The US Housing Market Helps Tame the Celtic Tiger

Buchanan, Wayne Department of Business/Defiance College/701 N. Clinton St./Defiance, OH 43512/419 783 2356 (USA)

Gallagher, Michael J. Department of Business/Defiance College/701 N. Clinton Street/Defiance, OH 43512/419-783-2333 (USA) 2

Wayne D. Buchanan Ph.D. Defiance College 701 N. Clinton St. Defiance, OH 43512 419-783-2356 (work) 954-801-0349 (cell) [email protected]

Michael J. Gallagher, PhD Defiance College 701 N. Clinton Street Defiance, OH 43512 419-783-2333 work 419-576-7627 cell [email protected] 3

Abstract

The globalized economy experienced a crisis caused in part by the collapse of the real estate market in the United States. The Irish housing market experienced a significant decline along with the United States housing market. The Irish economy experienced significant growth during the 1990’s up to 2007. The “Celtic Tiger” became the model for the expanded European Union with their economic growth fueled by globalization.

This paper will show the changes in the gross domestic product (GDP), the housing market, and trends in immigration and unemployment along the timeline of the economic recession that has continued through 2009. It illustrates the dependence of the Irish economy on the global economy and how the United States housing crises affected the Irish economy.

Key words: globalization, Irish Economy, US Housing Market, Economic Development 4

Inadvertently Hunting The Tiger

By now, the whole world has participated in the subprime mortgage market collapse, which began to show up in the United States in 2007 and then collapsed the global financial markets. Home prices and homeownership had been booming since the late 1990s, and investing in a house had seemed a sure route to financial security and even wealth [18, Buchanan, 2009].

U.S. homeownership rates rose over the period 1997– 2005 for all regions, all age groups, all racial groups, and all income groups. According to the U.S. Census, the homeownership rate increased from 65.7% to 68.9% (which represents an 11.5% increase in the number of owner-occupied homes) over that period. The increases in home-ownership were largest in the West, for those under the age of 35, for those with below-median incomes, and for Hispanics and blacks [Buchanan, 2009; 18].

As Buchanan (2009) reported, encouraging homeownership was practically deemed a right by the Carter administration and an admirable national goal that was legislated by the Community Reinvestment Act (CRA) of 1978 in the United States.

When President Clinton began enforcing the elements of the CRA in 1997, housing values in the United Stated rose 83% in the next nine years.

With the housing market booming, the GDP of the U.S. rose to 6.3% in the last quarter of 2005, and was at its highest level since the housing boom in 1950-1951 [18].

This rise in America’s GDP also helped to propel global rises in GDPs and stimulate growth across various markets within individual countries. The housing market could not sustain this boom and prices began to fall in mid-2006. As prices declined at an accelerating rate, the boom in home construction collapsed and in late 2008, America’s economy buckled under this housing and subprime market failure [Buchanan, 2009;

18]. 5

Unfortunately, this crisis caused financial failures in Germany, France, and most notably Northern Rock Building Society in the UK [18]. Not reported as much, was what the boom and bust of the US housing market did to the housing market of the

Republic of Ireland.

The Taming of the Celtic Tiger

The economy of Ireland was booming in the 1990’s because of an influx of money from the European Union (EU) starting in 1993 and it continued through 2004 when the EU expanded to 25 countries. The growth of the Irish economy was assisted by the growth of the global economy. The Irish economy generated an increase in Gross

Domestic Product (GDP), an increase in real estate values, high employment, and an increase in immigration. The United States economy was also growing during this period along with many of the globalized economies throughout the world.

This section of the paper will illustrate the correlation of the decline in GDP, the decrease in real estate values, high unemployment, and a decline in immigration that correlates the Irish economy to the economy of the United States (Barrett, Kearney,

Goggin, 2009; Duffy, 4/2009; Ruhs, 9/2009).

Gross Domestic Product

The Gross Domestic Product in Ireland showed an increase of 6% in 2007 before a drop of 3% in 2008 followed by a 7.9% expected drop in 2009 and a further expected decrease of 2.3% in 2010 (Barrett, Kearney, Goggin, 2009). According to

Figure 1, Ireland’s real GDP outpaced both the United States and the European Union from 1970 to 2004 (Dorgan, Sean, 6/23/2006). This was a period of time when the idea of globalization was the economic model that fueled the Celtic Tiger.

Ireland created several regional hubs to provide a framework for economic development. These hubs were located in the core cities of Ireland and were not concentrated in the major city of Dublin (Gallagher, 2006). Many countries in the past 6 developed a globalization policy that revolved around their one major city. These emerging countries were hindered because the growth was not experienced throughout the country. “This type of economic development has the potential to leave other parts of the country isolated and creates a low socio-economic status for people indigenous to this region” (Gallagher, 2006).

Figure 1. Ireland’s Economic Growth

This economic growth continued into 2007 as the GDP rose 6% but then the

Irish economy showed a decrease in 2008 and expects a further decrease in 2009 and

2010. The Economic and Social Research Institute (ESRI) says the “contraction in the economy is expected to continue through this year and into next, with "a very modest rate of growth now expected to emerge in mid-2010." At that time, output will be over

13 per cent below its peak in 2007 and will be lower than the level recorded in 2005.

Gross national product (GNP) per head will be back to the 2001 level” (Finfacts Team,

7/16/2009). The result of the globalization policies tied to the United States economy helped cause a collapse of the Irish economy that may have exceeded that of the United

States. This economic crisis is also evident in the Irish housing market. 7

Housing

The Irish housing market experienced a remarkable increase in value from the first quarter of 1995 to the peak value in 2007 when the United States housing market also started a decline. “At their peak, average new house prices were 327 per cent higher than quarter 1, 1995, while the average price of an existing dwelling was 451 per cent higher” (Duffy, 4/2009). This remarkable increase in value caused the Irish housing market to create a “bubble” that resulted in recessionary pressures in the Irish economy. “The dramatic fall off has been caused by the decline in all sectors of the construction industry including residential, commercial, public sector and civil engineering”

(Finfacts Team, 9/21/2009).

