Many people have read or watched the movie the Big Short, the author Michael Lewis wanted to know who made money on the housing crisis? In investing you can make money when the market goes up, down or sideways. In the book Boomerang written by Michael Lewis published by W.W. Norton & Company, New York, 2011 Mr. Lewis examines countries outside the United States and how they were affected by the housing market collapse. Mr. Lewis picked 4 countries – Iceland, Greece, Ireland and Germany all countries which had made the news prior to 2008.
When the real estate market fell in the United States, one of the countries also hit was Ireland. For a number of years, Ireland 3 biggest banks – Anglo Irish, Bank of Ireland and Allied Irish Banks were the stars of the country. Then with a thud they were all bankrupt and now owned by the government.
In Iceland, the banks had bought overseas assets, in Ireland it was Irish real estate. For a time more than a 1/5th of the Irish workforce was employed building homes. The construction industry had swollen to become nearly a 1/4 of the Irish GDP compared to less than 10% in a normal economy. The economy was building half as many new houses a year as the United Kingdom and they had 15 times as many people to house. The price since 1994 had risen 500% and in parts of Dublin rents on million dollar homes could be rented for $833 a month. The good news was home ownership went to over 87% and who was going to live in the other homes? Who was going to lease the office space being built?
When the ball stopped spinning, the banks managed to persuade a lot of people they needed to be bailed out because of systemic risk or their failure would bring down a lot of other things too. The reality is Anglo Irish the biggest lender had 6 branches and no ATMs. It lent money to people to buy land and build. In the case of Irish they wanted to save the banks, why not just the deposits? The investors would have been stuck and had to do workouts or be long term holders. The bondholders did not expect to be bailed out but they were 100 cents on the dollar.
Why did the older banks act like Anglo Irish? They were growing at 30% a year in a business that should grow at 5-7% . The banks changed their tactics to getting the clients of Anglo Irish and paying lending officers of loans lent, not loans repaid. In October 2008 when the Irish Times published a list of the 5 biggest real estate deals in each of the past 3 years, the old banks lent 10 of the 15, Anglo Irish just 1.
Linking to dividend paying stocks, the above is to show you there were warning signs but most people decided to ignore them. In the property bubble that was Ireland, simple questions of who was going to buy and occupy space were not asked? It is a testament to the country to build housing, however if the private sector is going to pay, then who was going to live in the housing? Perhaps if a natural disaster happens, there is room for optimism. However when a mature market which typical has reasonably low rates for growth begins to show high rates of return, enjoy for a while and then ask why would it be sustainable?
There are more questions than answers, till the next time – to raising questions.