Caution - NAMA crossing

Six months on from the National Asset Management Agency Bill, outlining how NAMA will work, we are getting to the business end of things, with the first few loans expect to transfer over shortly. Many commentators are still doing their best to point out shortcomings with the NAMA concept and viable alternatives to it – see for example David McWilliams’ “Anglo is our Stalingrad” and Brian Lucey’s “Micawbernomics“. At this point, though, I have to confess I’m resigned to NAMA going ahead and, if that’s the case, the focus has to be damage limitation and to the elephant in the room that is the yield on Irish property.

In a way, this isn’t as hopeless as it sounds. NAMA is based on the concept of long-term economic value, i.e. relating the value of properties, in a time when markets are thin/broken, to what they could realistically fetch in rents, when out the other side of the Great Recession.

However, as I pointed out in the Irish Times in September, this relies on those running NAMA getting its core assumptions right. In particular:

• It has to get the fall from peak to time-of-transfer right.
• It has to get the yield right.
• It has to get how yields might correct right.

What’s the loan book worth now?

On the first, no harm reminding ourselves that NAMA is scheduled to take over the loans of properties that were, when the loans were issued, worth €88bn. The loans themselves were worth €68bn, although there’s about another €10bn in accruing interest, by this stage. As I pointed out six months ago, while there is some international diversification, the 6% of the loan book that’s not in Ireland or the UK just about offsets the 6% that’s up in Northern Ireland, let alone the 66% in the Republic.

In terms of getting the fall right, the big problem with NAMA is that, for all the detail we have – €110m in Czech developments compared to €90m in Italian associated loans – we just don’t know what’s in about €64bn of the original €88bn. All we know is that these are broken down into €32bn of land and €32bn of “associated loans”. It seems likely that about €21bn  is in Irish land. This is the same land that, for what it’s worth, Judge Peter Kelly of the Commerical Court estimates has fallen in value by about 75%. Indeed, if some land is down 95% or more – like the land in Athlone over which he was judging – while other land is down by (only!) 60%, the original €21bn of land is probably now worth less than €5bn.

The focus then turns to the €16bn or so in Irish commercial and residential developments. It’d be a brave person who’d put €10,000 (or, if you like, €10,000 for every citizen in the State) on the average peak-to-trough fall in prices in both segments being less than 50%. (Asking prices – more than likely above closing prices – were 43% down from peak levels in Dublin city centre in late 2009.) So, looking purely at the Republic of Ireland, it’s hard to see how how falls of 50%-75% could average at 47%.

The vast bulk of the remaining €21bn of foreign land and developments is in the UK, either in Britain, where property prices are falling again after a supply drought had help them up, or Northern Ireland, where prices are over one third below the peak.

In short, even a 20% average fall in NAMA’s non-Irish loan book means that a 47% is already looking optimistic. The figures outlined above would suggest an average fall of 51%. (And remember, from this graph, every percentage point more on the way down makes the 10%-in-10-years argument increasingly risible. A 51% fall means NAMA needs a 25% rebound in property prices by 2020 to break even, give or take the token amount the banks would have to pay back to the state in such an occurrence.)

What’s the problem with yields?

The real problem for NAMA, however, is in relation to the second and third bullet points above, i.e. in relation to the yield on property. The following paragraph is from the supplementary documentation published with the NAMA bill, with my additions in italics:

A property yield is derived by expressing a year’s rental income as a percentage of the property cost. There is an inverse relationship between yields and property prices; as property prices rise, yields fall [assuming rents stay constant]. The prime yields broadly represent the market’s evaluation of the attractiveness of investment in property. It is clear from the table that follows the majority of European cities current prime yields [on commercial property] are higher than their long term 20 year average, particularly Dublin where the Prime Yield [on commercial property] is at 7.25% in comparison to a 5.56% long term average. As yields move towards their long term average this would indicate an increase in [commercial] property prices [or a decrease in commercial rents].

The good news is that by looking at yields, NAMA is looking in the right direction for long-term economic value. The bad news…

1. This is only the yield for commercial property in Dublin. This is a subset (commercial) of a subset (development) of a subset (Dublin) of a subset (Ireland) of NAMA’s loan book – perhaps 5% of NAMA’s loan book. Surely we as the shareholders in NAMA deserve a better prospectus than this? A somewhat more representative set of yields, on residential property around the country, is presented in the graph below.
2. By portraying prices as the only mechanism through which a yield can correct, the paragraph above shows either a stunning lack of understanding about the fundamentals of the property market or a conscious or unconscious willingness to direct attention to prices not rents. Yields can correct through either property prices changing or through rents changing. A  glut of supply on to the market would mean rents would have to fall to balance the market.

This is exactly what we’ve seen in the residential rental market in the last two years as a result of boom-time over-construction. What is the prospect for commercial rents in Ireland? A February 2010 report by Savills on the Dublin industrial market contained the following eyebrow-raising statistics: During 2009, uptake of industrial space in Dublin fell by 33% to 110,000 sq/m. Meanwhile, about 1 million sq/m (nine years supply based on 2009 take-up) is sitting available on the market, up from 700,000 sq/m a year ago. As the report authors themselves say:

This has and will continue to put downward pressure on rents and force landlords to deliver more flexible terms than in the past.

