Keywords

7.1 The End of the Boom

The boom came to an end in 2007. GNP, in constant prices, had grown at an average rate of 5.0% p.a. in 2002–2007, but it peaked in 2007 and then declined by 2.9% p.a. over the next four years. Similarly, total employment had grown by 3.6% p.a. in 2002–2007, but it peaked in 2007 and then declined by 3.9% p.a. over the next four years. Thus, the boom was followed by an exceptionally long and deep recession.

Some of the key trends in the economy in the period after 2000 were already discussed above in Chapter 4, towards the end of Sect. 4.2. It was noted there that export growth slowed down very markedly after 2000. This led to quite a common view which held that the sustainable export-led boom that had been occurring in Ireland up to about 2000 really came to an end at around that time because export growth became so much weaker, while economic growth became very dependent on unsustainable factors such as the speculative housing boom.

However, it was shown in Sect. 4.2 that the weakening of export growth after 2000 was not as serious for the economy as it appeared to be. Most of the weakness in exports occurred in a sector where net foreign earnings were a relatively low proportion of the value of exports so the dramatic decline in its exports had only a limited negative impact on the overall trend in net foreign earnings. Meanwhile, there was strong growth in exports of services, including indigenous services, where net foreign earnings were a relatively high proportion of the value of exports, so that the strong growth of these exports had a disproportionately large positive impact on the overall trend in net foreign earnings. The net result was that the sharp decline in the growth rate of the current value of exports, from 14.0% p.a. in 1985–2000 to 5.6% p.a. in 2000–2005, left the growth rate of the current value of net foreign earnings virtually unchanged, at 9.9% p.a. in 1985–2000 and 9.6% p.a. in 2000–2005.

Therefore, the sustainability of the boom was not undermined by the weakening in export trends, at least until about 2005. The growth rate of net foreign earnings, at 9.6% p.a. in 2000–2005, was sufficient to sustain the prevailing growth rate of GNP in that period, at 9.0% p.a. in current prices (Table 4.9). Balance of payments data confirm that view, since the balance of payments current account deficits were small in 2001–2004, being in a range between 0% and 1.2% of GNP and averaging 0.7% of GNP, even though the economy was growing a good deal faster than exports.

However, the final few years of the boom were different. In 2005–2007 the growth of our estimated net foreign earnings slowed right down, to 3.8% p.a. in current values, which was not sufficient to sustain GNP growth which continued at a high rate of 8.1% p.a. in current values. This was reflected in a rise in the current balance of payments deficit from 0.7% of GNP in 2004 to 4.1% in 2005 and 2006 and 6.2% in 2007. This means that, in those years, the economy was growing at an unsustainable rate, which was made feasible only because there was a large inflow of finance from abroad associated with the housing boom that was occurring at the time.

This deceleration in the growth of net foreign earnings in 2005–2007 was primarily a result of a virtual cessation of growth among foreign-owned firms, while the growth trend was much stronger among Irish indigenous companies. The current value of the net foreign earnings of foreign-owned firms increased by an estimated 0.2% p.a. in 2005–2007, while the corresponding figure for indigenous firms was 13.9% p.a. Within the foreign-owned category, the weakness was in manufacturing whereas foreign-owned services carried on growing at about the same rate as Irish indigenous companies.

In foreign-owned manufacturing, the weak trend in the current value of net foreign earnings was caused by a combination of slow growth in the value of exports and a significant reduction in the proportion of the value of exports that was retained in the Irish economy as net foreign earnings. The value of foreign-owned manufacturing exports grew by just 3.8% p.a. in 2005–2007, compared with 14 or 15% for the value of foreign services exports and all Irish indigenous exports. At the same time, the estimated value of net foreign earnings declined from 26% of the value of exports in foreign-owned manufacturing in 2005 to 18% in 2007—not because of a rise in profit outflows, but because the value of imported inputs increased substantially as a proportion of the value of sales.Footnote 1

It is not entirely clear why these trends occurred, but it is probably relevant to note that the value of the US dollar declined by 10% against the euro in 2005–2007. The relevance of this is that many of the exports of foreign-owned manufacturing firms in Ireland would have been priced in US dollars so that the euro value of those exports would have been reduced by the changing exchange rate. Unless there was a similar reduction in the euro prices of the imported inputs purchased by those firms, the value of those inputs would have increased as a proportion of the value of their sales.

