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TheIrishPropertyBubble:Causesand Consequences. 
MorganKelly January15,2009 
MorganKellyTheIrishPropertyBubble:CausesandConsequences. 
 
Whilehousepriceboomsandcollapsesarecommoninternationally, theyarerarelycatastrophic. Irelandisunusualbecauseitsentireeconomyafter2000cametobe drivenbyapropertybubble. By2006constructionaccountedfor20%ofGNP,bankshad dangerousexposurestobuildingandcommercialpropertyloans, anddomesticwageshadbeendriventouncompetitivelevels. Therapidcollapseofthebubbleleavesusfacingtheprospectof cumulativefallsinGNPofover25%,unemploymentabove15%by theendoftheyear,andnoprospectofnationalrecoveryuntil wagesfalltointernationallycompetitivelevels. 
MorganKellyTheIrishPropertyBubble:CausesandConsequences. 
 
AsimplemodelofIrelandsince1990. 
Duringthe1990sIrelandexperiencedtheCelticTiger:rapid employmentgrowthdrivenbycompetitivelabourcosts. Asemploymentandincomerose,housepricesweredrivenup. Constructionroseandthisincreasedemployment,leadingtofurther construction:multiplieraccelerator. Aspropertypricesrose,valueofcollateralincreasedandperceived riskofpropertylendingfell:nancialaccelerator. EectofbanklendingexacerbatedbynarrownessofIrishmarket: byincreasinglendingby20%ahandfulofbankscoulddriveup propertypricesby20%:elementsofpyramidscheme. Marketcametobedrivenbyexpectationsofcapitalgains:rental yieldsbelow4%. 
MorganKellyTheIrishPropertyBubble:CausesandConsequences. 
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