The overwhelming evidence from Ireland’s commercial and residental markets is that rents are responding to boom-time over-construction by shifting downwards. (No bad thing, either, as Ireland seeks to get its property costs out of the global top 20.) This means that any positive “yield gap” could easily be corrected by changing rents, not increasing property prices. Not only that, the graph below shows that, for residential property at least, the gap between current yields and what NAMA assumes as a long-run yield actually goes the other way, and by some amount.

Yields on 3-bedroom properties, by region, 2006-2009

If NAMA could show that it’s aware of these very basic facts about Ireland’s property market before it starts taking over any loans, I would be a lot less worried about giving it access to tens of billions of euro worth of current and future taxpayers’ earnings. If it doesn’t, the elephant is very much still in the room. If it does, and taxpayers pay a fair price, cash-starved banks will mean a new elephant will take its place – nationalisation.

The latest Exchequer figures are out today, and the headlines talk about tax receipts and government spending down. Scratching the surface, though, most of the falls seem in line with expectations. So where are we? Three months on from the toughest Budget in a generation, it’s time to take stock.

The best place to start is the big picture on Ireland’s government finances. In 2007, gross expenditure by the state was €63bn, while gross receipts were €61bn. This year, expenditure will be €69bn while receipts will be €50bn. The fall in revenue has been driven by tax receipts, which have actually fallen by €16bn and have been offset by other forms of revenue, including levies. The increase in expenditure is accounted for by increased social welfare payments (up €5bn) and debt servicing (up €3bn).

The 2010 deficit, therefore, is estimated to be €19bn. Expressed in relative terms, the deficit is 11% of our national output. Only the UK and Greece have bigger deficits. Ireland’s 2009 deficit – excluding the (one-off?) €4bn ploughed into Anglo – was €21.5bn. So we can see that Budget 2010 was certainly a step in the right direction but we’re not there yet. Not by a long shot.

First, a bit of good news. Figures out last week show that 2009 spending came in €360m less than what the Department of Finance expected at the time of the Budget. Even more encouraging, this was spread across all major areas of expenditure, except social welfare, which is to be expected, given unemployment. All things considered, the overall result was a €300m improvement in the deficit for 2009 – that’s 2% of the way there for free!

Last week, Minister Lenihan announced that he wants to bring about cuts of €3bn in 2011, to further reduce the deficit. The Minister has highlighted two areas of savings: €1bn from capital spending, and €2bn from an as-yet-unspecified mix of spending cuts and tax increases.

Unfortunately, cutting €3bn does not bring about a reduction of €3bn in the deficit. For one thing, “odd” forms of revenue - in particular levies from the banks – are estimated to be particularly high this year. Expecting €3bn from such sources in 2011 – rather than the €4.5bn of this year – undoes some of the good work. Also unhelpful is the logical consequence of large deficits – servicing the national debt. Money spent paying back our growing national debt is likely to rise from €4.6bn to €5.8bn in 2011. The painful truth is that, when looked at in conjunction with other developments in State finances, the Minister’s proposed measures worth €3bn would leave the deficit almost unchanged next year.

What is the plan for the next five years? In December, following Budget 2010, I outlined a scenario for the next five Budgets that would reduce the deficit from €19bn (or 11% of output) back to what the EU has demanded, about €7bn (or about 4% of output). It involved a lot of productivity improvements in the public sector, as well as relying on average growth of 2% from 2011-2015. How does it stack up now?

Put bluntly, after grasping the nettle of public sector pay in Budget 2010, there are now eight further things the Minister for Finance, whoever it may be, needs to do between Budget 2011 and Budget 2015. Three are in relation to taxes, while five are expenditure-related. These are:

1. Bring Ireland’s income tax system back into line with our OECD peers, by taxing the average earner 20% of their income, not 2%
2. Replace the growing menagerie of levies and social contributions with a single, easy-to-understand and easy-to-apply social solidarity levy (see below)
3. Replace stamp duty with a sustainable property tax that promotes investment by homeowners in their property and prevents land hoarding or speculation
4. Achieve €2bn in efficiencies on the money spent on Social Welfare and FÁS (currently €22bn)
5. Maintain an appropriate level of investment in future-proof infrastructure
6. Bring about significant and ongoing annual productivity improvements of 5% in expenditure on health (€3.5bn savings in total)
7. Bring about significant and ongoing annual productivity improvements of 5% in expenditure on education (€1.9bn savings in total)
8. Bring about significant and ongoing annual productivity improvements of 5% in expenditure on other public services (€2.5bn savings in total)

On the spending side, this involves cutting current expenditure from €55bn to €45bn. In other words, each and every year until 2015, annual savings of €2bn must be found, well above what the Minister has in mind even for Budget 2011. Assuming further pay-cuts are not an option, from an industrial relations point of view, this means that significant productivity improvements will be required.

