Tom Cruise (yes, his real name) and his partner Clare bought their dream house a couple of years ago in the Crotanstown Grange estate, an hour's drive south of Dublin. At the time, the list prices for the new luxury houses were rising at €100,000 ($160,000) a year, with some going for €700,000.
Their house's value soared, then fell hard this year. But it didn't particularly bother them; they had two kids and had no intention of selling.
Their world turned upside down three weeks ago. "We were on holiday in Spain and I wasn't back 20 minutes when my employer told me I had to go," said Mr. Cruise, who was a manager at a local steel fabrication company.
Clare is looking for work but is not optimistic because the hotel industry, where she has experience, is falling apart. "We're still in shock," she said. "I'd take anything at this stage."
Until about a year and a half ago, developments such as Crotanstown Grange promised something akin to the suburban American dream, with neat, trim houses, big kitchens, gardens and parking - features rare or non-existent in central Dublin. But with Ireland having the dubious distinction of being the first country in Western Europe to fall into recession, that dream has since turned into a nightmare for many families.
How did the model economy - the low-tax miracle lauded by economists, neo-conservatives and liberals alike - go from Celtic Tiger to Celtic Catastrophe?
The property market is in genuine crisis throughout Ireland. Yesterday, the Organization for Economic Co-operation and Development, in its Outlook report, predicted the downturn will hit Ireland particularly hard. "Activity is contracting as the severe housing market correction has weakened the wider economy, and the weakness will persist well into 2009," it said.
Everyone - economists, estate agents, bankers, employers - thinks values still have a long way to fall and will make the recession worse. No sector, with the possible exception of the discount grocers, has survived unscathed. The banks are in particularly bad shape.
But Ireland cannot blame outsiders for the entire mess. "This is a home-made crisis made worse by the international crisis," said Constantin Gurdgiev, the research director in Dublin at NCB Stockbrokers and an economist at Trinity College. "This is the most indebted country in the whole European Union."
The economic numbers are grim. The 6-per-cent unemployment rate is expected to rise to 8 per cent next year, Ireland's Economic and Social Research Institute said last week. Mr. Gurdgiev and other economists think low double digits are possible. In the past year, 100,000 jobs have disappeared. By his calculations, total debt held by financial and non-financial institutions, plus credit to private households, is a staggering 265 per cent of GDP.
A few kilometres away from the Cruises, in the more modest Roseberry estate, Martin Ennis, 34, bought a townhouse seven months ago for €350,000. Too bad he didn't wait. "Prices are definitely going down," he said. "We've dropped to €300,000."
House prices are down 30 per cent from their peak and some real estate professionals said the number is close to 50 per cent in the hardest-hit parts of the county. The Irish Banking Federation says only 27,000 mortgages were written in the third quarter, down from 120,000 in the same quarter a year ago. House construction has utterly collapsed. Ditto car sales, which were down 54 per cent in October. "We are so conditioned to living in the boom years that we're having trouble adapting to this new reality," said Pat Farrell, chief executive officer of the Irish Banking Federation.
While none of these numbers seems large by North American standards, it's important to remember that Ireland has a population of only 4.2 million, about a million less than the Greater Toronto Area.
Greed, easy credit, immigration, massive foreign investment inflows and government spending certainly fuelled the boom. Membership in the European Union and the euro zone added muscle to Paddy Power. But Ireland is learning the hard way that euro zone membership doesn't necessarily work as well on the way down as it did on the way up. Ireland would like far lower interest rates and a devalued currency to cushion its fall. Too bad it has no control over these economic levers. The European Central Bank sets the monetary agenda.
Until the 1960s or so, Ireland was a poor, largely agricultural country. In the 1970s and early 1980s, the country tried to drag itself out of virtual Third World status, but largely failed. Each attempt was overwhelmed by high taxes, the jobs-for-life mentality and absent entrepreneurial flare. Emigration drained talent from the country.
