The Celtic Tiger [Fribble] March 27, 2000

Fribble The Celtic Tiger

By (peter brennan)
March 27, 2000

I live in Dublin, Ireland. The last five years have seen a remarkable change in Irish economic circumstances, with a kind of "irrational exuberance" taking hold. The economy has grown about 10% per annum over the past five years, one of the fastest growth rates in the world. My house has doubled in value (or should I say cost) over the past three years, and it's still rising.

Like all booms, this one has been partially fueled by fundamentals. The economy is at full employment, driven largely by U.S. multinational investment attracted by low corporation tax rates of 10% and a relatively cheap English-speaking workforce. In addition, Ireland joined the Euro in 1998 when it was launched. This has meant that Irish interest rates are artificially low relative to what they would normally be. Add in a temporary housing supply shortage and you get runaway house price inflation, around 20% per annum.

Traditionally, Irish people are cautious spenders mainly because up until the last five years Ireland has been a relatively poor country. Now people's expectations have changed. Past caution is gone. Un-Foolish behavior is everywhere. Personal debt has soared. When I got out of college in the '80s, almost no young person could afford a car. It is now quite common for young people to start their first job and proceed to take out a five-year car loan for a new car that can swallow up to 50% of their disposable income.

Because the boom in housing prices has pushed even a modest house beyond many people's means, many young couples are financing a house purchase by doubling up with other debt and by taking family loans. This behavior is leading to a classic housing bubble. Many commentators in the media are warning about the risks of buying a house in such a bubbly market, but people push on, regardless. Cocktail party logic among young people in Ireland is that rent is "dead money" and that property always works out in the end as long as you can pay the early years' mortgage. There is little understanding that the factors driving a booming market can suddenly disappear should the economy suffer a sharp shock. Many young couples could be caught in a negative equity trap.

So how will it all end? Despite the obvious danger signs, there are no signs of a spectacular crash coming. The biggest danger is probably a U.S. stock market crash with a resulting shakeout in the American multinational sector in Ireland, leading to thousands of job losses. From a personal viewpoint, I'll be OK. I am quite Foolish by nature and have not joined the spending spree.

I am willing to be flexible with my house and sell if I see a big correction coming. Although market timing gets bad press in Fooldom, this is an opportunity for me to sell high and buy back lower, hopefully eliminating my mortgage.

(Editor's Note: Yikes! We certainly don't think timing the market is Foolish. We don't have any idea how to "see a big correction coming." See our thoughts on the merits of buying and holding in this FoolU column.)