September 15, 2023 • 48 mins
Join me in search of the elusive and fascinating cuckoo.
I am joined by a great group of guests including Sean Keyes from the Currency who discusses the media's influence on policy. Pat Farrell for IIP defends his supposed winged members and David Tilson from Cantor Fitzgerald explains why Leo doesn't need to fear the Lettuce just yet.
And you thought this was a boring housing policy podcast.
Links to items mentioned in this episode:
Housing is breaking brains: https://www.theatlantic.com/ideas/archive/2022/11/us-housing-supply-shortage-crisis-2022/672240/
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Rick (00:02):
Picture this a small, unassuming bird flitting from
treetop to treetop, carefullyobserving its surroundings.
It spots a nest in a tree below, brimming with eggs.
The tiny bird stops and waitspatiently, hidden from view,
until the occupant of the nestdeparts, leaving the eggs
unsupervised.
(00:23):
Sensing an opportunity, sheswoops down at incredible speed,
in a behavior honed overmillions of years.
She gets to work, using anenormous amount of energy, to
remove one of the eggs from thenest and then, with impeccable
timing, replaces it by layingone of her own.
With a flutter of her wings,she is gone, never to return.
(00:45):
The whole operation fromlanding to departure, completed
in just ten seconds.
My name is Rick Larkin and youare listening to the Build my
podcast about property andeverything that goes with it.
Today's episode is definitelyfor the birds.
For this episode, I did a lotof reading about cuckoos.
(01:22):
I even went out to try torecord some in the wild, but as
it turns out, they are actuallyexceptionally hard to find.
Or maybe I'm just not a skilledbirder, but fear not, I am low
at the disappoint my loyallisteners, and if you tuned in
today for some cuckoo action,well then, cuckoo action is what
you are going to get, accordingto popular lore, there are
(01:45):
large murmurations of cuckoosall around us.
Perhaps one is even speaking toyou right now.
I'm my cuckoo right, becausethis is Sean Keyes.
He's a finance correspondentfor the currencyie, which if you
haven't visited you're missingout.
It's the only real businessnews site in Ireland.
Sean knows money and propertyand cuckoos First of all.
(02:10):
Do you know where it came from?
No, okay, because I've been toldthat he was a journalist in one
of the two national newspapersthat came up with this.
I've actually gone and lookedand looked and I can't seem to
isolate the first time that itwas written, but it's become a
catch-all term to reallydemonise any foreign investor
(02:33):
who has invested in producinghousing in Ireland.
That's the bit that rankles alot with people, because in the
construction industry we knowthat a huge majority of the
construction that happened thelast five years just wouldn't
have happened if it wasn't forthese people.
The fact that they've beenregularly just put upon in some
(02:55):
elements of the press has had areal impact on them.
What are your thoughts on that?
Do you think the press have anycase to answer it?
Do you think that we're justwingy builders and that really
we should get over ourselves?
Sean Keyes (03:08):
I'm not sure how much of it is specifically Irish
and how much of it is justinating people to be skeptical
of institutional investment.
Let's say In the US peoplewould be skeptical of
institutional investment too.
It's much bigger over there.
But there's an extra layer inIreland that it's foreign.
(03:30):
It's like an invading, aninvasive species sort of a thing
.
It's definitely very potent inIreland.
We really need it because we'vegiven up on the ability to fund
ourselves, fund our ownproperty investment.
The old model of Irish peoplefunding Irish property
(03:50):
development through the bankingsystem is gone.
Rick (03:55):
Are the press reacting to the general atmosphere Like you
say?
That's present in a lot ofcountries, it's present in
America, it's present everywherethat people are skeptical of
institutional investment andtherefore that skepticism is
amplified and therefore policymakers are sometimes quite
reactive to that perception aswell, because they're looking to
(04:15):
get elected and they're electedby the people.
Still, people understand thisand they're like no.
Or is it that people don'treally understand it and they
get a snippet of something?
Or they get the dogma ofcertain parts of society who
maybe wouldn't like to see muchof a private sector involvement
in housing or think the idea ofprofit on housing and stuff like
(04:37):
that is horrible.
Where do you think it generatesfrom?
Sean Keyes (04:42):
I tend to in this question more generally, beyond
just housing, it's more bottomup than top down.
I think that side of it isunderrated.
I think there is a tent.
People say look at Fox News inthe States.
That gets blamed for this iswhy certain some Americans are
(05:04):
crazy.
It's because they're gettingthis fed into their TVs every
day and Fox News are the badguys who are causing this.
I think there's an urge to finda bad guy who's responsible for
this messed up situation thatwe find ourselves in.
I think much more like I'vebeen in the media industry the
media is responding.
It's a very, very competitiveindustry and it's responding to
(05:28):
what people want in the long run.
Rick (05:32):
I don't disagree with that at all.
If it bleeds, it bleeds, right,we've all heard that phrase and
it's absolutely true.
They have to sell papers.
But then there's anotherelement of it too, because Fox
News.
You're absolutely right, foxNews don't control everything.
But if they didn't have anyinfluence, you wouldn't see all
the politicians catering theirmessage to line up with it.
(05:53):
The phrase cuckoo funds right,I look at it.
The word on the street didn'tcome up with that.
Actually, the first person toGoogle it would realize that
it's not even a very goodanalogy, because cookies don't
steal mess.
People think that cookies stealmess.
They don't steal mess.
Sean Keyes (06:06):
That's your real problem with this.
It's ornithologicallyinaccurate.
It's just by the by you areenhancing.
Rick (06:12):
Did you ever wonder why they called it a cuckoo clock?
Apparently as the call is sodistinctive, a two-tone call.
It's unusual in the animalkingdom and it was a type of
innovation in the clock worldback in the 18th century by
using a bellows and a whistle.
It was a technological leap tohave a clock make that sound
instead of just a bell clanging.
That might be usefulinformation for a pub quiz
sometime.
(06:33):
Next scene that this podcast isjust going to be about birds.
It's not going to do anythingabout building, but just stuff
like that.
So somebody came up with thatbecause they're like cookie fund
, that sounds great and everyonethinks the cookie steal mess.
So they're stealing houses Tosay that it's totally bottom up.
I get it, but things like that.
To me it's distilling it downinto an inaccurate argument that
(06:56):
can be very easily repeated andspread, which just amplifies
wrong information, which thenreaches policymakers who do
things like pull the bill torent planning regulations just
because of outrage, not becauseof any actual objective fact.
Get rid of co-living planningregulations again because of
(07:16):
outrage.
Sean Keyes (07:17):
All of these things are driven by this, I think
there's a thing with housingwhere the worst if you've got a
problem with your housing system, it'll probably it has a
tendency to get worse and worseand worse.
I think it's because there's aquirk in human nature where we
(07:38):
just something about housingbreaks our brains.
There's a piece that actuallyhad that title housing is
breaking America's brains, orsomething like that, and then it
was referring to this researchthat was out a year or two ago
about attitudes to housingsupply and what that did to the
housing market.
And the researchers askedpeople, asked Americans if you
came up with a lot of extra oilor corn or cars, what thing that
(08:02):
would do the price.
And 80 or 90% of people saidwell, more cars would make the
price of cars go down.
But when you put the samequestion to them about housing,
it was way more evenly divided,and about 30 to 40% of Americans
believe that if a lot of newhousing was built in their
region, then rents and homeprices would rise.
(08:23):
So there's just something inAsian people that housing just
doesn't.
It's not intuitive to them, andso the reason I think it gets
worse is because when the systemstarts to malfunction, you get
this kind of confusion, which isresulting from people's
misunderstanding of housingeconomics.
So if you have a system that'sworking way quietly in the
(08:44):
background and there's no needfor debate and there's then less
debate, then the fewer badideas are getting tossed around
and implemented and yeah, sothat's.
I think it's something likethat, and I think it's very
difficult to get to kind of makeany progress on it, because
people are intuitively quitehostile to new housing.
Rick (09:07):
But you the stuff that you've written in about property
and, in fairness, the currencygenerally haven't gone down this
road of there's a bad guy or abogeyman, and here it is and you
have attempted to explain allof these things because,
contrast to right, with anotheremergency when we had the
(09:30):
pandemic and when the thepandemic came up first, right,
none of us have any clue.
I mean, it was remarkable,actually within two weeks, how
many experts there were aboutinfectious diseases that just
crawl out of the world, and thathappens every time.
But what was interesting aboutthe pandemic was a lot of that
(09:50):
stuff of the armchair guy or theperson who just decided they're
an expert.
That got pushed aside likerelatively quickly, and the
press focused on a couple ofheadline people and actually
took huge stock in what thegovernment were saying, which
was interesting, because that'snot normally the approach that
the press takes.
They have a healthy skepticismwhat the government say, but the
(10:12):
housing crisis has been goingon for much longer, but there's
almost complete skepticism aboutwhat the government say.
There's complete skepticismabout what industries say and
there there doesn't, and maybeyou're right, it's breaking
people's brains, but theredoesn't appear to be any attempt
to be like, okay, no, here's anexample of where this was dealt
(10:32):
with.
We should be doing these things.
Here's an explanation as to whyit's not as simple as clicking
your fingers and having 50,000houses for free.
This is because of x, y and z,but that's not.
That's not what's happening,right?
You guys have made a fewattempts to explain things, but
generally, that's not what'shappening no it's.
Here's a quick fix, here's aquick fix, here's some magic
(10:53):
beans.
Look over here, dazzle, dazzle.
There'll be loads of houses.
If only we can be elected, orif only we put this person in
charge.
Or only if we change the laws.
Or, as some people like to say,a lot about REITs or why don't
we make the REITs pay tax anduse that money to build housing?
You say REITs, the shareholderspay tax.
They don't pay the tax because.
But no one even wants toexplain, like even a little bit.
(11:15):
Are people that unreceptivelike the ordinary going street?
Are your?
Your readers are obviouslygoing to be more receptive, but
do you think that peoplegenerally are that hostile to it
, like the American thinkingmore houses mean more expensive
houses?
Sean Keyes (11:28):
yeah, we do, we think so.
That's that's what makes it sohard to fix.
You've got to start from asituation of incredible
skepticism and you know some ofit is, some of it is is sort of
just some misapprehensions about, about housing, economics and
stuff like that.
And that's fine, people aren'ttrained economists.
And then other parts of it are,elements of it are.
(11:51):
You know, the planning systemobviously plays a big role and
you know people do havelegitimate reasons not to want
housing near them.
Yeah, you know, it's justself-interested person.
If someone's going to build anapartment beside my house,
that's not good news.