On the taxation side, there have been few signs that anything will be done about income tax changes or the new property tax. The ’social solidarity’ levy, however, is likely to be introduced in Budget 2011 and will more than likely be the source of the €1bn in new tax revenue the Government will seek in 2011. What will its introduction mean for average workers?

Currently, there are a variety of health, income and PRSI levies, and cumulatively they mean a total tax rate starting at 4% for someone on €10k rising to about 12% for those on incomes over €75k. (This is entirely separate to income taxes.) To raise an extra €1bn in revenue, the social solidarity tax would have to be structured something similar to the following lines:

• 0% on those earning less than €10k,
• 8% for those on incomes of €10k-€25k,
• 10% for those on €25k-€75k, and
• 13% for those earning more than €75k

The important thing to note is that for most full-time workers, the rate would stay at 10% - exactly what it is now when adding up health and incomes levies and PRSI. In other words, the damage done in the last two years is here to stay but should not get much worse. The reason the State would get €1bn more is that various anomalies at the two ends of the income distribution would be removed.

One important thing to note is the size of this new income source for the government. A consolidated and expanded social solidarity would bring in close to €16bn next year, compared to about €15bn for direct taxes (income tax and corporation tax) and indirect tax (VAT). The graph below shows the business end of Exchequer finances, revenues from direct, indirect and “social solidarity” sources, as well as four key spending areas: social welfare, health, education and debt service. Notice that we will be spending more on debt servicing than we will on education by 2015 – and that’s grasping the nettle. Without large-scale action on the deficit, debt servicing could overtake spending on health by then.

Main Exchequer revenue and expenditure items, 2005-2015 (€bn)

If, in Budget 2011 this December, the Minister were to raise €1bn each from a social solidarity levy and cuts in capital spending, and €2bn from productivity improvements in the public sector, rather than the €1bn currently pencilled in, the good news is that it would almost certainly be the toughest budget in the current crisis. (I will easily forgive readers who could have sworn they’d heard that one before.)

The bad news is that it would more than likely only just win that title. The deficit would have to be reduced by an average of €2.5bn every year each year between 2012 and 2015, in order to get our books back to the kind of imbalance acceptable at EU level.

DMA Best in Blogging Award 2010

Taking stock of the blog

As some of you may know, last week, this blog won “Best in Blogging”, at this year’s Digital Media Awards in Dublin. I’m absolutely thrilled to have won this award (just as I was to win last year’s Golden Spiders award for Best Blog, which I don’t think I marked at the time on the blog.) Since the revamped blog was launched at the start of June last year, we’ve had over 110,000 page-views from over 41,000 different visitors. Just over 40% of that traffic has been from search engines, while just over 25% each has come from direct traffic and from referring sites.

While it would be easy for me to get carried away with all the praise, the blog would be nothing without the efforts of others – not least its readership. I’d like to thank all those who come on to the site, read, engage and share. You’re a varied bunch. First up, we have the die-hards, email subscribers and feed-readers (all 350 of you!), friends on Twitter (amazingly almost 1000 of you!) and Facebook. Then we have visitors from regular referring sites, such as trueeconomics.blogspot.com, irisheconomy.ie, thepropertypin.com and politics.ie. We also have more occasional referrers, such as The People’s Republic, magicmum.com and soldiersofdestiny.org. (Some posts have even been linked to on modified car and weightlifter forums – the web is a wonderfully varied place!)

The awards are a recognition of all the work that goes in to the blog, and, with both awards, design and usability were key criteria. Therefore the biggest thanks have to go to the other two members of the ronanlyons.com team, designer par excellence Susan Gallagher and blog manager/web-mechanic Naoise McNally. (Much as she hates the whole social media guru phenomenon, it’s not by chance that over 40% of this site’s traffic comes from search engines!)

Golden Spiders 2009 Best Blog award

Laurel non-resting

However, we’re not ones to rest on our laurels, so version 2.0 of the site went up last night. You may not have even noticed the changes, as we were happy with almost everything. Nonetheless, a host of little bits and pieces were tidied up, and – probably most importantly – the home page has been tidied up of clutter. Now, at the bottom of the page, in addition to blog’s the two awards, you’ll find a list of most popular posts – and a spot for research.

A research section will include more formal pieces of work, semi-published or fully published, and so is likely to be a lot less frequent than the weekly posts of analysis. I should be putting up a couple of pieces of new research on there over the course of March and April.

War as an economic leveller

In the meantime, though, to get the section started, here is research I did a few years ago on the grim economics of war, in particular (link is a large PDF file) the Impact of World War On Labour Market Inequality . The research explores changes in rewards for skill in an economy, as signalled by the gap between the wages of (skilled) bricklayers and masons and those of their unskilled labourers. It uses wage data on the building industry gathered from surveys conducted by the International Labour Office and from official national sources, for the period 1910-1950.

