The time in which I write … has a horribly swollen belly, it carries in its womb a national catastrophe …
This opinion piece in today’s Irish Times is the worst kind of economic scaremongering from Prof. Morgan Kelly. He sets up his stall around potential bank collapses in the autumn, and builders’ all-or-nothing loan foreclosures causing a slash in house prices, which causes a further fall in house prices, and so forth, via social and economic contagion. Which is something he knows a lot about. In the strongest words possible, the professor tells potential buyers and sellers to hold off. Don’t enter the market, because it will fall further. If most people took his advice, that’s exactly what would happen. If people didn’t take his advice, the market wouldn’t fall as far. People wouldn’t see the value of their homes fall by as much, and the market could correct itself more slowly. I’m in agreement that housing is overvalued, but I don’t agree we need a crash to correct prices.
The professor is making the implicit assumption that people are buying to re-sell quickly. If people see a house, and buy to hold, and live in it for a few years, the market will eventually recover, and people will realise the value of their investments, if they hold it long enough. Recent research by the Boston Fed on the US market shows that the influence of negative equity on foreclosures is increasing, but they note the sample they were looking at was mostly people buying to resell.
Reading Prof. Kelly’s article, you’d be forgiven for thinking the end of days is coming:
We are facing a decade of recession, of the sort Germany is just emerging from, as our incomes are brought back into line with our productivity.
With prolonged recession, emigration will resume, further reducing housing demand. In fact, as Brendan Walsh has pointed out, the collapse in the birth rate during the 1980s means that, even with zero net emigration, the prime housebuying population of 20 to 40-year-olds will fall by 10 per cent in the next decade.
Those who bought with negative equity in the mid to late 1980′s in the UK were able to sell at a profit five years later.
Being an expert on contagion, Prof. Kelly knows—how can he not—that if people read this article, and it feeds into their decision not to buy or sell, the collapse of banks who hold lots of builders’ loans (and who, in Prof. Kelly’s estimation, won’t see a penny when the builders default) is assured. The market shudders because people decide the world is one way, and not another. It is a crisis of expectations, not of fundamentals. Because the housing market is not driven by fundamentals, and never has been. Anywhere. Ever, as Robert Shiller noted recently.
Normally I’m conscious of staying out of the housing debate, because it’s not a good place to be ranting. I’ll do my ranting somewhere else. But this article by Prof. Kelly jumps the shark for housing doom and gloom amongst Irish economists.
I’ll finish this piece with a quote from Mann’s Dr. Faustus, whom Prof. Kelly must have been channelling when writing this article. Mann is writing about a post World War Two Germany:
The time in which I write … has a horribly swollen belly, it carries in its womb a national catastrophe … Even an ignominious issue remains something other and more normal than the judgment that now hangs over us, such as once fell on Sodom and Gomorrah … That it approaches, that it long since became inevitable: of that I cannot believe anybody still cherishes the smallest doubt. … That it remains shrouded in silence is uncanny enough. It is already uncanny when among a great host of the blind some few who have the use of their eyes must live with sealed lips. But it becomes sheer horror, so it seems to me, when everybody knows and everybody is bound to silence, while we read the truth from each other in eyes that stare or else shun a meeting.
…[C]lung round by demons, a hand over one eye, with the other staring into horrors, down she flings from despair to despair. When will she reach the bottom of the abyss? When, out of uttermost hopelessness — a miracle beyond the power of belief — will the light of hope dawn? A lonely man folds his hands and speaks: “God be merciful to thy poor soul, my friend, my Fatherland!”
– Thomas Mann, Dr. Faustus (1947, written in 1945)
[excerpts from chapter 33, and the epilogue]