You know it's parking is goingto be harder, construction noise
(12:13):
, it's not.
You know it'll be busier, allthe things.
Like you know, most peoplewould just rather not have that.
Yeah, that's absolutely true.
Rick (12:20):
Yeah.
Sean Keyes (12:22):
It's not in your self-interest.
Rick (12:23):
But no, we don't live in a country of self.
Sean Keyes (12:27):
Be realistic about where we're starting from, that.
People are quite hostile todevelopment for a mixture of
reasons, and any solution shouldjust look at those facts in the
face and come up with ways tokind of help us to create
win-wins, you know, create ascenario where housing doesn't
(12:49):
get rammed down the throat ofpeople who don't want it in the
interest of the greater good.
Not just because that's, likeyou know, lousy on the guy, but
it's just it's not likely towork.
It's not likely we're going topass laws.
No, politicians aren't going tovote for laws that anger all
their constituents.
Rick (13:08):
On this we disagree, saying we shouldn't ram housing
down the throats of people whodon't want it.
In my mind, it's like asking achild to eat their vegetables,
and when they inevitably refuse,we simply throw our hands up
and say we could do no more.
In the full interview, Seantalked about something called
street plans, which you're goingto hear about in a later
episode.
I do think he's right.
The politicians won't want tovote for laws that anger their
(13:30):
constituents.
Just look at the recent attemptat reform of the Planning and
Development Act, which more andmore looks like lipstick on a
pig, but it's still calledreform.
I guess Bismarck was right Ifyou like laws and sausages, then
you shouldn't watch either ofthem getting made.
But let's back up for a second.
Does any of this even matter?
You've heard me complainingabout the medias treatment of
(13:50):
investors, but do the investorscare?
Pat Farrell (13:54):
I started off my life in the public health
service and in fact I worked oncapital projects.
So I was involved in theNorthwestern Health Board and a
lot of their capital programs atthe time.
And then I
Rick (14:05):
That's Pat Farrell.
Pat is the head of Irishinstitutional property or IAP.
They're like a representativebody for large property
investors.
Pat's been around, he'sexperienced, so what does he
think about this?
Pat Farrell (14:16):
You rightly reference the fact that there's
been a lot of misrepresentation.
I suppose the background to allthis is that we're in a
political war at the moment.
The next election is inprospect, probably a year or two
away.
It will pivot on who believeswho can do the best job in terms
of housing.
So there's a big prize to befought for here.
And, of course, when a warbegins, the first casualty of
war is truth, and what has beensaid, for example, is that, say,
(14:41):
all of the apartmentdevelopments that were funded
and delivered by institutionfunds were somehow snatched from
would-be first-time buyers,which is not true.
The cost of developing andfunding these kind of
developments is beyond the reachof somebody who wants to
actually build them and sellthem to individual homeowners.
So all stock is good, be it forthe rental market or for our
(15:04):
home ownership.
So this is additionality andhas provided more stock for the
market.
So, beside all that, like allof the other, house builders are
also getting institutionalmoney to enable their
developments as well, which isproviding additionality into the
market.
So this is about institutionalinvestment, which is actually
providing meaningful additionalhousing supply at a time when we
(15:26):
all know the supply is the bigissue and therefore I think
that's the way I would look atit and I think that's the way it
needs to be viewed.
The other thing we need to standback and realize is, like the
whole country's economic modeland our success is built on
foreign direct investment,foreign capital.
But when you suddenly associateforeign capital with housing
the toxic political issue of thedecade it's suddenly bad.
(15:48):
And I've only recentlydiscovered, with the row that
started over the Gresham houseand the forestry deal with
Quilchia, there's only one thingmore pejorative in Ireland than
a foreign fund, and that's aBritish fund.
Yeah, that's absolutely correct.
So I mean there's a lot ofmisrepresentation, there's a lot
of misuse of language, but it'sall to do with a political war
(16:09):
that's effectively on and whichwon't end, and even won't end
until the next election, becausethen we'll begin a whole new
cycle again and that's the otherpoint of this right that two
years from now, three years fromnow, four years from now, this
problem is not solved rightunder any different fork in the
road.
Rick (16:29):
I mean it doesn't seem like in the next three or four
years it's possible to buildenough residential property in
the next three or four years tocome anywhere close solving this
problem 100%.
Pat Farrell (16:38):
I mean, if you think about it, in 1977, we were
building seven or eight housesper thousand of population.
Today we're building four.
France and Belgium are buildingabout seven.
So we're way behind theballpark.
Rick (16:47):
And our population was a couple of million lower,
absolutely.
Pat Farrell (16:51):
And that's put me on to it.
You've prompted another issue,which is that, if you think
about the whole collapse of thehousing market post the crisis,
for a whole decade we had no newhousing at all built in the
country and over that sameperiod we had a 30% increase in
the population, so we createdthe so-called perfect storm in
this country.
We have a massive deficit tomake up.
You mentioned the election.
(17:11):
Regardless of who's in powerafter the next election, we're
still going to have the samefundamental issues we're not
building enough houses and we'regoing to need a huge amount of
capital in order for to buildthose houses.
And for sure, the state has arole to play.
And the state has a bigger roleto play and is actually most
recently starting to play abigger role.
And you can hear in theheadlines and some of the
(17:32):
announcements pre-budget thatthere's obviously going to be
more capital, probably suppliedby government.
But, that said, no government,regardless of whatever political
view, is going to make anymeaningful headway on solving
the housing crisis unless theycontinue to facilitate a
meaningful role for the privatemarket and for institutional
capital, because it's beyond thecapacity of the state, even
(17:52):
with the current burgeoning taxreceipts to be able to allocate
enough resources to deal withthis comprehensively.
The members I represent haveinvested plus to 20 billion and
it's across hospitality,commercial logistics, retail and
particularly housing, and ithas been a huge enabler of the
Irish economic recovery and ithas also been a huge contributor
(18:13):
to additionality in terms ofhousing units and this country
new housing units.
Rick (18:17):
So institutional property.
Just for people who arelistening.
You maybe don't work inindustry and I want to
understand.
You said it there.
It's pension funds.
Pension funds typically willcome along.
They will invest in real estatein order to get a stream of
cash flow.
So when normally a pension fundwould buy government bonds,
they say we'll lend thegovernment money, the government
(18:39):
agree to pay them interestevery month or every quarter and
they use that difference tofund their obligations to their
pensioners.
When you buy property, that'ssimilar.
So these institutionalinvestors are investing in
property for the cash flow fromit rather than speculating in it
.
It's not the same as adeveloper.
So that's really, it's fair tosay, a good description of
(19:01):
institutional.
Pat Farrell (19:02):
Yeah but I suppose it does go beyond that, because
you also have institutionalinvestment money backing
non-bank lenders who areproviding debt and equity
funding to developers, andthey're a feature of the market
as well, and that's obviouslyhigher risk capital and it does
carry a higher coupon, higherthan the one you just described.
It's not just in thatparticular area.
You have the institutionalinvestors acquiring and owning
(19:24):
themselves, but then you alsohave them providing finance
directly to developers Because,as you know, now in this market
post the crash again, anydeveloper in this country,
unless they have own funds orown equity, they're going to
require an equity slice toembark on any kind of
residential development, forexample.
And if they don't have thatfunding themselves and their own
resources, they're going tohave to find a partner and
(19:46):
inevitably, in a lot of casesthat will be a non-bank lender
who is backed by some form ofinstitutional capital.
Rick (19:54):
All right, can you continue to indulge my amateur
ornithology for a second?
What institutional investorsare doing is much more like the
social weaver.
You may not have heard of thisbird.
They mostly live in SouthernAfrica.
The social weaver is unique inthat it builds compound nests
cooperatively.
They come together and theybuild enormous nests capable of
holding as many as a hundredpairs of birds.
(20:16):
It's a lot like an apartmentbuilding.
It even has multiple entrances.
You should look up some of thepictures of the nests on Google.
They're amazing.
Funny thing, though, about thesocial weaver they also migrate.
Pat Farrell (20:28):
Well, you've brought me onto a very
interesting point, becausethat's the other thing is that
all global capital is highlymobile and they will only invest
in markets where they getstability and policy certainty.
And if you just think aboutthat issue alone, we had the
implementation of RPZ in 2016.
We had a cap in a 4%, followedby a link then to inflation,
(20:49):
then followed by a recap.
We had about three, four policyleft field swings in a boat
less than a few years, and thatis just so damaging to investor
confidence.
Rick (21:01):
And it's damaging to renters too, because there is
this thing out there again, theschizophrenia where it's seen as
, oh well, screw the developersand the landlords, we're not
helping them.
You say, okay, sure, if youwant to take that view, that's
fine.
But the reality is thosepolicies don't hurt us as much
as they hurt all the people whoare not in a rent-controlled
(21:23):
apartment.
Because when you crimp supply,okay, the guy who's in the
rent-controlled apartment, hisrent doesn't go up by more than
2%, good for him.
But the guy that doesn't havean apartment, right, the guy
who's 20 and is coming out ofcollege, or is 18 and is going
to college for the first timeand is renting for the first
time, he's now going into amarket where supply has been
(21:44):
crimped, rents have been drivenartificially higher because they
have risen dramatically in thelast five or six years.
That wouldn't have happened ifyou had the supply.
And I was to give the example ofFinland.
I don't know if you interactwith your colleagues in Finland.
Finland is almost unique asbeing a wealthy country in
Europe that does not have anyform of rent control, and rents
(22:07):
are falling in Finland andeverywhere else in Europe
they're rising, but Finland'sthe only place where they're
falling.
And why is that?
Because they over supplied themarket.
Now, what's worse for thedeveloper An over supplied
market or an under suppliedmarket?
It's obviously an undersupplied one because you can
have higher prices.
What's better for the renter?
The over supplied market?
(22:28):
They have nowhere in control.
They got the over suppliedmarket.
We put rank control in.
They put it in Scotland, theyput it in Germany, they put it
in Spain.
All of these places aresuffering terribly from this.
Pat Farrell (22:42):
And I mean we did a study with Ronan Lyons back in
2020, which demonstrated thisvery clearly, because he showed
that at any time in Dublin wherewe had an excess of 4,000 units
available for supply in Dublin,rinse fell and then when it
went below that figure, rinserose Absolutely undeniable fact.
And in fact, we did have aperiod in the 80s when you had
(23:04):
the section 23 where there was abig, big run of apartment
development in Dublin at thattime and there was an excess of
supply in the market and rinseactually stabilised and didn't
fell for a period at that time.