The research finds that both world wars in general reduced skill premiums within countries substantially, particularly World War I, in effect by making unskilled labour more scarce. In World War I, warring countries saw larger falls in their premium than neutrals, while in World War II, warring countries experienced a wider range of changes than in neutral countries. (World War I was mainly the destruction of labour, while the air strikes of World War II meant that both labour and capital were destroyed.)

Over the course of the twentieth century, developed countries have all converged around a similar skill premium. Both wars also contributed significantly to this international convergence in premiums, especially World War II. This is all in contrast to the interwar period, where increasing premiums were the norm rather than the exception.

The PDF above is quite long, so any readers will probably want to focus on Chapter 5 (as well as the short Intro and Conclusion). Those with economics training might also be interested in Chapter 6, which outlines the model and regression results. The graph below shows the percentage change in the skill premium in the building industry in various countries. It shows that the experience of interwar deglobalization is very different to that of world war.

Changes in building industry skill premiums, 1914-1946

Over the past couple of months, there have been unprecedented levels of interest in Greek economic affairs and the likely impact they might have on the entire euro project. Among those smirking from the sidelines have been those in the UK who have always looked on the euro project with scepticism and who point to the current fiscal difficulties within the eurozone as proof, if it were needed, that the UK did the right thing in not joining the euro.

Having your own currency decisions and your own interest rates decisions, this conventional wisdom suggests, is just what macroeconomic policymakers need when a once-in-a-lifetime economic crisis comes knocking.

Seamless photo-shopping!

There is another way to view this, though. Countries like Ireland and Greece would, in previous decades, have taken a look at their debts and deficits and decided there was nothing for it but to devalue their currency and start all over on the growth cycle. And there’s no denying that competitive devaluations played a large part in Ireland’s economic successes after 1987. However, there is downside to pulling that trigger: it severely reduces the need to address the underlying problem, namely the government’s errant spending path.

In other words, the eurozone gives countries like Ireland and Greece something new and highly desirable – the (almost) irrevocable clarity of purpose to keep proper control of public finances. Other countries with similar boomtime growth stories but with their own currencies still don’t have this purpose of mind. For example, with Ireland and Greece pulling out the stops to get their deficits back to 3% by 2013/14, the UK has much more limited aims: a deficit perhaps twice that size by the same time.

This is not just pointless picking on the UK either. Sometimes it’s easy to forget in all this talk of PIGS but the UK government finances are in a very shaky position and, with no annoyed Germans on the other side of the table, do not look like improving any time soon. Four points:

• The UK’s fiscal deficit is projected to be larger than any PIGS country both this year and next. (For those curious, Ireland [not Greece] takes second place.)
• Linked to this, the UK will move into the developed world’s heavily indebted club pretty quickly, while interest payments on national debt will be larger than Spain, Portugal or Ireland by next year. (Its gross debt will be between Ireland and Portugal next year, the OECD estimates.)
• Government spending as a proportion of the economy is rising faster than any other developed country apart from perhaps Finland.
• Lastly, assuming they stay safe within their currency union, Ireland, Spain and Portugal are expected to undergo competitive devaluations (through consumer price channels). Like Sweden, through higher inflation, the UK will pay the price for having its own currency.

Various different indices exist giving an insight into pressures on particular countries and currencies. I’ve taken four key state finance metrics, deficit, debt, interest payments and total government spending (all as % of GDP), and using OECD projections ranked 24 developed countries in terms of both where they will be in 2011 and how much they’ll have changed between 2007 and 2011, eight metrics in total. To these, I’ve also added three macroeconomic variables from the European Commission’s detailed economic forecasts: GDP growth, unemployment and inflation.

Taking the simple rank in each of the 11 metrics as that country’s score, the sum gives each country a number between 0 (top rank on all metrics) and 253 (worst rank on all), which is then normalised into a number between 0 and 100, a higher number representing a worse state of government finances, taking into account the health of the economy. The result is below, with the “two-Ied PIGS countries” in red and their eurozone neighbours are in blue.

An Index of the Health of Various Governments' Finances

Some pre-emptive methodological comments:

• Australia, New Zealand, Canada and Korea are omitted due to their exclusion from European Commission projections.
• Current accounts are not included because they reflect many things and this is essentially a measure of Government finances, not private finances.
• Composite indices like this are a function of what goes in – in particular here, ranks hide gaps between, say, 19th and 20th placed countries.
• The inclusion of the level of Government spending in 2011 as a variable is of course potentially ideologically charged. Then again, more than likely so are bond markets.

Pound/euro exchange rate, Feb-2008 to Feb-2010

The UK saw its currency depreciate strongly in late 2008 (see graph to the right). As an adjustment, though, that marked the start rather than the end, because it threw purchasing-power parity between the two currency areas out of whack.

With the UK as a major reserve currency worldwide, further devaluation and inflation (i.e. making foreigners and children pay) does not seem an ideal solution to its economic woes. Instead, it should look to take the bull by the horns and bringing back into balance tax receipts and public spending.