The United States housing market has not demonstrated as volatile a change as the

Irish housing market. This may be caused because the housing market in the United States had less growth than the Irish market during the same period (first quarter of 1995 compared to the first quarter of 2007). The average price of a home in January of 1996 in the United States was $155,300 as compared to $329,400 in the first quarter of 2007

( www.census.gov/const/us price mon.pdf, pages 11 and 12). Irish housing markets show a greater decrease than the United States housing market. The average value of a home in 1996 in Ireland was 75,000euros as compared to 311,078euros in 2007

(www.globalpropertyguide.com/Europe/Ireland/Price-History, updated July 8, 2008).

The dependence on the globalized marketplace places Ireland at risk from economic turndowns caused by policies of countries that influence this global economy. The Irish housing market was down 23% from the first quarter of 2007 to the second quarter of

2009 (Finfacts, 8/31/2009). The decline in the United States housing market over this same period was 16% ( www.census.gov/const/us price mon.pdf, page 12). The reliance on globalization resulted in a dramatic increase in housing cost in Ireland. The resulting housing crises caused in part by United States economic and lending practices caused a 8 decrease in housing cost and possibly recessionary pressures. The Irish economy would have been considered an emerging economy showing economic growth from 1970 though the expansion of the European Union in 2004 to 25 countries. The Irish housing market may now be considered in a mature stage that may be greatly influenced by the global economy and because Ireland may exhibit qualities of a mature economy (like the United States) the Irish economic policies may influence global economics.

Immigration and Employment

The Irish migration pattern could be classified in five phases caused by several events including “net emigration prior to the 1990’s, increased immigration from 1990 to the early 2000’s caused by the rapid economic expansion including assistance from the European Union (EU) economic policies, increased immigration from 2001-2004 from non EU countries, 2004-2007 increased immigration from the 10 new members of the EU, and reduced immigration from 2007-2009” (Ruhs, 9/2009). The “Celtic Tiger” was assisted by the number of Irish nationals who were well educated in the Irish school system but left the country before the 1990’s.

“The higher education system of Ireland always had a strong influence on the

Irish economy-even when the Irish economy was struggling. The result then was that although the Irish were well educated, many went abroad to work in more developed countries. Several sources stated that “our biggest export was people” when referring to the graduates of the universities in the Republic of Ireland” (Gallagher, 2006). These returning Irish citizens provided the well trained workforce necessary for the economic boom in the country. The immigrants from non EU countries were able to provide services for jobs not requiring the educational background of the returning Irish.

The Irish workforce continued to expand 2004-2007 as a result of the globalized economy in the country. These workers traveled from the 10 countries of the expanded

European Union. Many of these workers were well trained and were able to step into 9 the jobs necessary for as the still continuing economic growth. Many of the 10 countries had a well trained workforce but did not have positions to utilize their skills.

This is similar to the Irish before the 1990’s. In addition, immigrants for the expanded

EU countries were able to fill the jobs not requiring the higher levels of training. The

Irish economy was able to add these immigrants seamlessly to the workforce of the still expanding Irish economy.

The years 2007-2009 were a period of reduced immigration to the Republic of

Ireland. The Irish economy experienced a maturation stage at this point but employment was still stable and immigration was slowing. The Republic of Ireland may reverse back to a state of net emigration because of the economic recession. This recession has hit the non Irish workers at a higher rate than the Irish Nationals. “The immigrants from the EU-10 are generally a highly educated group (meaning they have a postsecondary degree) but not all immigrants are employed in occupations that fully reflect these high education levels. Immigrants have also been shown to earn less than their Irish counterparts. EU-10 migrants tend to have the lowest occupational attainment. The recession has hit non-Irish nationals harder: their unemployment was

14.7 percent in the first quarter of 2009 compared to 9.4 percent for Irish nationals”

(Ruhs, 9/2009).

“Ireland’s Gross Domestic Product (GDP) will fall by 12% by 2010.

Unemployment is set to rise by 17% by the end of the 2009” (McDonald, 4/29/2009).

“The number of emigrants from the State in the year to April 2009 is estimated to have increased by over 40% from 45,300 to 65,100, while the number of immigrants continued to decline over the same period, from 83,800 to 57,300” (FinFacts Team

9/22/2009). The “Celtic Tiger” has been tamed by the global economic recession. The

Irish economy may have been hit harder because of the rapid expansion of the last 25 10 years and because the Irish economy relied on globalization to a higher degree than othe developed economies.

Conclusion

The subprime mortgage market collapse illustrates a potential problem when economic decisions are not based on the free enterprise system. The government subsidies to allow housing purchases created an inflated value within the housing market. This may be a factor in a globalized recession that has spread throughout the global markets through the current period (fourth quarter of 2009).

This paper illustrates that emerging economies may be hit harder when their economic prosperity is based on global economic policies. The housing market in

Ireland grew at a faster rate than the housing markets in the United States and other more established economies. Ireland may be classified as a mature economy based on their economic position moving into the next decade (2010). The “Celtic Tiger” was once considered a model of economic growth for countries in the expanded European

Union. The recent events from 2007 to the current period may provide these countries with ideas of economic policies that will take advantage of their emerging nation position but in addition will provide caution of the depending on global economics for a high percentage of their Gross Domestic Product. 11

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