But then obviously we got backinto scenario again where after
that, where supply became scarceand obviously there's a
(23:25):
reaction to that and, as I said,the only answer to the current
high levels of rinse is to bringon more supply.
Rick (23:35):
Yeah, we touched on there a couple of minutes ago about
stability, policy stability andthings like that.
What's your member's view onIreland now in terms of
attractiveness, the politicalsituation Does that get
discussed at all?
Does the whole idea of thembeing called pejorative names in
the media affect their view onwhether or not they would come
(23:57):
and invest further sums here?
Pat Farrell (23:59):
Yeah, it's an interesting one.
I mean, if you actually thinkabout the last 12 months, the
terms we've talked about havebeen less and less in use in the
media.
So I think there's a slow butsteady understanding that
institutional funds have a roleto play, that they're long term
patient capital.
I remember when we launched2019, some of the media
commentary was that, oh well,these investors are just in and
out, in and out.
Well, guess what, like themembers that I represent have
(24:22):
been here for well over a decadenow.
The other thing is that we aregoing through a correction in
the real estate market.
I think the fact that we've thepresence of such a large
representation of institutionalinvestment in real estate is a
steady in influence on themarket and doesn't allow you to
mimic the kind of effects ofwhat we had when it was entirely
debt funded back in 2000.
(24:42):
So that's another positive butfor sure.
I think, if investors look inat our today, they still attract
by the fundamentals of Ireland,which are extraordinarily
strong, and then the fact thatwe such a strong economy.
But the kind of things that Ithink they find frustrating are
times are the slowness ofdecision making at times and the
issues with the planning systemas we know, that are well
(25:03):
chronicled and the kind ofconstant chopping and changing
with policy.
But look, that said, there havebeen a number of very good
initiatives by the government inrecent times Cree, cona,
project, tossi, the Starinitiative time will tell, but
they're only betting in.
But I think they've been gooddevelopments and the fact that
the government actually broughtout a comprehensive housing
policy, housing for all, whichfor the first time took a
(25:25):
holistic view.
I think slowly but surely it'sstarting to crank up and
starting to get momentum.
I think the big issue now isfor to accelerate that progress,
to invest more money from thepublic side and then to keep
encouraging the presence of theinstitutional investors and the
private market and have a muchmore effective collaboration
between the two, because therealways hasn't been the level of
(25:47):
collaboration that there shouldbe.
But I think if we can work onthat then we can start to up the
delivery both for rental andfor private ownership and slowly
but surely start to makeprogress.
But there's a huge amount oftime.
Rick (26:05):
But the point is that this development would only happen
because of the presence of thisinstitutional capital, because
it's not there domestically,right?
The domestic banks are veryrestricted on what they can lend
and then there isn't a hugestock of domestic investors.
Yeah, I know you've explainedit very well.
Pat Farrell (26:23):
And another lens to look at it too is say, for
example, if we take, say, thegovernment's own target at
33,000 homes per annum, theDepartment of Finance themselves
have estimated and it'sprobably out of date, this
estimate, because it was pre thecurrent hyperinflation we've
had in construction that it wasgoing to cost about 13 billion a
year to fund those 33,000.
33,000 houses.
(26:43):
So if you look at where doesthe money come from?
The government says it'sspending about 4 billion a year,
but there's probably about abillion of that is HAP, so
that's up X rather than CAPEX.
So we're talking maybe 3billion, maybe less than 3
billion capital supplied by thegovernment of the 13.
And then we have banks which, asyou rightly pointed out, are
absolutely limited in how muchthey will be allowed to lend due
(27:06):
to regulations, so that's aboutanother 1.2, 1.5 billion.
So now you have this big gap ofabout 6 or 7 billion, and the
only way that gap can be filledis by institution investors or
non-bank lenders, and they arethe people that are supplying
that balance.
And then, if we accept thehigher numbers which as are yet
unpublished but had beenreferenced from the housing
commission of 50,000 homes perannum.
(27:26):
Well, the numbers are jumpingnow maybe to 15 to 20 billion,
but the size of the gap between,say, banks and the government
and this big void that needs tobe filled, can only really come
from institutional capital.
So institutional capital isabsolutely critical if we're to
make headway on housing andindeed in all the other real
estate classes that arenecessary for a functioning
(27:47):
economy.
Rick (27:48):
For the love of God, did you hear that?
20 billion euros per year andthe government is going to spend
about 4.
And, in fairness, that's a lot.
Where on earth is the rest ofit going to come from?
These numbers are big.
Ireland is awash with cash atthe moment, but can we really
afford to spend that kind ofmoney every year?
For years, I asked someone inthe know.
David Tilson (28:09):
David Tilson from Canterford Gerald.
My title with Canterford Geraldis head of debt capital markets
.
I guess that's effectivelylooking at the bond market, the
interest rate market andeffectively advising companies
who may wish to raise debt.
Rick (28:24):
We hear about the bond market.
Can you tell me what the bondmarket is?
David Tilson (28:28):
Yeah, sure, I mean at its simplest level.
The bond market is where Isuppose, bigger and sometimes
more sophisticated organizationsgo to raise funds.
So you know, individual smallcompanies will go to their bank
for a loan.
Governments and largercorporates might tend towards
the bond market.
(28:49):
So they will issue a bond whichwill have a maturity date, just
like a loan, so say five years.
There'll be an interest rate onthat bond, generally fixed and
that's known as the coupon.
So they might decide they willgo out and issue funds for five
years at 5%.
They can also issue at afloating rate.
In Europe that floating rate iscalled URIBER and those type of
(29:13):
bonds are called floating ratenotes or FORNs.
But generally it's the issueinto the bond market at fixed
rates.
Rick (29:20):
Okay, so any government would normally issue a fixed
rate that they can't stand awayfrom floating rate bonds.
David Tilson (29:27):
The Japanese banks might be more 70-30.
Rick (29:30):
So the government has two ways of raising money right they
levy taxes on all of us andthey collect the money and spend
it.
And then, if they don't haveenough tax income coming in to
pay for everything, they go outand they borrow the money from
someone else who is assumedlywilling to lend it.
Right now everyone is talkingabout the surplus, that there's
a budget surplus, so what doesthis mean for government debt?
(29:53):
Like, if right now we're takingin more money in taxes than
we're spending, then presumablywe don't need really to borrow
any money, but we're stillborrowing money.
So what's going?
David Tilson (30:07):
on.
Yeah, I mean, it's a reallygood question because, as you
say, at face value it might makesense, but there are probably a
few things at play.
Last year was an 8 billionsurplus, in 2022.
This year was going to bepotentially around 10 billion.
And the NTMA, who effectivelymanaged the government's debt.
(30:27):
So the National TritoryManagement Agency, colloquially
known as NTMA, go out and managethe debt on behalf of the
government.
They have 25 billionapproximately in cash as well on
the book.
So, again, why are we going outand issuing it?
Rick (30:45):
So there's 25 billion in cash and there's projected to be
another 10 billion in excessreceipts.
So that would mean at the endof 23 we have 35 billion, and
yet we're still going to borrowmoney.
David Tilson (30:59):
Yep, I'll tell you why.
Okay, so firstly, there's a lotof debt has been accumulated
over the years.
So the national debt in Irelandis €233 billion.
So we have a lot of debt on ourbooks and that debt will mature
and will have to be paid offand will probably be rolled over
(31:20):
.
In other words, the governmentwill, as a bond matures, they'll
go out and issue an issue again.
So there's a stock of debtthere that actually needs to be
looked after.
The second thing I'd say is that, with these windfall corporate
tax coming in, the governmenthas basically said look, we're
going to put some of these awayinto a rainy day fund.
(31:40):
So they've already set up theNational Reserve Fund, or the
NRF, and there should be €8billion in that by the end of
next year.
And separately, they're alsotalking about setting up another
fund more longer term.
A lot of countries do this.
They're called sovereign wealthfunds, so the Saudis might do
(32:01):
it with their oil resources.
They recognize that things aregreat at the moment, but in 40
or 50 years time, potentially,things from a.
Saudi perspective may not be asrosy, so they squirrel money
away there.
So again, a lot of the moneybeing raised is actually
potentially being put away forthe long term as well.
(32:23):
So that's another reason.
And then, finally, the NTMAwant to keep liquidity in the
Irish government bond market, sorather than stepping away from
it completely, it will continueto fund itself there, albeit not
in huge size, to keep thenatural functioning of that
market going.
Rick (32:43):
Okay.
So because if they stop issuingnew bonds, then people won't be
interested, and then when itcomes time to issue the bonds,
there might be nobody there.
David Tilson (32:51):
That's exactly it, and you may pay a higher yield
at that stage.
Rick (32:54):
So the €233 billion?
Do governments typically paythat down?
Do they say, well, that's howmuch money we owe, so as long as
we keep growing our economy, wedon't really ever need to pay
that off?
David Tilson (33:10):
Technically, that is what has tended to happen, so
as economies grow, the debtgenerally grows with it.
That's why the likes of marketsand rating agencies tend to
look at the debt to GDP ratio.
So, in other words, how muchdebt do you have relative to how
fast you're growing or how bigyour economy is?
And that's a measure that a lotof people look at.
Rick (33:35):
Debt to GDP.
We hear a lot in the mediaabout how our GDP figures are
kind of bullshit.
Right, Like, the GDP here isdramatically inflated by the
number of foreign companies thatare in Ireland, and that's how
GDP is calculated.
So during the crash and allthat, when Ireland needed to
(33:57):
bail out, the debt to GDP ratiowas really really high, but now
it's really really lowtechnically when you look it up.
Right, that's right.
It's kind of interesting howthat happened.
Right, Because the debt went up.
I mean, we don't owe less moneynow than we did in 2011 during
the bailout, right, we actuallyowe more money.
(34:19):
And yet the debt to GDP ratiohas fallen from 100% to
something percent to 40%, simplybecause we revised up the GDP
figures.
David Tilson (34:27):
So the NTMA themselves will publish figures
based on we're not trying to gettoo technical but GNI star,
which is basically grossnational income modified, which
they feel is a more accuratereflection of the domestic
economy.
So debt to GDP is near 40,whereas debt to GNI star is
(34:48):
around 90%.
Rick (34:50):
That's a more accurate number, okay, and is it the case
that when it gets to 100%, Imean it's kind of a crude
measurement, but when it gets to100% that you're like you know
countries who are going tostruggle above that?
Or?
But there are examples, like inEurope, of I think Greece is
the standout one.
David Tilson (35:10):
Greece continues to stand out, despite the
efforts made in 2014 and 2015.