Having its own currency may have spared the UK the full wrath of the bond markets so far, but in allowing deficits and debt to grow, it may turn out to be a curse-in-disguise.

(Needless to say with the two-armed science that is economics, one can find UK economists that have been out in force in favour of current UK fiscal policy and against.)

You read that headline right. Rents actually increased in January, compared to December (and indeed November). The latest Daft report is out today, this one covering rents right up to end-January 2010. Michael Taft, who runs the popular Notes on the Front blog, provides the commentary. Some headlines:

• Rents fell by just over 15% on average during 2009, compared to 12% in 2008. (Rents peaked in early 2008.)
• Compared to peak levels, rents in Q4 2009 were 27.5% lower in Dublin and 23% lower in the rest of the country.
• In January, rents rose month-on-month for the first time in 24 months.

One thing that is particularly interesting is that while the jump up in the index in January is essentially being driven by Dublin, the levelling off in rents isn’t. Every single one of the sixteen regional markets analysed in the model showed an increase in rents in either December or January (7 in December, 11 in January – Galway city and West Leinster in both months).

In fact, Dublin seems to have missed the party somewhat, with none of the six markets in Dublin showing an increase in rents in December, before all six show increases in January. The jump in rents in Dublin in January was 2.7%, the largest one-month jump in rents since July 2007. Elsewhere, in January, rents rose by a much more modest 0.5%. The overall effect was a 1.5% increase, the sore thumb sticking out at the end of the graph below, which shows month-on-month changes in rents from January 2006 to January 2010.

Month-on-month % change in national average rent, 2006-2010

Is this seasonal? After all, January is to more mature renters what September is to the student cohort of tenants. The short answer is that we don’t know. One month is just far too short a period to reliably base any predictions. What can we say, though? Well, the first thing we can say is that it doesn’t look particularly seasonal. If you showed me that graph and asked me to predict a seasonal effect of higher volume of transactions in January, I might have guessed a fall of less than 1% rather than more, but that would be it.

We can go one better, though, and say that it looks more structural than seasonal. The main reason rents were falling so fast was that the total stock available to rent had quadrupled from 6,000 in mid-2007 to almost 24,000 in mid-2009. Since then, the stock to rent has fallen by 20% on average – and significantly more (up to 50%) in some parts of the country (e.g. Dublin city centre, Galway city). The second graph, below, shows the change in rents in January across each of the 16 regional markets, compared to the contraction in supply in that market since mid-2009. Top and left means a large jump in rents in January, following a sharp contraction in supply – bottom and right, means no increase in rents and supply not contracting.

Change in January rents and fall in supply to rent, across the country

For the bulk of areas, the downward line is apparent – the contraction in supply appears to explain the January increase better than saying “well, January is January”. (And in one sense, the numbers below 0% on the rent axis are a distraction, because rents in those areas actually rose in December.)

Who should care? Who should cheer? Landlords? We all should care. The reason stable rents are so important for the broader property market (and thus the economy) is that rents provide the only clear signal on what the true price of a house should be. The annual rental income should be thought of as the % AER on property. Knowing what that income is helps the market know what the value of the properties themselves is. So, particularly when tenants have not had things this good since the year 2000, the market bottoming out is good news all round.

So far, so optimistic, in terms of catching a shard of light in the tunnel that is our property bubble bursting. Caveats? Here are a few:

• The market may be getting back into balance in some parts of the country (balance = stock sitting on the market more or less the same as what the market can process in a month), but in other parts of the country, severe imbalances remains. In most parts of the country outside the major cities – South-East Leinster, Munster (ex-cities), Connacht (ex-Galway) and Ulster – there is still about twice as much sitting on the market as it can handle in a month, a backlog that will presumably have to be cleared at some point.
• There may be supply waiting in the wings. The number of vacant properties in the country has been estimated at 300,000. If even just 10% found its way on to the rental market in a hurry (say, following news that rents has bottomed out – gulp!), that could push rents further down. More generally, if developers are sitting on property pre-NAMA transfer, regardless of whether the properties are transferred to NAMA or not, they will ultimately find their way back on to the market, either rental or sales.
• Above, I mentioned how this is good news not just for landlords but for anyone who owns property or has a mortgage, because a stable rental income gives us an idea of what the true value of a property is. I mentioned thinking in terms of a % AER, or yield. NAMA believes that yield should be 6%. That is a reasonable assumption but is – unfortunately for homeowners – a good bit away from where we are now. Matt Cooper once asked me: “if house prices are falling by 30%, how come rents are only falling 20%?” The causality goes the other way. Rents will determine where house prices end up. Even if rents level off now, a healthy yield means that house prices will have to fall by a good bit yet (from the 30% fall in asking prices seen by end-December 2009). That’s a post for another day, though.

In the meantime, I can bask in the premature and perhaps transitory glow of my prediction of a month ago, while we have to wait until April to see whether it was indeed a one-off swallow or the herald of summer.

