around 3,000 unfinished housing developments.

During the boom, such was the frenzy to get on the ladder, it was common to see people sleeping outside real estate offices to be first in the queue for newly released houses. In 2006, in Northern Ireland, house prices increased by 48 per cent.

By 2010 and 2011, prices in many parts of Ireland, and Northern Ireland, had halved, or more. It was a long dive to the bottom of the market crash in late 2012. Governments stepped in with massive state bail-outs. Negative equity raised its ugly head.

Northern Ireland's boom and bust cycle was the most severe in the United Kingdom, and some argue it remains the most severe bubble burst in the history of housing crashes. Russia and parts of eastern Europe vie for that dubious title.

Before this, the bubble was extraordinary. According to the Council of Mortgage Lenders, in Northern Ireland the number of mortgages granted to home buyers dropped from a peak of 7200 loans in 2006 down to 1500 in 2009.

From early 2006 to 2007, house prices in Northern Ireland increased by 75 per cent in some areas. At the height of the boom, according to the Nationwide building society, the affordability index - the proportion of income spent on a mortgage and generally regarded as manageable if it's around 30 per cent - was up to 72 per cent in late 2007.

The effects are still being felt almost a decade after the peak.

In 2015, in the north, there were still around 60,000 homeowners in negative equity. A homegrown debt management industry has sprung up to help people in the equity trap. The average amount owed in negative equity was £68,000 ($115,000).

In Ireland, a Central Bank report in 2011 said more than 74,000 mortgage loans were in arrears by the end of 2010 and eight per cent of residential mortgage arrears were in arrears for more than 90 days. The government had to set up a special agency to deal with the debt crisis.

The crash was compounded by the global recession and the availability of easy credit, a permissive lending environment, housing over-supply, and an increasingly speculative investor market.

 - Stuff


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