And so they did get their debtpiled down.
But Greece's debt to GDP is170%, so it's still at a very,
very high level.
Very historically, it's been ina similar boat.
Rick (35:30):
It's 145% at the moment, so very, very high levels and
145% of what a much largereconomy too.
So in the overall size of theit's a WIO 230 billion.
I know it's kind of waving away3 billion euros there.
Let's just call it 230 billion.
How big is in Europe?
How much debt is there forgovernments?
David Tilson (35:52):
So in the eurozone , the size of the eurozone bond
market is 12.25 trillion.
Rick (35:58):
Okay, so that's 12,000 billion, 12,000, 12.25 billion,
and most of that is, I guess,the big economies.
David Tilson (36:09):
The big four will make up the bulk of that.
France would be the biggest.
Rick (36:13):
Is France a bigger economy than Germany, then in GDP?
David Tilson (36:17):
No, france is a smaller economy.
Rick (36:18):
Okay, so it has a higher debt to GDP it has a higher debt
to GDP.
Yes, and even Germany's debt toGDP ratios is high right, it's
90.
David Tilson (36:29):
So the eurozone average is around 90%.
Okay, and yeah, germany is moreor less kind of sitting on that
.
Rick (36:37):
So is there a lot of capacity then for those
countries to borrow more money?
I mean, we heard a lot duringCOVID.
There was these euro kind ofcollective bonds.
Right, they were issued to helpall the different countries do
economic stimulus.
If there was a huge call formore money, is there a capacity
out there for governments toborrow a lot more?
David Tilson (36:58):
Depends on defying a lot.
But yes, there is.
I mean, the bond markets arevery, very liquid.
Governments have been issuingfor a long time in the bond
markets.
They're well known.
The history of default is verylow.
So, yes, what the market willdo, whoever it is, it will
require a higher price for that.
(37:20):
So the more you issue.
So there's a reason why Italiandebt yields higher than German
debt, for instance, and it'sbecause their debt to GDP ratio
is 144%, whereas Germany's is at90%.
Rick (37:35):
So the risk of lending to Italy is higher, perceived to be
higher, in the sense that theyhave less capacity to pay the
bill for that.
That's exactly it, germany,okay.
So then, just turning back toIreland for a minute, the 230
billion.
Who do we owe that to?
David Tilson (37:51):
85% is owed to foreign investors and 15% is
held domestically.
Rick (37:59):
You see, the double standard here.
Right, we're happy to borrowmoney from foreigners, Like
we're happy to have them comehere and open factories and make
Botox and computer chips, butwhen they come build housing we
lose our shit.
And that domestic, like thatcould be people who own prize
bonds.
David Tilson (38:16):
I'm sure that's very small 25 billion in state
savings, that's 10% of the pot,and then some of the domestic
banks, as I know from myprevious role, will also hold
Irish sovereign bonds.
Rick (38:28):
And that's part of their capital structure.
Like that, they have Part oftheir liquidity structure yes,
the ECB.
David Tilson (38:33):
So the ECB you may have heard of the QE or
quantitative easing programs.
So when the ECB cut interestrates down to negative numbers,
it went down to minus a half apercent and it was felt that
that was probably the bottom.
They couldn't go any lower.
So what the ECB did andactually the US Federal Reserve
(38:55):
and the Bank of England didsimilarly at different times was
actually go out into the marketand buy bonds to try and drive
down the price of debt.
A few other technical reasonswhy they did it, but effectively
the ECB has ended up owning 40%of the eurozone bond market, so
12K to 5 trillion.
(39:16):
40% of that is owned by theEuropean central bank and the
numbers in Ireland are similar.
Rick (39:23):
European central bank has financed 40% of the debt
issuance in the eurozone withmoney that they invented.
We just change gears for alittle bit.
That's all very helpful to know.
So we owe 230 billion.
The government's going to tryand raise between 7 and 10
billion something like that thisyear, and that's for a lot of
(39:44):
reasons.
One, to keep the market open.
Two, because prudence keepraise the debt.
You have the cash.
You don't want to be stuck forthe money.
In simple terms, that makes alot of sense In the UK.
Liz's trust became primeminister.
We all remember this.
Right, she went a bit mad withher chancellor and they started
pledging to cut taxes, raisespending.
(40:06):
And then we all know whathappened.
Right, there was a lettuce.
The lettuce won and Liz wasgone.
I think it was 50 days or itwas something shockingly short.
I think the only other personto last less time actually got
either got assassinated or diedin office of a heart attack soon
after being elected.
So it really was prettyterrible.
(40:27):
But it was stunning to watch tosee how quickly the whole world
turned against the UK.
The UK is a very big economy.
They have debt the same wayeveryone else has debt, but it
seemed to be like in a couple ofdays, people were starting to
talk about the solvency of theUK From 10 years ago, it not
(40:51):
needing any bailout.
It in fact lend money toIreland directly, didn't it?
As part of the bailout, and toGreece and in Europe generally
before they decided to leave.
How does something like thathappen?
David Tilson (41:06):
The bottom line is the bond market actually has a
lot of power and it can beextremely unforgiving.
And in this case it looked atthe plans.
It said we think this isabsolutely crazy.
And it adjusted higher the costof UK debt.
So interest rates roseaggressively over two or three
(41:28):
days and they immediately had toroll back.
The plan was ripped up withintwo days.
She was gone, as you said, veryquickly the lettuce outlasted
her and, yeah, it was akin tostarting leaving the EOM back in
1992.
The economy was like the wholeedifices of the UK were being
(41:54):
literally falling down untilthey did the EOTR.
Rick (41:57):
We do a thought experiment here for a minute.
If she just said, nah, I'msticking to it, what do you
think would have happened?
Do you think that after thatwould have got progressively
worse and worse and worse?
Interest rates would havepotentially gone very, very high
?
The Bank of England didintervene.
Actually they did intervene?
David Tilson (42:16):
yes, because they were very worried about the
solvency of the pension industry.
Rick (42:20):
Right, because all the pension funds held the
government debt and the value ofthe bonds is falling because
the interest rate was rising.
David Tilson (42:27):
Yeah.
So suddenly they had theirliabilities on one side, assets
on the other side, the price ofthose assets as yields go up,
prices fall.
The prices of those assetsabsolutely collapsed.
So you had potentially solvencyquestion marks over the whole
UK pension industry.
Rick (42:42):
So they just were not going to take it Within a couple
of days.
David Tilson (42:44):
Exactly.
They just were not going totake a chance with that.
Rick (42:46):
So the bond market can react very quickly to events on
the ground.
So Ireland that's not really apossibility here at the moment
because of how good everyone'sflush with cash, the government
have a lot of cash on hand andthe economy is growing.
There's a lot of love forIreland and the bond market.
I have to stand right now butthere wasn't that long ago when
(43:11):
that wasn't the case If the 10billion of surplus went away
tomorrow.
So now the taxes are justcovering expenditure and there's
no surplus.
And we put some money into thesovereign wealth fund.
That's good, but by its verynature that's meant to be there.
That's not meant to be spent.
Right, it's meant to be thereforever.
So you can't really say well,we have put money into the piggy
(43:33):
bank and then spend it becauseit's not in the piggy bank
anymore.
So the surplus goes away, right, because the economy cools off
a little bit.
I wouldn't take much for thatsurplus to disappear right.
David Tilson (43:42):
Well, three American firms decide that
they're moving theirheadquarters out of Ireland.
That surplus has goneimmediately.
Gone immediately right.
Rick (43:48):
So the surplus has gone and the government
simultaneously decides it needsto undertake a huge spending
program, and I mean not COVID,much bigger than COVID.
The economy is softening, forexample.
Still we keep on this podcast.
We're talking a lot abouthousing, a lot of money to be
spent on housing.
How fragile is the relationshipbetween governments and markets,
(44:13):
like what happened in 2011,?
We obviously had unsustainablespending and we saw what
happened to LISTRUS.
They had a plan for what peoplejudged to be unsustainable
spending and lasted two or threedays the idea that we could
just decide here, or that wewould get so comfortable here
that we would decide we couldspend whatever we wanted on
(44:36):
infrastructure, like we heardthe plan they're going to spend
50 billion euros on rail overthe next 20 years, the amount of
50,000 houses to be built here,and the government are meant to
be funding a large proportionof that in many different ways.
All these things incrementallyadd up together.
Is it possible that we could bein a situation where the bond
(44:58):
market goes you can do this, butyou're not doing that?
David Tilson (45:01):
You can never say never.
I think one of the things andthis is maybe the difference
with LISTRUS piece is that ifthe market perceives that you're
borrowing to improve theultimately the productive
economy productiveness of theeconomy and that longer term,
actually, the market will bequite happy to fund you if it
(45:23):
felt that that was the outcome.
What happened in the UK wasvery different.
It was like oh yeah, we'regoing to borrow a massive amount
and spend it immediately.
Guess what?
The economy is going to begrowing strongly in about three
or four years time and that'sall going to come back in again
and the market went well.
That's a fairytale.
We don't believe that story.
The circumstances matter is thepoint that I'm making.
(45:43):
Can things change quickly?
Yes, things can change quickly,but we are in a very, very
strong position now.
We may have looked in a very,very strong position prior to
the last crisis.
In reality, that wasn't thecase and that became apparent
quite quickly.
But in this time around, evenallowing for the over reliance
(46:04):
maybe on corporate tax, theeconomy is structurally in a
much sounder space.
Rick (46:12):
Spending on capital investments is, broadly speaking
, welcomed.
David Tilson (46:17):
It's looked upon fondly, yes.
Rick (46:19):
Spending on current tax cuts and things like that,
because that's just money goingastray.
In 2023, the government plannedto spend €90.5 billion.
That's on everything.
Roughly €3 billion of it wasplanned for building new housing
, so 3.5%.
For the state to provide all ofthe funding needed to build
50,000 units a year, it wouldneed to multiply its spending by
(46:42):
seven the surplus Dave Tilsonis talking about.
Well, that's at the current taxtake.
Don't forget that just 10companies, all of which are
foreign, paid 60% of corporationtax, or €13 billion in 2022.
If even one of them left or ifthe profit started to decline,
then we'd very quickly be in adifficult situation.
(47:02):
The tax returns in Augustdeclined.
Hopefully that's a once-off andnot a trend.
Most of us can agree that theeconomy is in great shape right
now and there should be somecredit given to government for
being careful with the budget.
We saw what happened the lasttime.
We partied like there was notomorrow.
As Colin McCarthy said inepisode 106, it turned out there
was no tomorrow.