Last month, I talked about the need for unemployment to rise to the top of the agenda during 2010, having been a distant third behind the banks/NAMA and the public finances in 2009. Last week, the CSO published the latest detailed figures on the Live Register, which confirm the gravity of the unemployment situation facing the country.

In particular, the numbers highlight two dimensions of unemployment that cannot go ignored: regional differences and unemployment of young men. So much of the public debate last year revolved around the economic problems of middle-aged people. For Ireland to develop sustainably,  the economy needs to be able to create jobs for its young. For Ireland to develop anything like the model of regional balance envisaged in various policy documents such as Towards 2016, it also needs to be able to create jobs outside Dublin. To see where we are now relative to these aims, it’s worth taking a step back to the summer of 2006.

In the middle of 2006, there were 325,000 men between the ages of 15 and 24 in Ireland. Three of every five of these (about 192,000) participated in the labour force. The remaining 130,000, one presumes, were in education. (Even in these progressive times, it is not hard to believe that the number of stay-at-home male spouses under the age of 25 was small.)

With only about 18,000 of those in the labour force signing on the Live Register in mid-2006, it is safe to say that there were about 175,000 employed men under the age of 25 in Ireland in mid-2006. In the three and a half years since then, three things have happened to young men of working age:

1. Young men are unemployed and signing on. As discussed before, increases in the Live Register have proven to be a very good predictor of the recorded increase in unemployment. Whereas there were just 18,000 young men signing on in mid-2006, there are now (as of January 2010) over 55,000 signing on – meaning that at least 37,000 young men have lost their jobs. To put this in perspective, those currently signing on the Live Register represent one in five young male workers from 2006.
2. Young men are dropping out of the labour market. The participation rate fell from about 60% in 2006/2007 to 50% by mid-2009. This is the equivalent of another 26,000 job losses. Put another way, the loss of a further 15% of boomtime jobs for young men are not showing up in the statistics, because these young men are opting out of working altogether.
3. Young men are leaving the country. The latest figures available show that the total population of men under 25 has fallen from 325,000 to about 290,000. We all know that people in school or in university are unlikely to move country, so the dramatic fall of 10% in the male under-25 population almost certainly reflects lost jobs that aren’t showing up in Live Register or participation figures. Emigration is hiding the disappearance of a further 20% of peak-time jobs for young men. (And given that the CSO only publishes full population estimates for April of each year, the estimate of 35,000 who have left by mid-2009 is most likely a lower bound.)

These astonishing figures add up to almost 100,000 job losses in a segment of the population that had only 175,000 employed at the peak of the boom. Over 55% of jobs for young men have disappeared. One occasionally hears the argument that, as bad as things are, an increase in unemployment of ten percentage points means that 90% of us are in more or less the same position now as during the boom. What these figures show is that while the rest of the economy has lost perhaps about 10% of its jobs, young men have lost more than half theirs.

Even though who neither are male and under 25 nor have friends who are should be able to grasp the importance of turning this around. Even at its most basic, it represents a huge drag on the government finances, not to even mention the lost output and societal wellbeing behind the figures. The maps below compare the first quarter of 2007 with the best estimates available for January 2010. The number is a percentage, showing the estimated proportion of the male under-25 labour force signing on to the Live Register in each period.

Percentage of the male under-25 workforce signing on the Live Register, by county, 2007q1 and 2010q1

The graph (which is available over on Manyeyes) shows not only the huge increase in unemployment over those three years but also the regional differences that have emerged. The three largest cities Dublin (and its hinterland in Meath, Kildare, Wicklow), Cork and Galway are relatively unaffected, as are – perhaps surprisingly – many parts of the Midlands where their older siblings have found themselves trapped in negative equity.

On the other hand, in a number of areas, including Limerick and Waterford cities as well as Donegal and Louth, at least half of all young men are signing on. In Limerick, already a relative unemployment blackspot during the boomtime, two out of every three young men are signing on at the moment. This is bleeding over into counties Clare and Tipperary as well.

Perhaps these figures are not surprising. There are those who point out that this crash was bound to come, purely because of how reliant our male employment had become on construction. Indeed, these job losses may be led by construction, which had employed one in three men in this country by 2006. But the job losses have ultimately come from all sectors. And – more importantly – the eventual return of a healthy economy (and a healthy construction sector) will mean the employment of no more than one in six men in building, not one in three.

Therefore, Ireland must look to alternative solutions to get one half of its future labour market employed. Unfortunately, as a short-term valve, emigration will have to play its part, particularly for those for whom Ireland was a new home. But one must also look at falling participation rates as a blessing in disguise. A record number of mature students – at 15,000, not a panacea but not to be ignored – a record number of mature students are applying for third-level education under CAO this year. The obvious next question, though, is whether the qualifications we are providing for our young people – men and women – are what a 21st Century labour market needs.

In the last couple of months, I’ve sensed a growing impatience among those who, but for the bust, would have been first-time buyers at some point over the past two years or so. Granted this is purely anecdotal, but it’s worth exploring whether there’s anything to be said for the following line of reasoning:

“There are lots of us out there who would have bought, if the recession hadn’t happened. While there’s lot of stock for sale out there, much of it is apartments and in areas no-one really wants. The properties I want are the properties everyone like me wants and they’re going to go fast when the market turns, therefore I should be on the lookout for a good property now, so I don’t miss out.”