It is also possible that the weak trend in net foreign earnings was partly an effect of changing pricing or accounting practices in the MNCs concerned. In addition, the weak growth in exports from foreign-owned manufacturing companies in 2005–2007 could be seen as part of a longer term slowing of growth from them after their earlier surge of exceptionally rapid growth. Whatever the cause of the weakness in their net foreign earnings in 2005–2007, it seems to have been specific to foreign-owned MNCs since Irish indigenous companies were not affected.

If there had not been an extraordinary housing boom going on at the time, with its associated financial inflows, the slowdown in the foreign-owned sector would probably have brought an end to the long boom in the economy in 2005. Such an end to the boom might have been relatively benign, resulting in nothing worse than a return to lower rates of economic growth. As it was, however, the housing boom and its associated financial inflows kept the boom in the economy going for another couple of years. When the housing boom eventually collapsed, with profound financial consequences, it brought a far more damaging end to the boom in the economy.

7.1.1 A Loss of Competitiveness?

It has often been stated that a significant weakness in the Irish economy in the period after 2000 was a loss of competitiveness. For example, the Department of Finance (2011a) said that the 2000s, until 2008, “saw a steady erosion of Ireland’s competitive position with consumer prices, asset prices and wages all increasing at rates over and above our European peers”. Similarly, the Department of Finance (2011b) said “from 2000 onwards, the economy began to lose competitiveness. This reflected a combination of factors: a higher nominal exchange rate, a loss of price competitiveness and a loss of cost competitiveness”. Other organisations, including the Central Bank of Ireland, the European Central Bank and IBEC (Irish Business and Employers Confederation), expressed similar views at around that time (see O’Malley 2013).

In such views, a country’s competitiveness is considered to be determined by trends, relative to other countries, in national indicators of costs, costs per unit and prices. Consequently, a rise in Ireland’s costs and prices relative to competing countries is regarded as being in effect the same thing as a loss of competitiveness.

However, competitiveness means the ability of an economy to compete effectively in international markets. Prices and costs such as labour costs may have some influence on the ability to compete but there are also other factors that would have an influence on that ability. Relevant factors include characteristics of the companies in a country such as technology, innovation capabilities, marketing, product quality, customer service, etc. They also include characteristics of the economic and social environment such as education, infrastructure, business services, technical services, financial services, public services, etc. They also include the composition of industries in a country’s economy, which would often be changing over time, typically tending to shift away from sectors and products that are particularly price-sensitive and cost-sensitive and moving more towards other sectors and products which are less affected by prices and costs.

It has been commonly recognised that competitiveness is influenced by such a wide range of factors. For example, the Swiss-based World Economic Forum has for many years been publishing an annual Global Competitiveness Report which refers to a very wide range of indicators in assessing countries’ competitiveness. In Ireland, the National Competitiveness Council, and the National Competitiveness and Productivity Council, have had a long-standing practice of publishing a listing or “scorecard” that includes many different indicators that are considered to be relevant to competitiveness (see, for example, National Competitiveness Council 2011).

For these reasons, costs and prices, on their own, have important limitations as indicators of competitiveness. They are no more than partial and indirect indicators of competitiveness. They are partial indicators in the sense that they refer to only part of a wider range of influences on competitiveness. And they are indirect indicators in the sense that they measure some factors that may have an influence on competitiveness—not the actual record or performance of a country in competing internationally.

If we look directly at Ireland’s performance in competing in international markets, there was not a general loss of competitiveness in the period from 2000 to the end of the boom since Irish exports’ share of all countries’ exports of industrial products and services combined did not decline significantly over that period. Ireland’s share started at 1.37% in 2000 and then increased somewhat to 1.65% in 2002 and 1.63% in 2003, before decreasing a little to 1.49% in 2007, which was still above the level in 2000. Similarly, Irish exports’ share of EU countries’ exports of industrial products and services combined was 3.18% in 2000 and a little higher at 3.29% in 2007. Within those trends, there was a loss in export market share for industrial products, but this was more than offset by a rise in market share for services (O’Malley 2013).

As was noted above, Ireland’s exports grew at a slower rate in the period after 2000 compared to the very fast growth in the years before then. The corresponding trend in terms of export market shares was that a very rapid increase in export market shares during the 1990s (O’Malley 2004) came to an end during 2000–2007. However, this change did not amount to a significant decline in market share since Ireland’s market share remained a little higher in 2007 than in 2000. Furthermore, as already noted above, the decline in the growth rate of exports left the growth rate of net foreign earnings virtually unchanged because of the changing composition of exports. Consequently, the sustainability of the boom was not undermined by the weakening in export trends, at least until about 2005.