(47:23):
To avoid Leo versus the lettuce, the government can't spend €20
billion a year to build all ofthe housing.
The private sector is needed.
Institutional investors areneeded.
They are the social weavers.
Someone who tells you differentis simply living in Cloud
(47:44):
Cuckoo Land.
Picture this a small, unassuming bird flitting from
treetop to treetop, carefullyobserving its surroundings.
It spots a nest in a tree below, brimming with eggs.
The tiny bird stops and waitspatiently, hidden from view,
until the occupant of the nestdeparts, leaving the eggs
unsupervised.
(00:23):
Sensing an opportunity, sheswoops down at incredible speed,
in a behavior honed overmillions of years.
She gets to work, using anenormous amount of energy, to
remove one of the eggs from thenest and then, with impeccable
timing, replaces it by layingone of her own.
With a flutter of her wings,she is gone, never to return.
(00:45):
The whole operation fromlanding to departure, completed
in just ten seconds.
My name is Rick Larkin and youare listening to the Build my
podcast about property andeverything that goes with it.
Today's episode is definitelyfor the birds.
For this episode, I did a lotof reading about cuckoos.
(01:22):
I even went out to try torecord some in the wild, but as
it turns out, they are actuallyexceptionally hard to find.
Or maybe I'm just not a skilledbirder, but fear not, I am low
at the disappoint my loyallisteners, and if you tuned in
today for some cuckoo action,well then, cuckoo action is what
you are going to get, accordingto popular lore, there are
(01:45):
large murmurations of cuckoosall around us.
Perhaps one is even speaking toyou right now.
I'm my cuckoo right, becausethis is Sean Keyes.
He's a finance correspondentfor the currencyie, which if you
haven't visited you're missingout.
It's the only real businessnews site in Ireland.
Sean knows money and propertyand cuckoos First of all.
(02:10):
Do you know where it came from?
No, okay, because I've been toldthat he was a journalist in one
of the two national newspapersthat came up with this.
I've actually gone and lookedand looked and I can't seem to
isolate the first time that itwas written, but it's become a
catch-all term to reallydemonise any foreign investor
(02:33):
who has invested in producinghousing in Ireland.
That's the bit that rankles alot with people, because in the
construction industry we knowthat a huge majority of the
construction that happened thelast five years just wouldn't
have happened if it wasn't forthese people.
The fact that they've beenregularly just put upon in some
(02:55):
elements of the press has had areal impact on them.
What are your thoughts on that?
Do you think the press have anycase to answer it?
Do you think that we're justwingy builders and that really
we should get over ourselves?
Sean Keyes (03:08):
I'm not sure how much of it is specifically Irish
and how much of it is justinating people to be skeptical
of institutional investment.
Let's say In the US peoplewould be skeptical of
institutional investment too.
It's much bigger over there.
But there's an extra layer inIreland that it's foreign.
(03:30):
It's like an invading, aninvasive species sort of a thing
.
It's definitely very potent inIreland.
We really need it because we'vegiven up on the ability to fund
ourselves, fund our ownproperty investment.
The old model of Irish peoplefunding Irish property
(03:50):
development through the bankingsystem is gone.
Rick (03:55):
Are the press reacting to the general atmosphere Like you
say?
That's present in a lot ofcountries, it's present in
America, it's present everywherethat people are skeptical of
institutional investment andtherefore that skepticism is
amplified and therefore policymakers are sometimes quite
reactive to that perception aswell, because they're looking to
(04:15):
get elected and they're electedby the people.
Still, people understand thisand they're like no.
Or is it that people don'treally understand it and they
get a snippet of something?
Or they get the dogma ofcertain parts of society who
maybe wouldn't like to see muchof a private sector involvement
in housing or think the idea ofprofit on housing and stuff like
(04:37):
that is horrible.
Where do you think it generatesfrom?
Sean Keyes (04:42):
I tend to in this question more generally, beyond
just housing, it's more bottomup than top down.
I think that side of it isunderrated.
I think there is a tent.
People say look at Fox News inthe States.
That gets blamed for this iswhy certain some Americans are
(05:04):
crazy.
It's because they're gettingthis fed into their TVs every
day and Fox News are the badguys who are causing this.
I think there's an urge to finda bad guy who's responsible for
this messed up situation thatwe find ourselves in.
I think much more like I'vebeen in the media industry the
media is responding.
It's a very, very competitiveindustry and it's responding to
(05:28):
what people want in the long run.
Rick (05:32):
I don't disagree with that at all.
If it bleeds, it bleeds, right,we've all heard that phrase and
it's absolutely true.
They have to sell papers.
But then there's anotherelement of it too, because Fox
News.
You're absolutely right, foxNews don't control everything.
But if they didn't have anyinfluence, you wouldn't see all
the politicians catering theirmessage to line up with it.
(05:53):
The phrase cuckoo funds right,I look at it.
The word on the street didn'tcome up with that.
Actually, the first person toGoogle it would realize that
it's not even a very goodanalogy, because cookies don't
steal mess.
People think that cookies stealmess.
They don't steal mess.
Sean Keyes (06:06):
That's your real problem with this.
It's ornithologicallyinaccurate.
It's just by the by you areenhancing.
Rick (06:12):
Did you ever wonder why they called it a cuckoo clock?
Apparently as the call is sodistinctive, a two-tone call.
It's unusual in the animalkingdom and it was a type of
innovation in the clock worldback in the 18th century by
using a bellows and a whistle.
It was a technological leap tohave a clock make that sound
instead of just a bell clanging.
That might be usefulinformation for a pub quiz
sometime.
(06:33):
Next scene that this podcast isjust going to be about birds.
It's not going to do anythingabout building, but just stuff
like that.
So somebody came up with thatbecause they're like cookie fund
, that sounds great and everyonethinks the cookie steal mess.
So they're stealing houses Tosay that it's totally bottom up.
I get it, but things like that.
To me it's distilling it downinto an inaccurate argument that
(06:56):
can be very easily repeated andspread, which just amplifies
wrong information, which thenreaches policymakers who do
things like pull the bill torent planning regulations just
because of outrage, not becauseof any actual objective fact.
Get rid of co-living planningregulations again because of
(07:16):
outrage.
Sean Keyes (07:17):
All of these things are driven by this, I think
there's a thing with housingwhere the worst if you've got a
problem with your housing system, it'll probably it has a
tendency to get worse and worseand worse.
I think it's because there's aquirk in human nature where we
(07:38):
just something about housingbreaks our brains.
There's a piece that actuallyhad that title housing is
breaking America's brains, orsomething like that, and then it
was referring to this researchthat was out a year or two ago
about attitudes to housingsupply and what that did to the
housing market.
And the researchers askedpeople, asked Americans if you
came up with a lot of extra oilor corn or cars, what thing that
(08:02):
would do the price.
And 80 or 90% of people saidwell, more cars would make the
price of cars go down.
But when you put the samequestion to them about housing,
it was way more evenly divided,and about 30 to 40% of Americans
believe that if a lot of newhousing was built in their
region, then rents and homeprices would rise.
(08:23):
So there's just something inAsian people that housing just
doesn't.
It's not intuitive to them, andso the reason I think it gets
worse is because when the systemstarts to malfunction, you get
this kind of confusion, which isresulting from people's
misunderstanding of housingeconomics.
So if you have a system that'sworking way quietly in the
(08:44):
background and there's no needfor debate and there's then less
debate, then the fewer badideas are getting tossed around
and implemented and yeah, sothat's.
I think it's something likethat, and I think it's very
difficult to get to kind of makeany progress on it, because
people are intuitively quitehostile to new housing.
Rick (09:07):
But you the stuff that you've written in about property
and, in fairness, the currencygenerally haven't gone down this
road of there's a bad guy or abogeyman, and here it is and you
have attempted to explain allof these things because,
contrast to right, with anotheremergency when we had the
(09:30):
pandemic and when the thepandemic came up first, right,
none of us have any clue.
I mean, it was remarkable,actually within two weeks, how
many experts there were aboutinfectious diseases that just
crawl out of the world, and thathappens every time.
But what was interesting aboutthe pandemic was a lot of that
(09:50):
stuff of the armchair guy or theperson who just decided they're
an expert.
That got pushed aside likerelatively quickly, and the
press focused on a couple ofheadline people and actually
took huge stock in what thegovernment were saying, which
was interesting, because that'snot normally the approach that
the press takes.
They have a healthy skepticismwhat the government say, but the
(10:12):
housing crisis has been goingon for much longer, but there's
almost complete skepticism aboutwhat the government say.
There's complete skepticismabout what industries say and
there there doesn't, and maybeyou're right, it's breaking
people's brains, but theredoesn't appear to be any attempt
to be like, okay, no, here's anexample of where this was dealt
(10:32):
with.
We should be doing these things.
Here's an explanation as to whyit's not as simple as clicking
your fingers and having 50,000houses for free.
This is because of x, y and z,but that's not.
That's not what's happening,right?
You guys have made a fewattempts to explain things, but
generally, that's not what'shappening no it's.
Here's a quick fix, here's aquick fix, here's some magic
(10:53):
beans.
Look over here, dazzle, dazzle.
There'll be loads of houses.
If only we can be elected, orif only we put this person in
charge.
Or only if we change the laws.
Or, as some people like to say,a lot about REITs or why don't
we make the REITs pay tax anduse that money to build housing?
You say REITs, the shareholderspay tax.
They don't pay the tax because.
But no one even wants toexplain, like even a little bit.
(11:15):
Are people that unreceptivelike the ordinary going street?
Are your?
Your readers are obviouslygoing to be more receptive, but
do you think that peoplegenerally are that hostile to it
, like the American thinkingmore houses mean more expensive
houses?
Sean Keyes (11:28):
yeah, we do, we think so.
That's that's what makes it sohard to fix.
You've got to start from asituation of incredible
skepticism and you know some ofit is, some of it is is sort of
just some misapprehensions about, about housing, economics and
stuff like that.
And that's fine, people aren'ttrained economists.
And then other parts of it are,elements of it are.
(11:51):
You know, the planning systemobviously plays a big role and
you know people do havelegitimate reasons not to want
housing near them.
Yeah, you know, it's justself-interested person.
If someone's going to build anapartment beside my house,
that's not good news.
You know it's parking is goingto be harder, construction noise
(12:13):
, it's not.
You know it'll be busier, allthe things.
Like you know, most peoplewould just rather not have that.
Yeah, that's absolutely true.
Rick (12:20):
Yeah.
Sean Keyes (12:22):
It's not in your self-interest.
