In 10 years, the price of a new house rose by 153 per cent, but building costs rose by only 41 per cent, writes Colm Keena, Public Affairs Correspondent
There are graphs published with the Department of the Environment's annual housing statistics bulletins that say a lot about the Irish property boom. Starting in January 1991, they track the movement of a number of key factors, including house prices, house construction costs and mortgage rates, over the years. House prices shoot in one direction, upwards, while mortgage rates slump in the opposite direction. House construction costs hang around, rising very slowly from the base year.
The graph resembles a gaping mouth, its tongue out, hungry for ever greater amounts of money.
Taking January 1991 as the base and giving each factor a base value of 100, the graph shows new housing prices climbed to 109 by 1994, 187 by 1998, and 253 by 2000. In other words, the price of the average new house or apartment rose by 153 per cent in the decade.
During the same period, the cost of building a house rose by only 41 per cent, according to the graph.
Some people were making a hell of a lot of money.
The same data from the Department of the Environment even put a figure on how much money was being spent on new housing. In 1996, loans worth £1.3 billion were approved for the purchase of new homes or apartments. By 2000 the equivalent figure was £2.9 billion, by 2004 it was €9.7 billion, and by last year it was €13.9 billion.
This housing splurge was in part fuelled by falling mortgage rates. With a value of 100 in 1991, the mortgage rate index fell to 57 by 1996 and to 39 by 2002. It was not until December 2005 that mortgage rates started to climb. Meanwhile, mortgage lenders had loosened their criteria. The marketplace was flooded with money.
The huge change in Irish residential property values that took place during the economic boom applied to an even greater extent in the commercial and retail property sectors. Commercial property developers sell the rent book of the buildings they build. A new office development with a good tenant can sell for double or more the cost of its construction. During the 1990s there was huge demand for new office space from legal firms, multinationals, banks and accountancy firms. There were also many people who needed somewhere to invest the money they were making as the economy took off. Commercial property was an obvious and lucrative investment choice.
For more than a decade, the property sector was the place to be. As Richard Barrett of Treasury Holdings told The Irish Times in an interview for this series: "It was a very potent cocktail, virtually guaranteeing good returns. If you used bank borrowings to enhance your equity, you got super returns on your equity."
Developers even got tax breaks. During the 1990s the government introduced tax incentive schemes that cost the Exchequer, and benefited developers, billions. A review published by the Department of Finance in February 2006 found the schemes cost the Exchequer €3 billion, and will cost a further €850 million in the years they have left to run. As a Goodbody report commissioned by the Department put it, the scheme had "strong negative income distributional effects", ie better-off people benefited disproportionately.
Most property development projects involve a large element of bank borrowings. During the late 1990s and the early part of this decade, some projects were 100 per cent financed by the banks. Some commercial developments were so well organised, with tenants and investors in place before a sod was turned, that they involved no risk.
THE DEVELOPERS WHO were in at the beginning and who grew with the boom are now phenomenally wealthy. How wealthy exactly it is hard to say. Limited liability companies are obliged to lodge annual accounts with the Companies Registration Office (CRO) and some details as to the developers' wealth can be gleaned from these. However, even with audited accounts it is difficult, if not impossible, to establish how much a developer is making. A developer, for instance, can purchase land in his own name, and sell it to his company as it is required, so the true amount of wealth accruing to the developer is not visible from the CRO records. Also, as the years passed, many of the developers amassed significant assets held outside their company structures.
In more recent years, as their fame and wealth have grown, many developers have switched their companies to unlimited status. This status means the liabilities of the companies, should they ever get into difficulty, are not limited to the assets of the companies, but can extend to the assets of the owners.
Unlimited companies do not have to file accounts with the CRO, and this increased privacy is undoubtedly attractive. Hugely rich people have normal privacy concerns but also have security issues to worry about. Extremely wealthy parents have legitimate concerns about how publicity about their wealth affects their children. Wealthy people also fear that publicity about their wealth can have political repercussions, from abusive comment to calls for special taxes.
Some worry about what to do with all the money they have accumulated. A few developers are said to be donating large amounts of money in discreet philanthropic donations. The use of unlimited status could also be used to obscure this.