7.1.2 The Housing Boom

For the reasons discussed above, the boom in the economy continued to be sustainable until about 2005, but the boom would probably have ended in 2005 if there had not been an extraordinary boom going on at the time in building & construction, especially in house building.

The first signs of a housing boom began to emerge in the late 1990s when house building activity and house prices began to rise unusually fast. Home completions, which were generally no higher than 35,000 per year in 1975–1995, began to rise above that level in 1997 and carried on rising to 93,000 by 2006 (Honohan 2010; Whelan 2014). Investment in housing increased from no more than 6% of GNP in 1980–1996 to around 14% of GNP in 2006 (FitzGerald 2012). Employment in construction followed a similar trend. It had usually been in a range between 6 and 8% of total employment from the early 1980s until 1996, but it then increased to 13% by 2007 (Honohan 2010; Whelan 2014).

At the same time, house prices, which had generally increased at about the same rate as the consumer price index in 1976–1996, began a surge in 1997 which brought them by 2007 to a level more than three times higher than the level expected if they had remained in line with the consumer price index (Honohan 2010).

This housing boom was facilitated by Ireland’s entry to European Monetary Union (EMU), because EMU precipitated a sharp decline in interest rates in Ireland while also giving Irish banks access to much larger eurozone capital markets. The fall in interest rates began from the start of EMU. In late 1998, Irish nominal interest rates began to fall towards German levels, and Irish real interest rates began to fall from about 3% before EMU to negative levels until the end of the boom (Honohan 2010).

A massive increase in borrowing from eurozone capital markets by Irish resident banks began about five or six years later, in 2004. Until the end of 2003, domestic savings in Ireland had been sufficient to fund the housing boom, but banks in Ireland then borrowed increasing amounts abroad and lent these funds to the Irish property sector. Net indebtedness of Irish banks to the rest of the world rose from just 10% of GDP at the end of 2003 to more than 60% of GDP by early 2008. Since most of the growth in bank lending was for the property sector, 60% of bank assets were in property-related lending by 2006 (Honohan 2010; Kearney 2012).

In the early years of this housing market boom, there was nothing very surprising about it. Because of the boom in the economy, employment and incomes were rising fast, so there was a growing number of people who were able and willing to pay more for more housing. Consequently, it was to be expected that this rising demand for housing would generate substantial rises in output and prices in the housing industry. In addition, Ireland had a relatively small housing stock at the start of the housing boom since it was estimated that Ireland had the smallest housing stock per head in the EU (Whelan 2014). Consequently, a period of accelerated house building would have been needed just to increase the stock of housing towards average EU levels.

There is also reason to believe that house prices were somewhat under-valued in Ireland before the housing boom began. McQuinn and O’Reilly (2008) found that there was generally a reasonably consistent relationship between disposable income levels and interest rates on the one hand and house prices on the other hand, during the period 1980–2005. However, relative to the prices predicted by this relationship, house prices looked under-valued in the years 1993–1997. Consequently, a period of above-average price increases would have been needed to return to the expected price level.

However, although the increases in house building and house prices may not have been excessive at first, it is evident that these trends did become excessive later. The amount of new housing being built in the later stages of the housing boom was running well ahead of effective demand from the population for living accommodation, so that 15% of the housing stock was vacant by 2006, with only 3% being holiday homes (Honohan 2010).

As regards house price trends becoming excessive, Honohan (2010) remarked that, long before it peaked, the rise in prices looked unsustainable to most commentators. McQuinn and O’Reilly (2008) found that, from 2003 onwards, house prices rose faster than would have been expected according to their formerly predictable relationship with incomes and interest rates. Since many would argue that the interest rates that applied across the eurozone were too low for the booming Irish economy, this implies that house prices were already excessive before 2003. Kelly (2007) argued that, by 2007, house prices in Ireland had risen so much that they could fall by 40–60% over a number of years. This was based on trends seen in 40 other housing booms in OECD countries since 1970.