Rick (12:23):
But no, we don't live in a country of self.
Sean Keyes (12:27):
Be realistic about where we're starting from, that.
People are quite hostile todevelopment for a mixture of
reasons, and any solution shouldjust look at those facts in the
face and come up with ways tokind of help us to create
win-wins, you know, create ascenario where housing doesn't
(12:49):
get rammed down the throat ofpeople who don't want it in the
interest of the greater good.
Not just because that's, likeyou know, lousy on the guy, but
it's just it's not likely towork.
It's not likely we're going topass laws.
No, politicians aren't going tovote for laws that anger all
their constituents.
Rick (13:08):
On this we disagree, saying we shouldn't ram housing
down the throats of people whodon't want it.
In my mind, it's like asking achild to eat their vegetables,
and when they inevitably refuse,we simply throw our hands up
and say we could do no more.
In the full interview, Seantalked about something called
street plans, which you're goingto hear about in a later
episode.
I do think he's right.
The politicians won't want tovote for laws that anger their
(13:30):
constituents.
Just look at the recent attemptat reform of the Planning and
Development Act, which more andmore looks like lipstick on a
pig, but it's still calledreform.
I guess Bismarck was right Ifyou like laws and sausages, then
you shouldn't watch either ofthem getting made.
But let's back up for a second.
Does any of this even matter?
You've heard me complainingabout the medias treatment of
(13:50):
investors, but do the investorscare?
Pat Farrell (13:54):
I started off my life in the public health
service and in fact I worked oncapital projects.
So I was involved in theNorthwestern Health Board and a
lot of their capital programs atthe time.
And then I
Rick (14:05):
That's Pat Farrell.
Pat is the head of Irishinstitutional property or IAP.
They're like a representativebody for large property
investors.
Pat's been around, he'sexperienced, so what does he
think about this?
Pat Farrell (14:16):
You rightly reference the fact that there's
been a lot of misrepresentation.
I suppose the background to allthis is that we're in a
political war at the moment.
The next election is inprospect, probably a year or two
away.
It will pivot on who believeswho can do the best job in terms
of housing.
So there's a big prize to befought for here.
And, of course, when a warbegins, the first casualty of
war is truth, and what has beensaid, for example, is that, say,
(14:41):
all of the apartmentdevelopments that were funded
and delivered by institutionfunds were somehow snatched from
would-be first-time buyers,which is not true.
The cost of developing andfunding these kind of
developments is beyond the reachof somebody who wants to
actually build them and sellthem to individual homeowners.
So all stock is good, be it forthe rental market or for our
(15:04):
home ownership.
So this is additionality andhas provided more stock for the
market.
So, beside all that, like allof the other, house builders are
also getting institutionalmoney to enable their
developments as well, which isproviding additionality into the
market.
So this is about institutionalinvestment, which is actually
providing meaningful additionalhousing supply at a time when we
(15:26):
all know the supply is the bigissue and therefore I think
that's the way I would look atit and I think that's the way it
needs to be viewed.
The other thing we need to standback and realize is, like the
whole country's economic modeland our success is built on
foreign direct investment,foreign capital.
But when you suddenly associateforeign capital with housing
the toxic political issue of thedecade it's suddenly bad.
(15:48):
And I've only recentlydiscovered, with the row that
started over the Gresham houseand the forestry deal with
Quilchia, there's only one thingmore pejorative in Ireland than
a foreign fund, and that's aBritish fund.
Yeah, that's absolutely correct.
So I mean there's a lot ofmisrepresentation, there's a lot
of misuse of language, but it'sall to do with a political war
(16:09):
that's effectively on and whichwon't end, and even won't end
until the next election, becausethen we'll begin a whole new
cycle again and that's the otherpoint of this right that two
years from now, three years fromnow, four years from now, this
problem is not solved rightunder any different fork in the
road.
Rick (16:29):
I mean it doesn't seem like in the next three or four
years it's possible to buildenough residential property in
the next three or four years tocome anywhere close solving this
problem 100%.
Pat Farrell (16:38):
I mean, if you think about it, in 1977, we were
building seven or eight housesper thousand of population.
Today we're building four.
France and Belgium are buildingabout seven.
So we're way behind theballpark.
Rick (16:47):
And our population was a couple of million lower,
absolutely.
Pat Farrell (16:51):
And that's put me on to it.
You've prompted another issue,which is that, if you think
about the whole collapse of thehousing market post the crisis,
for a whole decade we had no newhousing at all built in the
country and over that sameperiod we had a 30% increase in
the population, so we createdthe so-called perfect storm in
this country.
We have a massive deficit tomake up.
You mentioned the election.
(17:11):
Regardless of who's in powerafter the next election, we're
still going to have the samefundamental issues we're not
building enough houses and we'regoing to need a huge amount of
capital in order for to buildthose houses.
And for sure, the state has arole to play.
And the state has a bigger roleto play and is actually most
recently starting to play abigger role.
And you can hear in theheadlines and some of the
(17:32):
announcements pre-budget thatthere's obviously going to be
more capital, probably suppliedby government.
But, that said, no government,regardless of whatever political
view, is going to make anymeaningful headway on solving
the housing crisis unless theycontinue to facilitate a
meaningful role for the privatemarket and for institutional
capital, because it's beyond thecapacity of the state, even
(17:52):
with the current burgeoning taxreceipts to be able to allocate
enough resources to deal withthis comprehensively.
The members I represent haveinvested plus to 20 billion and
it's across hospitality,commercial logistics, retail and
particularly housing, and ithas been a huge enabler of the
Irish economic recovery and ithas also been a huge contributor
(18:13):
to additionality in terms ofhousing units and this country
new housing units.
Rick (18:17):
So institutional property.
Just for people who arelistening.
You maybe don't work inindustry and I want to
understand.
You said it there.
It's pension funds.
Pension funds typically willcome along.
They will invest in real estatein order to get a stream of
cash flow.
So when normally a pension fundwould buy government bonds,
they say we'll lend thegovernment money, the government
(18:39):
agree to pay them interestevery month or every quarter and
they use that difference tofund their obligations to their
pensioners.
When you buy property, that'ssimilar.
So these institutionalinvestors are investing in
property for the cash flow fromit rather than speculating in it
.
It's not the same as adeveloper.
So that's really, it's fair tosay, a good description of
(19:01):
institutional.
Pat Farrell (19:02):
Yeah but I suppose it does go beyond that, because
you also have institutionalinvestment money backing
non-bank lenders who areproviding debt and equity
funding to developers, andthey're a feature of the market
as well, and that's obviouslyhigher risk capital and it does
carry a higher coupon, higherthan the one you just described.
It's not just in thatparticular area.
You have the institutionalinvestors acquiring and owning
(19:24):
themselves, but then you alsohave them providing finance
directly to developers Because,as you know, now in this market
post the crash again, anydeveloper in this country,
unless they have own funds orown equity, they're going to
require an equity slice toembark on any kind of
residential development, forexample.
And if they don't have thatfunding themselves and their own
resources, they're going tohave to find a partner and
(19:46):
inevitably, in a lot of casesthat will be a non-bank lender
who is backed by some form ofinstitutional capital.
Rick (19:54):
All right, can you continue to indulge my amateur
ornithology for a second?
What institutional investorsare doing is much more like the
social weaver.
You may not have heard of thisbird.
They mostly live in SouthernAfrica.
The social weaver is unique inthat it builds compound nests
cooperatively.
They come together and theybuild enormous nests capable of
holding as many as a hundredpairs of birds.
(20:16):
It's a lot like an apartmentbuilding.
It even has multiple entrances.
You should look up some of thepictures of the nests on Google.
They're amazing.
Funny thing, though, about thesocial weaver they also migrate.
Pat Farrell (20:28):
Well, you've brought me onto a very
interesting point, becausethat's the other thing is that
all global capital is highlymobile and they will only invest
in markets where they getstability and policy certainty.
And if you just think aboutthat issue alone, we had the
implementation of RPZ in 2016.
We had a cap in a 4%, followedby a link then to inflation,
(20:49):
then followed by a recap.
We had about three, four policyleft field swings in a boat
less than a few years, and thatis just so damaging to investor
confidence.
Rick (21:01):
And it's damaging to renters too, because there is
this thing out there again, theschizophrenia where it's seen as
, oh well, screw the developersand the landlords, we're not
helping them.
You say, okay, sure, if youwant to take that view, that's
fine.
But the reality is thosepolicies don't hurt us as much
as they hurt all the people whoare not in a rent-controlled
(21:23):
apartment.
Because when you crimp supply,okay, the guy who's in the
rent-controlled apartment, hisrent doesn't go up by more than
2%, good for him.
But the guy that doesn't havean apartment, right, the guy
who's 20 and is coming out ofcollege, or is 18 and is going
to college for the first timeand is renting for the first
time, he's now going into amarket where supply has been
(21:44):
crimped, rents have been drivenartificially higher because they
have risen dramatically in thelast five or six years.
That wouldn't have happened ifyou had the supply.
And I was to give the example ofFinland.
I don't know if you interactwith your colleagues in Finland.
Finland is almost unique asbeing a wealthy country in
Europe that does not have anyform of rent control, and rents
(22:07):
are falling in Finland andeverywhere else in Europe
they're rising, but Finland'sthe only place where they're
falling.
And why is that?
Because they over supplied themarket.
Now, what's worse for thedeveloper An over supplied
market or an under suppliedmarket?
It's obviously an undersupplied one because you can
have higher prices.
What's better for the renter?
The over supplied market?
(22:28):
They have nowhere in control.
They got the over suppliedmarket.
We put rank control in.
They put it in Scotland, theyput it in Germany, they put it
in Spain.
All of these places aresuffering terribly from this.
Pat Farrell (22:42):
And I mean we did a study with Ronan Lyons back in
2020, which demonstrated thisvery clearly, because he showed
that at any time in Dublin wherewe had an excess of 4,000 units
available for supply in Dublin,rinse fell and then when it
went below that figure, rinserose Absolutely undeniable fact.
And in fact, we did have aperiod in the 80s when you had
(23:04):
the section 23 where there was abig, big run of apartment
development in Dublin at thattime and there was an excess of
supply in the market and rinseactually stabilised and didn't
fell for a period at that time.
But then obviously we got backinto scenario again where after
that, where supply became scarceand obviously there's a
(23:25):
reaction to that and, as I said,the only answer to the current
high levels of rinse is to bringon more supply.
Rick (23:35):
Yeah, we touched on there a couple of minutes ago about
stability, policy stability andthings like that.