To shed some light on this, I’ve had a look at six types of property (anything more granular would start to lose its readability): apartments and houses in each of Dublin (Dub, in the charts below), the other four cities (City) and the rest of the country (ROC). I’m cheating a little here, as “apartments” actually refers to 1-bed and 2-bed properties, while houses refers to properties of between three and five bedrooms, but you get the gist. I will present these charts with minimal comment, so people can make up their own minds about what signals they send.

The first chart below shows how the six market segments have developed over the past year. Each line shows the number of properties listed on daft during 2009, relative to the average for late 2008, when the stock for sale nationwide peaked. Dublin has clearly seen a reduction in the total number of properties listed for sale, by about 15%. Outside the main cities, particularly for apartments, the number looks like it’s still rising.

Stock for sale in different segments of Ireland's property market over 2009 (2008Q4=100)

I’ve deliberately put these numbers on the same scale and not in absolute numbers so that the trends can be compared. However, that’s not to say the absolute levels is unimportant. The following graph shows approximately what percentage of properties in each segment was listed for sale on daft in December 2009, based on Census 2006 figures.

The approximate percentage of properties for sale, by segment, December 2009

So, there you have it. I’ll stick to my promise of making minimal comment, but am happy to take things up in the comments section, should anyone be so inclined!

This week’s recommended reading and some latest stats and facts…

First up, some research:

• Economists almost always decline to involve themselves with the specifics of particular industries and goods, preferring instead to talk about widgets and other abstractions. However, that’s not very realistic when you look at economic history or think of, for example, the central nature of the construction and automobile industries in the ongoing economic downturn. In that vein, the OECD has just released a study called “The automobile industry in and beyond the crisis“. After setting out the importance of the industry, it examines the collapse in car sales during the crisis and looks ahead to the future of the industry, country by country. In particular, Western European manufacturers – and those in Japan and Korea – have capacity significantly above domestic demand, meaning that their export performance will be critical in determining the health of these industries. China – and to a lesser extent India – are not unpredictably growth markets for the industry.
• Secondly, some interesting academic research in the Journal of International Economics on the long-term effects of colonialism. The paper, called “The erosion of colonial trade linkages after independence”, is available in its gated (official) form on ScienceDirect, but a just-as-good version is available to all from Sciences-Po. The authors use the fact that most countries today were part of empires as late as 1945 to examine bilateral trade since then. They find little short-run effect on trade, except in the case of “hostile separation”, but thirty years after independence, trade with the colonizer shrinks by more than 60%. It seems to be more the unwinding of trade diversion rather than economic revenge, as the effect extends to “Commonwealth partners”, fellow colonised countries.
• Edgar Morgenroth presented a paper at the ESRI a couple of years ago on how immigration into Ireland has boosted imports of consumer goods from the home countries – think Polish food taking up Spar’s shelf real-estate. Giovanni Peri and Francisco Requena-Silvente consider the alternative: an increase in exports to home countries. They present evidence from Spain suggesting that doubling the number of immigrants leads to a 10% increase in exports to their country of origin, an effect that is larger when the countries are “culturally different”.
• Lastly, the OECD welcomes Chile into its club of high-income members with an inaugural review, highlighting two priorities for its policymakers: solidifying its economic growth base and tackling inequality.

To close, a few things we didn’t know last week:

• According to Eurostat’s latest review of IT and business, e-commerce accounted for 12% of enterprises’ turnover in the EU27 in 2008. Also, by January 2009, four out of five enterprises had a broadband internet connection.
• Speaking of differences across industries, the euro area is currently seeing its industrial sector expand – by 1.6% between October and November 2009 – while its construction output fell by 1.1%.
• Closer to home, 2009 saw a big hit in tourism, with almost 900,000 fewer trips to Ireland in year to November 2009.

In a recent post, Gerard O’Neill on his Turbulence Ahead blog gives his take on some of the recent research into the steady decline of absolute poverty. His upbeat take is a good complement to Bill Easterly, over on Aidwatchers.com, who applauds recent querying (by Angus Deaton among others) of the exactness and indeed necessity of statistics on poverty. (If nothing else, check out his revelation of the World Bank’s extraordinary statistical gymnastics on Indian and global poverty!)

All this talk of relative and absolute poverty made me think of the importance of hard and fast numbers like wages. After all, people are paid wages, not GDP. A couple of months ago, the ILO published the latest instalment of its Global Wage Report (with full access to its database). Naturally, a lot of the news coverage at the time was on the impact of the economic downturn on wages. In my opinion, the nature of the wage data collected by the ILO doesn’t really lend itself to up-to-the-minute analysis like that. The data are much better for reviewing what’s happened over longer timeframes.