In the final years of the Irish housing boom, the housing market was showing signs of a classic bubble. House building was exceeding real requirements and house prices looked unreasonably high and were still rising. This process developed its own momentum as market participants came to expect that there would be continuing growth in demand and continuing increases in prices. Based on such expectations, builders continued to build, banks continued to lend and house purchasers continued to buy—some because they wanted to buy a home as soon as possible before prices rose even higher, while a growing number of other purchasers were buying houses as an investment which they believed would yield a good return.

However, such processes cannot continue indefinitely. House prices and house building peaked in 2007, and both went into prolonged decline. As house prices fell, prospective home buyers had an incentive to wait until prices fell further, which weakened demand and reinforced the downward trend in prices and building. As the market declined, construction employment dropped from over 13% of total employment in 2007 to 6% by 2009 and then continued to fall to less than 5% by 2012 (Whelan 2014). The sudden loss of such a substantial part of economic activity had a depressing effect on other sectors and brought on a recession in the whole economy.

As the housing market collapsed, the banks began to face significant difficulties since they were heavily exposed to that market, through lending to house buyers, builders, and property developers. Foreign banks, whom Irish banks had become reliant on as sources of funding, became increasingly concerned. Consequently, the Irish banks found that they could no longer raise funds on bond markets. In September 2008, the senior management of the major banks had to turn to the government for help.

The government responded by providing a guarantee for the liabilities of the Irish domestic banks for two years. This meant that any default on those bank liabilities would be covered by the Irish government. It has often been argued that the government should not have provided such a broad blanket guarantee as it was unnecessarily risky. But it seems that the government believed at the time that the banks were essentially sound and only had a short-term liquidity problem rather than an insolvency problem, as advised by the Central Bank (Whelan 2014).Footnote 2

Over the following two years, the government became embroiled in an overwhelming financial crisis, for several reasons. In the first place, the government’s financial situation was negatively affected by the recession occurring in Ireland, which meant that there was a loss of income-related tax revenue and an increase in social welfare expenditure, as would happen in any recession. This was greatly exacerbated by the fact that property-related taxes (stamp duties, capital gains tax and capital acquisition tax) had become a significant component of total tax revenue during the housing boom. When the housing market collapsed, these taxes declined sharply, from 12.5% of total tax revenue to less than 4% (Whelan 2014).

On top of those difficulties, it emerged that the banks were in a far weaker state than the government had believed, so the government became involved in extremely expensive measures to rescue the banks, to the extent that serious doubts arose about the creditworthiness of the Irish state.

Meanwhile the international context was making the crisis in Ireland even more difficult. An international recession began in 2008 and this included a major financial crisis with bank failures and bank bailouts occurring in a range of countries. This international background added greatly to Ireland’s own crisis, which had originated domestically (Honohan 2010).

The combination of these factors undermined the state’s creditworthiness so that, by late 2010, the government was forced to seek assistance from the EU and the IMF (Whelan 2014; Kearney 2012).

It is beyond the scope of this book to go any further into the details of the recession and the financial crisis since the focus of this book is on the boom period that ended in 2007. However, it is appropriate to consider here two questions that are relevant to the period before 2007. What measures could have been taken in the years before 2007 to prevent this crisis from arising? Why was action not taken in good time to prevent a crisis?

As regards the measures that could have been taken, it should be recognised that the policy environment was substantially affected by eurozone membership. If Ireland had not been in the eurozone, the Central Bank could have raised interest rates to dampen the housing boom and to reduce inflationary pressures. Also, the commercial banks would not have been able to undertake such heavy foreign borrowing as they did in the last few years of the boom, which would have limited their ability to carry on increasing lending to the property sector (Barry 2016/2017).

However, although Ireland was not free to make its own decisions on interest rates, there were other options that could have been employed instead. Whelan (2014) notes that the authorities had the power to place limits on mortgage lending, such as limiting multiples of income or requiring large down-payments, or they could have restricted the exposure of individual financial institutions to property development. FitzGerald (2012) points out that a general tightening of fiscal policy could have been applied by the government, while a more targeted tax on mortgage interest payments could have had the same effect for households as a rise in interest rates.

Rather than adopting such measures, government policy tended to encourage the property boom. Most of the budgets in the period 2001–2007 increased spending power rather than reducing it, while there was a range of tax-based incentives that encouraged investment in property (FitzGerald 2012; Whelan 2014).

This brings us to the second question—why was effective action not taken to prevent the crisis from emerging? The main reason appears to be simply because it was not sufficiently recognised and accepted that the housing boom was potentially dangerous and could lead to serious consequences. Some people did recognise that there were real dangers of course, and warnings were given, but their view did not become the prevailing view.