What's your member's view onIreland now in terms of
attractiveness, the politicalsituation Does that get
discussed at all?
Does the whole idea of thembeing called pejorative names in
the media affect their view onwhether or not they would come
(23:57):
and invest further sums here?
Pat Farrell (23:59):
Yeah, it's an interesting one.
I mean, if you actually thinkabout the last 12 months, the
terms we've talked about havebeen less and less in use in the
media.
So I think there's a slow butsteady understanding that
institutional funds have a roleto play, that they're long term
patient capital.
I remember when we launched2019, some of the media
commentary was that, oh well,these investors are just in and
out, in and out.
Well, guess what, like themembers that I represent have
(24:22):
been here for well over a decadenow.
The other thing is that we aregoing through a correction in
the real estate market.
I think the fact that we've thepresence of such a large
representation of institutionalinvestment in real estate is a
steady in influence on themarket and doesn't allow you to
mimic the kind of effects ofwhat we had when it was entirely
debt funded back in 2000.
(24:42):
So that's another positive butfor sure.
I think, if investors look inat our today, they still attract
by the fundamentals of Ireland,which are extraordinarily
strong, and then the fact thatwe such a strong economy.
But the kind of things that Ithink they find frustrating are
times are the slowness ofdecision making at times and the
issues with the planning systemas we know, that are well
(25:03):
chronicled and the kind ofconstant chopping and changing
with policy.
But look, that said, there havebeen a number of very good
initiatives by the government inrecent times Cree, cona,
project, tossi, the Starinitiative time will tell, but
they're only betting in.
But I think they've been gooddevelopments and the fact that
the government actually broughtout a comprehensive housing
policy, housing for all, whichfor the first time took a
(25:25):
holistic view.
I think slowly but surely it'sstarting to crank up and
starting to get momentum.
I think the big issue now isfor to accelerate that progress,
to invest more money from thepublic side and then to keep
encouraging the presence of theinstitutional investors and the
private market and have a muchmore effective collaboration
between the two, because therealways hasn't been the level of
(25:47):
collaboration that there shouldbe.
But I think if we can work onthat then we can start to up the
delivery both for rental andfor private ownership and slowly
but surely start to makeprogress.
But there's a huge amount oftime.
Rick (26:05):
But the point is that this development would only happen
because of the presence of thisinstitutional capital, because
it's not there domestically,right?
The domestic banks are veryrestricted on what they can lend
and then there isn't a hugestock of domestic investors.
Yeah, I know you've explainedit very well.
Pat Farrell (26:23):
And another lens to look at it too is say, for
example, if we take, say, thegovernment's own target at
33,000 homes per annum, theDepartment of Finance themselves
have estimated and it'sprobably out of date, this
estimate, because it was pre thecurrent hyperinflation we've
had in construction that it wasgoing to cost about 13 billion a
year to fund those 33,000.
33,000 houses.
(26:43):
So if you look at where doesthe money come from?
The government says it'sspending about 4 billion a year,
but there's probably about abillion of that is HAP, so
that's up X rather than CAPEX.
So we're talking maybe 3billion, maybe less than 3
billion capital supplied by thegovernment of the 13.
And then we have banks which, asyou rightly pointed out, are
absolutely limited in how muchthey will be allowed to lend due
(27:06):
to regulations, so that's aboutanother 1.2, 1.5 billion.
So now you have this big gap ofabout 6 or 7 billion, and the
only way that gap can be filledis by institution investors or
non-bank lenders, and they arethe people that are supplying
that balance.
And then, if we accept thehigher numbers which as are yet
unpublished but had beenreferenced from the housing
commission of 50,000 homes perannum.
(27:26):
Well, the numbers are jumpingnow maybe to 15 to 20 billion,
but the size of the gap between,say, banks and the government
and this big void that needs tobe filled, can only really come
from institutional capital.
So institutional capital isabsolutely critical if we're to
make headway on housing andindeed in all the other real
estate classes that arenecessary for a functioning
(27:47):
economy.
Rick (27:48):
For the love of God, did you hear that?
20 billion euros per year andthe government is going to spend
about 4.
And, in fairness, that's a lot.
Where on earth is the rest ofit going to come from?
These numbers are big.
Ireland is awash with cash atthe moment, but can we really
afford to spend that kind ofmoney every year?
For years, I asked someone inthe know.
David Tilson (28:09):
David Tilson from Canterford Gerald.
My title with Canterford Geraldis head of debt capital markets
.
I guess that's effectivelylooking at the bond market, the
interest rate market andeffectively advising companies
who may wish to raise debt.
Rick (28:24):
We hear about the bond market.
Can you tell me what the bondmarket is?
David Tilson (28:28):
Yeah, sure, I mean at its simplest level.
The bond market is where Isuppose, bigger and sometimes
more sophisticated organizationsgo to raise funds.
So you know, individual smallcompanies will go to their bank
for a loan.
Governments and largercorporates might tend towards
the bond market.
(28:49):
So they will issue a bond whichwill have a maturity date, just
like a loan, so say five years.
There'll be an interest rate onthat bond, generally fixed and
that's known as the coupon.
So they might decide they willgo out and issue funds for five
years at 5%.
They can also issue at afloating rate.
In Europe that floating rate iscalled URIBER and those type of
(29:13):
bonds are called floating ratenotes or FORNs.
But generally it's the issueinto the bond market at fixed
rates.
Rick (29:20):
Okay, so any government would normally issue a fixed
rate that they can't stand awayfrom floating rate bonds.
David Tilson (29:27):
The Japanese banks might be more 70-30.
Rick (29:30):
So the government has two ways of raising money right they
levy taxes on all of us andthey collect the money and spend
it.
And then, if they don't haveenough tax income coming in to
pay for everything, they go outand they borrow the money from
someone else who is assumedlywilling to lend it.
Right now everyone is talkingabout the surplus, that there's
a budget surplus, so what doesthis mean for government debt?
(29:53):
Like, if right now we're takingin more money in taxes than
we're spending, then presumablywe don't need really to borrow
any money, but we're stillborrowing money.
So what's going?
David Tilson (30:07):
on.
Yeah, I mean, it's a reallygood question because, as you
say, at face value it might makesense, but there are probably a
few things at play.
Last year was an 8 billionsurplus, in 2022.
This year was going to bepotentially around 10 billion.
And the NTMA, who effectivelymanaged the government's debt.
(30:27):
So the National TritoryManagement Agency, colloquially
known as NTMA, go out and managethe debt on behalf of the
government.
They have 25 billionapproximately in cash as well on
the book.
So, again, why are we going outand issuing it?
Rick (30:45):
So there's 25 billion in cash and there's projected to be
another 10 billion in excessreceipts.
So that would mean at the endof 23 we have 35 billion, and
yet we're still going to borrowmoney.
David Tilson (30:59):
Yep, I'll tell you why.
Okay, so firstly, there's a lotof debt has been accumulated
over the years.
So the national debt in Irelandis €233 billion.
So we have a lot of debt on ourbooks and that debt will mature
and will have to be paid offand will probably be rolled over
(31:20):
.
In other words, the governmentwill, as a bond matures, they'll
go out and issue an issue again.
So there's a stock of debtthere that actually needs to be
looked after.
The second thing I'd say is that, with these windfall corporate
tax coming in, the governmenthas basically said look, we're
going to put some of these awayinto a rainy day fund.
(31:40):
So they've already set up theNational Reserve Fund, or the
NRF, and there should be €8billion in that by the end of
next year.
And separately, they're alsotalking about setting up another
fund more longer term.
A lot of countries do this.
They're called sovereign wealthfunds, so the Saudis might do
(32:01):
it with their oil resources.
They recognize that things aregreat at the moment, but in 40
or 50 years time, potentially,things from a.
Saudi perspective may not be asrosy, so they squirrel money
away there.
So again, a lot of the moneybeing raised is actually
potentially being put away forthe long term as well.
(32:23):
So that's another reason.
And then, finally, the NTMAwant to keep liquidity in the
Irish government bond market, sorather than stepping away from
it completely, it will continueto fund itself there, albeit not
in huge size, to keep thenatural functioning of that
market going.
Rick (32:43):
Okay.
So because if they stop issuingnew bonds, then people won't be
interested, and then when itcomes time to issue the bonds,
there might be nobody there.
David Tilson (32:51):
That's exactly it, and you may pay a higher yield
at that stage.
Rick (32:54):
So the €233 billion?
Do governments typically paythat down?
Do they say, well, that's howmuch money we owe, so as long as
we keep growing our economy, wedon't really ever need to pay
that off?
David Tilson (33:10):
Technically, that is what has tended to happen, so
as economies grow, the debtgenerally grows with it.
That's why the likes of marketsand rating agencies tend to
look at the debt to GDP ratio.
So, in other words, how muchdebt do you have relative to how
fast you're growing or how bigyour economy is?
And that's a measure that a lotof people look at.
Rick (33:35):
Debt to GDP.
We hear a lot in the mediaabout how our GDP figures are
kind of bullshit.
Right, Like, the GDP here isdramatically inflated by the
number of foreign companies thatare in Ireland, and that's how
GDP is calculated.
So during the crash and allthat, when Ireland needed to
(33:57):
bail out, the debt to GDP ratiowas really really high, but now
it's really really lowtechnically when you look it up.
Right, that's right.
It's kind of interesting howthat happened.
Right, Because the debt went up.
I mean, we don't owe less moneynow than we did in 2011 during
the bailout, right, we actuallyowe more money.
(34:19):
And yet the debt to GDP ratiohas fallen from 100% to
something percent to 40%, simplybecause we revised up the GDP
figures.
David Tilson (34:27):
So the NTMA themselves will publish figures
based on we're not trying to gettoo technical but GNI star,
which is basically grossnational income modified, which
they feel is a more accuratereflection of the domestic
economy.
So debt to GDP is near 40,whereas debt to GNI star is
(34:48):
around 90%.
Rick (34:50):
That's a more accurate number, okay, and is it the case
that when it gets to 100%, Imean it's kind of a crude
measurement, but when it gets to100% that you're like you know
countries who are going tostruggle above that?
Or?
But there are examples, like inEurope, of I think Greece is
the standout one.
David Tilson (35:10):
Greece continues to stand out, despite the
efforts made in 2014 and 2015.
And so they did get their debtpiled down.
But Greece's debt to GDP is170%, so it's still at a very,
very high level.
Very historically, it's been ina similar boat.
Rick (35:30):
It's 145% at the moment, so very, very high levels and
145% of what a much largereconomy too.