Things began to change in the late 1980s. Wage constraints were negotiated in exchange for tax relief. The tax cuts soon became deeper. The corporate tax rate went from 40 per cent to 12.5 per cent. Personal tax rates were more or less halved. Attracted by the low taxes and an educated work force, foreign companies piled in, including Google and Hewlett-Packard, creating tens of thousands of high-paying jobs. In the past 20 years, Ireland's work force doubled to about two million. In Western Europe, there was no hotter economy.
The tech crash of 2000, and the terrorist attacks of September, 2001, bashed the Irish economy. But new growth drivers in the form of government spending and construction soon came to the rescue. Both went out of control. "The economy became overly reliant on the booming construction sector," said Turlough O'Sullivan, director-general of the Irish Business and Employers Confederation (IBEC). "It was a bubble waiting to happen."
IBEC first warned of the potential dangers of the construction and government spending free-for-all in 2002, to no avail. The per-capita rate of house construction, at its peak, was about 20 times the British rate.
The government funded a staggering array of infrastructure projects while not forgetting to take care of itself. In this decade alone, the number of public servants soared by 80,000 to 370,000.
Easy credit, driven by low euro zone interest rates, took the balloon to bursting point. Banks competed among each other to make mortgages easier to obtain. The 20-per-cent down payment rule went out the window. Many mortgages required no down payment, effectively giving Ireland a U.S.-style subprime market of its own. The number of licensed estate agent companies (also known as auctioneers) doubled to 2,400.
Even at the peak, few Irish thought the boom had gone too far. The optimists felt that Ireland was still catching up with the rest of Western Europe. Immigration, rising employment and salaries would keep the good times rolling. "We felt we were not the typical growth economy heading towards a bubble," said Alan Cooke, the CEO of the Irish Auctioneers & Valuers Institute.
In truth, the Irish property market peaked in 2006, more than a year before the U.S. subprime mortgage mess ushered in the global financial crisis. Worse, there is a sense neither the Irish government, with its widening deficit, nor the European Union can do much to help. "The ECB rates were high and designed to placate German fears of inflation," said Mr. Gurdgiev, the Trinity College economist. "Now they're too high for Ireland."
In central Dublin itself, the streets are still lively but the signs of the downturn are ubiquitous. There is more than a whiff of Iceland in Ireland.
Some streets are cluttered with "For Sale" and "Price Reduced" signs. The number of idle taxis is stunning.
The construction of a 120-metre tower in Dublin's docklands that was to house U2's rock studio was just put on hold. Hotels are struggling. A new, four-star hotel called the Louis Fitzgerald, at the south end of the city, advertises rooms at €10 a pop. The Christmas sales have begun.
Back in Crotanstown Grange, Tom and Clare Cruise are devising a backup plan in case they can't find work. They like the idea of moving to Canada or Australia, where they imagine jobs are more plentiful, but they fear the imploding Irish real estate market might make that impossible. "People can't sell their houses now, no matter how low they go," Mr. Cruise said.
Irish statistics aren't smiling
Europe's retail sales are slow,
but Ireland's are slower
RETAIL SALES (JULY)
Ireland: -5 per cent
Euro zone: -1.8 per cent
Ireland has little room to cut sales tax, Irish Prime Minister Brian Cowen said this week, despite fears from retailers that the U.K.'s VAT cut could drive more Irish shoppers to neighbouring Northern Ireland.
His comments come as concerns grow about the number of Irish shoppers who head over the border to buy their goods and who are already taking advantage of the sterling's recent weakness against the euro. "A small economy doesn't have as much room for manoeuvre as a large economy in that respect," Mr. Cowen said.
Ireland's low corporate tax rate made it a magnet for global companies and European workers. But as the jobless rate rises, people are leaving. The net migratory outflow in 2009 is expected to be 30,000.
Agriculture: 6 per cent
Industry: 27 per cent
Services: 67 per cent.
THE LOOK AHEAD
Although a severe housing market correction has weakened the economy, the OECD says growth will recover in 2010 as the housing construction cycle bottoms out and the financial turmoil wanes.
Sources: Economic and Social Research Institute, CIA World Factbook, Bloomberg, Reuters, staff