To be more specific, it is useful to distinguish between the risk of a recession in the housing market on the one hand and the risk of collapse of the banks on the other hand. There seems to have been very little recognition before 2007 that the banks were at risk of failure, whereas warnings about the housing market were somewhat more common.Footnote 3

For examples on the housing market, Casey (2018) presented a very thorough analysis of a wide range of commentary on the Irish economy during the period of the property boom, and he identified a number of economists and journalists who gave warnings about the trends in property and construction. However, warnings about the threat to the banks were scarcer. Lunn (2013) reports that, despite following up on many suggestions, he had not encountered any paper or article prior to Kelly (2007) that contained a warning that came close to reflecting the scale of what was ultimately to occur (i.e., including the banking collapse).Footnote 4

Even on the issue of the housing market, despite the efforts of those who warned about the risks, there was not a general acceptance that the situation was becoming very risky. A wide range of relevant actors showed by their actions or words that they did not believe that the housing boom could have severe consequences. House buyers, builders and property developers presumably did not perceive major risks, while the Irish commercial banks were sufficiently confident to carry on lending. The government and the Central Bank were not sufficiently concerned to intervene significantly. In addition to these Irish-based parties, there were also participants from other countries who failed to recognise the dangers. These included the foreign banks who had enough confidence to lend very large amounts to the Irish banks who were funding the housing boom. There were also foreign investors who willingly held shares in Irish banks as well as building and property companies. In addition, foreign-owned banks were very active directly in expanding their property-related lending in Ireland during the boom, and Honohan (2010) notes that several of them recorded heavy loan losses.Footnote 5

Three international organisations were making regular assessments of the Irish economy, and two of them were at least partial exceptions to the picture of considerable confidence in the Irish housing market. Casey (2014) studied the relevant publications from these organisations in the years before the crash, and he found that the European Commission published little of relevance to the issue, but the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) advised that trends in the Irish property boom were excessive and presented risks. However, the OECD felt that a soft landing would be the most likely outcome for Ireland. Casey (2014, 2018) considered that the analyses of the housing boom from the IMF and the OECD recognised that there were vulnerabilities, but they failed to predict how severe the consequences would be, including the near-total collapse of construction and the extent of the ramifications for employment, economic output, the banks and the government’s finances.

Thus, the warnings from the IMF and the OECD were relatively mild compared to the actual dangers that were present, and they did not have a great impact on opinion in Ireland, which mostly continued to believe that there was no major cause for concern.

So, what can explain the continuing confidence of participants in the housing boom? In the literature on the Irish housing boom and its consequences, one finds words such as “mania”, “frenzy” and “collective madness” to describe the behaviour of participants in the boom. Such terms are expressive, but they are not particularly helpful for understanding what happened. This point is underlined by the fact that the Irish housing boom and slump was not a unique occurrence involving uniquely bizarre or aberrant behaviour. Rather, it was one example of many booms and slumps in housing markets that have occurred in many countries. As was mentioned above, Kelly (2007) was able to refer to what happened in 40 other housing booms in OECD countries since 1970 when he was trying to foresee the consequences of the Irish housing boom. Granted, the consequences of the Irish case were exceptionally severe compared with most such booms (Ó Riain 2014). However, this can be explained in terms of the circumstances surrounding the Irish housing boom while the behaviour involved in the boom itself was not very different to other booms. (We will return below to the question of why the consequences of the Irish boom were so severe.)

From the perspective of behavioural economics, Lunn (2013) argues that it is well established that there are some biases that are common when making judgements or decisions and that seven of these biases were instrumental in the development and severity of the crisis in Ireland.Footnote 6 As an explanation for the behaviour of those involved, this looks more satisfactory than explanations in terms of a mania or frenzy. The seven biases included:

  • Extrapolation bias (placing most weight on the most recent events when predicting future outcomes based on the past).

  • Confirmation bias (the tendency to look for and to pay the most attention to information consistent with one’s existing beliefs).

  • Overconfidence bias (a tendency to be too optimistic regarding one’s own abilities and one’s own predictions).

  • Behavioural convergence (the tendency to copy other people’s behaviour and decisions, or to conform to majority views; also known as bandwagon effects, groupthink, information cascades).

