House prices should be equal to between 12 and 14 times earnings

In the US, analysts claim that, in the long run, house prices should be equal to between 12 and 14 times earnings. This means that if a house is generating a rent of $10,000 a year, it must be worth between $120,000 and $140,000 a year.

Apply this test to Ireland. A quick search of Daft.ie will reveal, for example, that a three-bedroom house in Co Wicklow - advertised as an investment property - is on sale for €289,000.

The same website tells us that the average rent for a three-bed in Arklow is €850. So let us say that, in the best possible case, this place is rented for 11 profitable months a year - the final month’s rent goes on various costs. The implication from the American model is that the house is worth about €122,000.

The implication from this, compared to the advertised price of €289,000, is that the house is still wildly overvalued. The Irish calculation means that the house is trading at 31 times its annual yield. This clearly needs to fall dramatically by close to 60 per cent for it to make any financial sense to buy.

So one of the factors impinging on Ireland’s recovery is that we have to see house prices fall dramatically for any investor in their right mind to get back into the market. As long as estate agents, banks and builders are in denial about where prices need to go, we will not have a platform for any recovery.

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Exposed Bank of Ireland

Bank of Ireland’s share price plunged to levels not seen since the early 1990s. While bank stocks in general have been trashed, Bank of Ireland has suffered more than most. By yesterday morning, the bank was trading at less than 10% of its February 2007 peak. By mid-morning, the stock had reached a paltry €1.50.

What we have is an institution [BOI] which has lost the confidence of the markets, a bank now ranked in the eyes of investors alongside, exposed banks, its reputation on the floor.

In the absence of a major re-capitalisation, Bank of Ireland may simply limp along providing a trickle of loan capital to customers, acting as a drag on a struggling economy and providing the prospect of a tasty meal for an overseas predator once international credit markets recover. So much for men with “safe pairs of hands”.

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Bigger clouds are on the horizon for Irish Banks!

Ireland's banks and building societies are massively exposed to the
domestic property market: loans of more than €240bn have been extended to homeowners, property developers and construction companies. Last Tuesday, as he faced interrogation from the members of the Joint Committee on Economic and Regulatory Affairs, Pat Neary said that he was only really concerned about €15bn of those loans.

He told the deputies and senators that "speculative lending to construction and property development in Ireland amounts to €39.1bn, of which €24bn is supported by additional collateral or alternative sources of cashflow and realisable security. This leaves a balance of €15bn secured directly on the underlying property. There will undoubtedly be some losses on these exposures. However, any such losses would occur over a number of years and would be offset by profits on
performing loans over the same period." Neary, so it appeared, was worried, but not that worried.

Under closer examination by the committee members, however, his confidence was dented. He agreed that some of the "additional collateral" that he had referred to was made up of share portfolios (which would have plunged in value in recent months), other properties (which would also have fallen sharply in value) and properties with rental income. In good times, all of that
collateral might have seemed prudent and safe: in a recession, it could be worthless.

Neary also maintained that the banks' combined capital was in the region of €42bn, a figure that gave him plenty of confidence that they were more than adequately capitalised and still had plenty of reserves to weather the storm.

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Irelands, per capita gross domestic product is the 4th highest in the world

Ireland's, whose per capita gross domestic product is the forth highest in the world (above Iceland), according to the United Nations 2007/2008 Human Development Index, will have to tighten their belts.

Panic buying in Iceland!

After a four-year spending spree,
Icelanders are flooding the supermarkets one last time, stocking
up on food as the collapse of the banking system threatens to cut
the island off from imports.

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24 hours that brought Irish banks back from the brink

The bankers' message was not that Anglo Irish Bank was about to
collapse; or that Irish Nationwide was on the brink, though both had
cash shortages to face on Tuesday and Wednesday. Instead, it was that they themselves were facing crisis.

"(They) made it clear to us that liquidity was drying up in the Irish
banking system and the maturity dates for the various loans they need to fund their business were shortening all the time and reaching dangerous levels of exposure in terms of time limits.

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How will our generation handle a Great Depression?

The Mother Of All Bank Runs?

When investors don't trust even venerable institutions like Morgan
Stanley and Goldman Sachs, you know that the financial crisis is as
severe as ever. When a nuclear option of a monster $700 billion rescue
plan is not even able to rally stock markets, you know this is a global
crisis of confidence in the financial system.


The
next step of this panic could be the mother of all bank runs, i.e. a
run on the trillion dollar-plus of the cross-border short-term
interbank liabilities of the U.S. banking and financial system, as
foreign banks start to worry about the safety of their liquid exposures
to U.S. financial institutions. A silent cross-border bank run has
already started, as foreign banks are worried about the solvency of
U.S. banks and are starting to reduce their exposure. And if this run
accelerates--as it may now--a total meltdown of the U.S. financial
system could occur.

Read Doctor Doom & idleworm