So in the overall size of theit's a WIO 230 billion.
I know it's kind of waving away3 billion euros there.
Let's just call it 230 billion.
How big is in Europe?
How much debt is there forgovernments?
David Tilson (35:52):
So in the eurozone , the size of the eurozone bond
market is 12.25 trillion.
Rick (35:58):
Okay, so that's 12,000 billion, 12,000, 12.25 billion,
and most of that is, I guess,the big economies.
David Tilson (36:09):
The big four will make up the bulk of that.
France would be the biggest.
Rick (36:13):
Is France a bigger economy than Germany, then in GDP?
David Tilson (36:17):
No, france is a smaller economy.
Rick (36:18):
Okay, so it has a higher debt to GDP it has a higher debt
to GDP.
Yes, and even Germany's debt toGDP ratios is high right, it's
90.
David Tilson (36:29):
So the eurozone average is around 90%.
Okay, and yeah, germany is moreor less kind of sitting on that
.
Rick (36:37):
So is there a lot of capacity then for those
countries to borrow more money?
I mean, we heard a lot duringCOVID.
There was these euro kind ofcollective bonds.
Right, they were issued to helpall the different countries do
economic stimulus.
If there was a huge call formore money, is there a capacity
out there for governments toborrow a lot more?
David Tilson (36:58):
Depends on defying a lot.
But yes, there is.
I mean, the bond markets arevery, very liquid.
Governments have been issuingfor a long time in the bond
markets.
They're well known.
The history of default is verylow.
So, yes, what the market willdo, whoever it is, it will
require a higher price for that.
(37:20):
So the more you issue.
So there's a reason why Italiandebt yields higher than German
debt, for instance, and it'sbecause their debt to GDP ratio
is 144%, whereas Germany's is at90%.
Rick (37:35):
So the risk of lending to Italy is higher, perceived to be
higher, in the sense that theyhave less capacity to pay the
bill for that.
That's exactly it, germany,okay.
So then, just turning back toIreland for a minute, the 230
billion.
Who do we owe that to?
David Tilson (37:51):
85% is owed to foreign investors and 15% is
held domestically.
Rick (37:59):
You see, the double standard here.
Right, we're happy to borrowmoney from foreigners, Like
we're happy to have them comehere and open factories and make
Botox and computer chips, butwhen they come build housing we
lose our shit.
And that domestic, like thatcould be people who own prize
bonds.
David Tilson (38:16):
I'm sure that's very small 25 billion in state
savings, that's 10% of the pot,and then some of the domestic
banks, as I know from myprevious role, will also hold
Irish sovereign bonds.
Rick (38:28):
And that's part of their capital structure.
Like that, they have Part oftheir liquidity structure yes,
the ECB.
David Tilson (38:33):
So the ECB you may have heard of the QE or
quantitative easing programs.
So when the ECB cut interestrates down to negative numbers,
it went down to minus a half apercent and it was felt that
that was probably the bottom.
They couldn't go any lower.
So what the ECB did andactually the US Federal Reserve
(38:55):
and the Bank of England didsimilarly at different times was
actually go out into the marketand buy bonds to try and drive
down the price of debt.
A few other technical reasonswhy they did it, but effectively
the ECB has ended up owning 40%of the eurozone bond market, so
12K to 5 trillion.
(39:16):
40% of that is owned by theEuropean central bank and the
numbers in Ireland are similar.
Rick (39:23):
European central bank has financed 40% of the debt
issuance in the eurozone withmoney that they invented.
We just change gears for alittle bit.
That's all very helpful to know.
So we owe 230 billion.
The government's going to tryand raise between 7 and 10
billion something like that thisyear, and that's for a lot of
(39:44):
reasons.
One, to keep the market open.
Two, because prudence keepraise the debt.
You have the cash.
You don't want to be stuck forthe money.
In simple terms, that makes alot of sense In the UK.
Liz's trust became primeminister.
We all remember this.
Right, she went a bit mad withher chancellor and they started
pledging to cut taxes, raisespending.
(40:06):
And then we all know whathappened.
Right, there was a lettuce.
The lettuce won and Liz wasgone.
I think it was 50 days or itwas something shockingly short.
I think the only other personto last less time actually got
either got assassinated or diedin office of a heart attack soon
after being elected.
So it really was prettyterrible.
(40:27):
But it was stunning to watch tosee how quickly the whole world
turned against the UK.
The UK is a very big economy.
They have debt the same wayeveryone else has debt, but it
seemed to be like in a couple ofdays, people were starting to
talk about the solvency of theUK From 10 years ago, it not
(40:51):
needing any bailout.
It in fact lend money toIreland directly, didn't it?
As part of the bailout, and toGreece and in Europe generally
before they decided to leave.
How does something like thathappen?
David Tilson (41:06):
The bottom line is the bond market actually has a
lot of power and it can beextremely unforgiving.
And in this case it looked atthe plans.
It said we think this isabsolutely crazy.
And it adjusted higher the costof UK debt.
So interest rates roseaggressively over two or three
(41:28):
days and they immediately had toroll back.
The plan was ripped up withintwo days.
She was gone, as you said, veryquickly the lettuce outlasted
her and, yeah, it was akin tostarting leaving the EOM back in
1992.
The economy was like the wholeedifices of the UK were being
(41:54):
literally falling down untilthey did the EOTR.
Rick (41:57):
We do a thought experiment here for a minute.
If she just said, nah, I'msticking to it, what do you
think would have happened?
Do you think that after thatwould have got progressively
worse and worse and worse?
Interest rates would havepotentially gone very, very high
?
The Bank of England didintervene.
Actually they did intervene?
David Tilson (42:16):
yes, because they were very worried about the
solvency of the pension industry.
Rick (42:20):
Right, because all the pension funds held the
government debt and the value ofthe bonds is falling because
the interest rate was rising.
David Tilson (42:27):
Yeah.
So suddenly they had theirliabilities on one side, assets
on the other side, the price ofthose assets as yields go up,
prices fall.
The prices of those assetsabsolutely collapsed.
So you had potentially solvencyquestion marks over the whole
UK pension industry.
Rick (42:42):
So they just were not going to take it Within a couple
of days.
David Tilson (42:44):
Exactly.
They just were not going totake a chance with that.
Rick (42:46):
So the bond market can react very quickly to events on
the ground.
So Ireland that's not really apossibility here at the moment
because of how good everyone'sflush with cash, the government
have a lot of cash on hand andthe economy is growing.
There's a lot of love forIreland and the bond market.
I have to stand right now butthere wasn't that long ago when
(43:11):
that wasn't the case If the 10billion of surplus went away
tomorrow.
So now the taxes are justcovering expenditure and there's
no surplus.
And we put some money into thesovereign wealth fund.
That's good, but by its verynature that's meant to be there.
That's not meant to be spent.
Right, it's meant to be thereforever.
So you can't really say well,we have put money into the piggy
(43:33):
bank and then spend it becauseit's not in the piggy bank
anymore.
So the surplus goes away, right, because the economy cools off
a little bit.
I wouldn't take much for thatsurplus to disappear right.
David Tilson (43:42):
Well, three American firms decide that
they're moving theirheadquarters out of Ireland.
That surplus has goneimmediately.
Gone immediately right.
Rick (43:48):
So the surplus has gone and the government
simultaneously decides it needsto undertake a huge spending
program, and I mean not COVID,much bigger than COVID.
The economy is softening, forexample.
Still we keep on this podcast.
We're talking a lot abouthousing, a lot of money to be
spent on housing.
How fragile is the relationshipbetween governments and markets,
(44:13):
like what happened in 2011,?
We obviously had unsustainablespending and we saw what
happened to LISTRUS.
They had a plan for what peoplejudged to be unsustainable
spending and lasted two or threedays the idea that we could
just decide here, or that wewould get so comfortable here
that we would decide we couldspend whatever we wanted on
(44:36):
infrastructure, like we heardthe plan they're going to spend
50 billion euros on rail overthe next 20 years, the amount of
50,000 houses to be built here,and the government are meant to
be funding a large proportionof that in many different ways.
All these things incrementallyadd up together.
Is it possible that we could bein a situation where the bond
(44:58):
market goes you can do this, butyou're not doing that?
David Tilson (45:01):
You can never say never.
I think one of the things andthis is maybe the difference
with LISTRUS piece is that ifthe market perceives that you're
borrowing to improve theultimately the productive
economy productiveness of theeconomy and that longer term,
actually, the market will bequite happy to fund you if it
(45:23):
felt that that was the outcome.
What happened in the UK wasvery different.
It was like oh yeah, we'regoing to borrow a massive amount
and spend it immediately.
Guess what?
The economy is going to begrowing strongly in about three
or four years time and that'sall going to come back in again
and the market went well.
That's a fairytale.
We don't believe that story.
The circumstances matter is thepoint that I'm making.
(45:43):
Can things change quickly?
Yes, things can change quickly,but we are in a very, very
strong position now.
We may have looked in a very,very strong position prior to
the last crisis.
In reality, that wasn't thecase and that became apparent
quite quickly.
But in this time around, evenallowing for the over reliance
(46:04):
maybe on corporate tax, theeconomy is structurally in a
much sounder space.
Rick (46:12):
Spending on capital investments is, broadly speaking
, welcomed.
David Tilson (46:17):
It's looked upon fondly, yes.
Rick (46:19):
Spending on current tax cuts and things like that,
because that's just money goingastray.
In 2023, the government plannedto spend €90.5 billion.
That's on everything.
Roughly €3 billion of it wasplanned for building new housing
, so 3.5%.
For the state to provide all ofthe funding needed to build
50,000 units a year, it wouldneed to multiply its spending by
(46:42):
seven the surplus Dave Tilsonis talking about.
Well, that's at the current taxtake.
Don't forget that just 10companies, all of which are
foreign, paid 60% of corporationtax, or €13 billion in 2022.
If even one of them left or ifthe profit started to decline,
then we'd very quickly be in adifficult situation.
(47:02):
The tax returns in Augustdeclined.
Hopefully that's a once-off andnot a trend.
Most of us can agree that theeconomy is in great shape right
now and there should be somecredit given to government for
being careful with the budget.
We saw what happened the lasttime.
We partied like there was notomorrow.
As Colin McCarthy said inepisode 106, it turned out there
was no tomorrow.
(47:23):
To avoid Leo versus the lettuce, the government can't spend €20
billion a year to build all ofthe housing.
The private sector is needed.
Institutional investors areneeded.
They are the social weavers.
Someone who tells you differentis simply living in Cloud
(47:44):
Cuckoo Land.
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