  • Time inconsistency (inconsistency in individual preferences over time, such that more immediate rewards are felt to be disproportionately attractive).

For example, in the housing market context, extrapolation bias would mean that the expectations of market participants about prices and demand would tend to be heavily influenced by trends in the recent past. Overconfidence bias would mean that market participants tend to have too much confidence in their ability to foresee market trends accurately. Confirmation bias means that market participants would tend to pay attention to evidence that confirms their judgements about the market while ignoring or dismissing evidence that could challenge their views. Behavioural convergence would have the effect of amplifying market trends, in both rising markets and falling markets, as market participants are drawn to join the prevailing trend. And so on. Such biases could affect decision-making by regulators and government as well as the decisions of active housing market participants.

Lunn (2013) argues that there is strong international research evidence showing that these biases are real and can be influential in decision-making situations. He also argues that there is evidence that is consistent with a role for the seven biases in Ireland’s crisis.

As regards the question of why the consequences of the Irish housing boom were more severe than in most other housing booms, Lunn suggests that the seven biases may have been enhanced by the sheer length and extent of the boom in Ireland. For example, the length of the boom could have increased the extent of extrapolation bias and overconfidence bias, increased perceived competence in assessing property risk, and increased perceived opportunities for more immediate rewards.

To this we can add that the consequences of the housing boom in Ireland were made more severe by the timing of the end of that boom and the exceptionally unfavourable international context at that time. A major international recession and a financial crisis were the dominant features in the international economy in the years after Ireland’s housing and economic booms came to an end. This had negative effects on overseas demand for Ireland’s exports, on FDI, on emigration options for Irish jobseekers, and on the ability of Irish banks and ultimately the state to borrow funds abroad. In addition, it has been argued that membership of the eurozone made Ireland’s financial crisis more severe and more difficult to resolve.Footnote 7

Before concluding this section, it is worth clarifying what was the relationship between the boom in the Irish economy and the housing boom. The boom in the economy began long before the housing boom and it continued to be independently sustainable until about 2005. The housing boom began about a decade after the boom in the economy began, and it was initially generated by the rising employment and incomes that resulted from the economic boom. Trends in house building, house prices and property-related lending probably started to become excessive and unsustainable at some stage during the period 2001–2004. However, the housing boom was not an important factor driving overall economic growth at that time, because economic growth was still being driven by quite rapid growth in net foreign earnings while the housing boom was still being financed by Ireland’s own domestic savings rather than by additional injections of funding sourced from abroad. When the growth of net foreign earnings eventually slowed down, that would probably have brought an end to the boom in the economy in 2005, were it not for the housing boom. By that time, the housing boom was being heavily financed by increasing amounts of funding borrowed by the banks from abroad, and it kept the boom in the economy going for another couple of years until 2007.

The whole Celtic Tiger boom has sometimes been depicted as largely built on a debt-fuelled housing bubble, but such an interpretation is not grounded in reality.

7.2 Conclusion

The boom came to an end in 2007. Although it has often been pointed out that export growth slowed down very markedly as early as 2000, that trend was not particularly serious for the economy because the growth of net foreign earnings did not slow down, due to the changing sectoral composition of exports. Thus, the sustainability of the boom was not undermined by the weakening in export trends until about 2005. The growth of net foreign earnings then slowed down in 2005, which would probably have brought an end to the long boom in the economy at that time were it not for the housing boom. The housing boom and its associated financial inflows kept the boom in the economy going for another couple of years.

For about eighteen of its twenty years, the Celtic Tiger boom in the Irish economy was a sustainable export-led boom, and it was only in its last two years that it came to be largely powered by a debt-financed housing boom.

The housing boom turned into a classic bubble which ended in the collapse of the construction sector and ultimately the banks, with disastrous consequences for the economy. The Irish housing boom and slump was not a unique occurrence involving uniquely aberrant behaviour since it was one example of many booms and slumps in housing markets that have occurred in many countries. However, the Irish case undoubtedly had more severe consequences than most such booms, partly because the Irish housing boom lasted so long and partly because a major recession and financial crisis in the international economy exacerbated the consequences of the conclusion to Ireland’s housing boom.

Since housing markets can be prone to damaging booms and slumps, probably because people are naturally prone to the biases and behaviour outlined in this chapter, it is essential to have tight and effective regulation of such markets and banks. It is also not wise to leave the provision of something as essential as housing to be delivered largely by markets.