One of the database’s most interesting contributions is on relative inequality. For a growing subset of countries, the ILO have figures on the average wages earned by the top 10% and bottom 10% of earners, as well as the median wage in the economy. For about 35 countries, there is information on wage inequality between top and bottom earners from the mid-1990s on. Sixteen of the countries are medium income or lower, i.e. have average per capita income of no greater than $20,000. While inequality fell in eight of those, that is hardly compelling evidence that there is a steady decline in inequality in the sample of 16, let alone all low and middle income countries. (Certainly not in Russia – where inequality has soared to level almost without global parallel in the last decade.)

In wealthier countries, on the other hand, wage inequality has typically risen since the mid-1990s – although it did fall in Belgium, Austria and (marginally) in France and Ireland. It’s important however, when people discuss inequality in wealth countries, that they bear in mind the overwhelming bigger picture: firstly, inequality is typically dramatically lower in rich countries than it is in poor, and secondly, even the poor in wealthy countries are better off than most people in the world. That’s not to say that inequality is not important, rather that most people had the choice of living in an equal society where average incomes are low or in a somewhat unequal society where even low income people are relatively well off, most people would choose the latter.

This is shown in the graph below. Using the top-bottom earner ratio, it’s possible to estimate the average income per person in the bottom 10% of wealthy countries, adjusting for the cost of living, and compare it to poor countries. The blue squares below are income per person, adjusted for cost of living, in the sixteen low/medium income countries covered in the ILO report, and the orange diamonds are average incomes of the poorest 10% of a range of high-income countries.

As you can see, the poorest in wealthy societies typically enjoy an average income of between $15,000 and $20,000 a year (those are US$ adjusted for cost of living in each country). In Korea – and also surprisingly in the UK – the bottom 10% live in conditions similar to the typical Latin American country, but elsewhere, the poorest live in conditions that average earners in even medium income countries like Chile and Russia would happily take.

Average income in the poorest cohorts of high-income countries in perspective

Is this important? Well, yes, because the balance in importance between absolute and relative wealth is all too often misunderstood. It is now almost a truism to say that relative wealth matters more for happiness than absolute wealth. It is widely believed that people are happier when they don’t have to put up with significantly wealthier people than themselves. However, the most recent and most thorough research (you can read the research by economists Betsey Stevenson and Justin Wolfers at your leisure) into this so-called “Easterlin paradox” shows it doesn’t actually exist.

It may be a subtle distinction but making society less unequal is not what people want – they want to be better off. Making people better off is certainly not the only thing that makes people happy, but – holding everything else constant – making people better off does seem to make people happier, as measured by when you ask them whether they’re happy, surely an important metric. Not only that, this effect holds regardless of how wealthy they are to begin with. Society should not forget this.

To my shame, my Recommended Reading section on the blog has fallen somewhat by the wayside of late. While I can’t promise I’ll fully rectify that overnight, I can do my bit here and now. Without further ado, here are ten articles on the world economy that I’ve found interesting in the last week:

1. From the excellent VoxEU, an important step in understanding some of the massive implications of urbanisation and economic growth in emerging markets comes in a paper called ‘How Green is China?‘. Per capita emissions in China’s most polluted city are still just a fraction of what they are in the typical US city.
2. Patrick Love, over on the OECD Insights Blog, gives some perspective on the development of Haiti, formerly the Jewel of the Antilles.
3. Some mildly good news – recessions won’t drive up violent deaths that much, according to researched cited on the Irish Economy blog.
4. Over at Reuters, Felix Sammon discusses the economics of the New York Times’ generally much-discussed introduction of a paywall. It leads him to discuss the concept of bundling, itself closely related to price discrimination, for example in the digital TV market, as per the commentator a couple of days ago.
5. Today, an Englishman, an Irishman and a South African had an exchange of views about which major currency has the best/worst long-term prospects, largely on the back of developments in relation to the Greek economy. None of us, however, thoguht to mention the Canadian and Australian dollars!
6. Mark Perry is always good for a provocative post – he doesn’t disappoint on the EU-vs-US debate that seems to have risen, unprompted, in the past couple of weeks, as the successor to the Sachs-Easterly-Collier debate that raged among economists last summer. I have a whole host of reasons I disagree with him, but that’s the subject for a full blog-post in itself (makes note on to-do list).
7. On a completely unrelated topic, Tim Harford, the Undercover Economist has a nice short explanation of heavy traffic on Mondays and rainy days.
8. The Conference Board is one of the world’s premier sources for data on productivity. Their latest report on productivity shows the strong gains in emerging markets, some the WSJ views as an economic threat.
9. All this talk of emerging markets and China – what with its booming economy at the moment, is China headed for a crash?
10. And all this talk of productivity and competitiveness… I talked a couple of weeks ago about the 2010 Lisbon Strategy adopted by the EU almost 10 years ago, designed to make the EU the most competitive economy in the world by now. Charles Wyplosz argues it’s time for a new model of competitiveness for the EU.

And a non-economics link to boot: it turns out “status updates” are at least a hundred years old!