Boomerang_ Travels in the New Third World - Michael D. Lewis [38]
MORGAN KELLY IS a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics regarded as abstruse even by academic economists (“The Economic Impact of the Little Ice Age”). “I only stumbled on this catastrophe by accident,” he says. “I had never been interested in the Irish economy. The Irish economy is tiny and boring.” Kelly saw house prices rising madly, and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And the sight and sound of them troubled him. “Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’”
The statement struck him as absurd on the face of it: real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than people’s expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become, and flee the market, and the market will crash. It was in the nature of real estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that if his former students were cast on Irish TV playing the financial experts, something was amiss. “I just started Googling things,” he said.
Googling things, Kelly learned that more than a fifth of the Irish workforce was now employed building houses. The Irish construction industry had swollen to become nearly a quarter of Irish GDP—compared to less than 10 percent or so in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had fifteen times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of Dublin rents had fallen to less than 1 percent of the purchase price; that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in twenty-five years, three times as rich as the United States. (“A price/earnings ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled and the economy had become consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”
The endless flow of cheap foreign money had teased a new trait out of a nation. “We are sort of a hard, pessimistic people,” says Kelly. “We don’t look on the bright side.” Yet since the year 2000 a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.
Their real estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned and it went unquestioned so long as it appeared sustainable. After all, once the value of Irish real estate came untethered from rents, there was no value for it that couldn’t be justified. The 35 million euros Irish entrepreneur Denis O’Brien paid for the impressive manor house on Dublin’s Shrewsbury Road sounded like a lot until the real estate developer Sean Dunne’s wife paid 58 million euros for the four-thousand-square-foot fixer-upper just down the street. But the minute you compared the rise in prices to