Rick: 0:02

Picture this a small, unassuming bird flitting from treetop to treetop, carefully observing its surroundings. It spots a nest in a tree below, brimming with eggs. The tiny bird stops and waits patiently, hidden from view, until the occupant of the nest departs, leaving the eggs unsupervised. Sensing an opportunity, she swoops down at incredible speed, in a behavior honed over millions of years. She gets to work, using an enormous amount of energy, to remove one of the eggs from the nest and then, with impeccable timing, replaces it by laying one of her own. With a flutter of her wings, she is gone, never to return. The whole operation from landing to departure, completed in just ten seconds.

Rick: 0:54

My name is Rick Larkin and you are listening to the Build my podcast about property and everything that goes with it. Today's episode is definitely for the birds. For this episode, I did a lot of reading about cuckoos. I even went out to try to record some in the wild, but as it turns out, they are actually exceptionally hard to find. Or maybe I'm just not a skilled birder, but fear not, I am low at the disappoint my loyal listeners, and if you tuned in today for some cuckoo action, well then, cuckoo action is what you are going to get, according to popular lore, there are large murmurations of cuckoos all around us. Perhaps one is even speaking to you right now.

Rick: 1:53

I'm my cuckoo right, because this is Sean Keyes. He's a finance correspondent for the currencyie, which if you haven't visited you're missing out. It's the only real business news site in Ireland. Sean knows money and property and cuckoos First of all. Do you know where it came from?

Rick: 2:11

No, okay, because I've been told that he was a journalist in one of the two national newspapers that came up with this. I've actually gone and looked and looked and I can't seem to isolate the first time that it was written, but it's become a catch-all term to really demonise any foreign investor who has invested in producing housing in Ireland. That's the bit that rankles a lot with people, because in the construction industry we know that a huge majority of the construction that happened the last five years just wouldn't have happened if it wasn't for these people. The fact that they've been regularly just put upon in some elements of the press has had a real impact on them. What are your thoughts on that? Do you think the press have any case to answer it? Do you think that we're just wingy builders and that really we should get over ourselves?

Sean Keyes: 3:08

I'm not sure how much of it is specifically Irish and how much of it is just inating people to be skeptical of institutional investment. Let's say In the US people would be skeptical of institutional investment too. It's much bigger over there. But there's an extra layer in Ireland that it's foreign. It's like an invading, an invasive species sort of a thing. It's definitely very potent in Ireland. We really need it because we've given up on the ability to fund ourselves, fund our own property investment. The old model of Irish people funding Irish property development through the banking system is gone.

Rick: 3:55

Are the press reacting to the general atmosphere Like you say? That's present in a lot of countries, it's present in America, it's present everywhere that people are skeptical of institutional investment and therefore that skepticism is amplified and therefore policy makers are sometimes quite reactive to that perception as well, because they're looking to get elected and they're elected by the people. Still, people understand this and they're like no. Or is it that people don't really understand it and they get a snippet of something? Or they get the dogma of certain parts of society who maybe wouldn't like to see much of a private sector involvement in housing or think the idea of profit on housing and stuff like that is horrible. Where do you think it generates from?

Sean Keyes: 4:42

I tend to in this question more generally, beyond just housing, it's more bottom up than top down. I think that side of it is underrated. I think there is a tent. People say look at Fox News in the States. That gets blamed for this is why certain some Americans are crazy. It's because they're getting this fed into their TVs every day and Fox News are the bad guys who are causing this. I think there's an urge to find a bad guy who's responsible for this messed up situation that we find ourselves in. I think much more like I've been in the media industry the media is responding. It's a very, very competitive industry and it's responding to what people want in the long run.

Rick: 5:32

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 another element of it too, because Fox News. You're absolutely right, fox News don't control everything. But if they didn't have any influence, you wouldn't see all the politicians catering their message to line up with it. The phrase cuckoo funds right, I look at it. The word on the street didn't come up with that. Actually, the first person to Google it would realize that it's not even a very good analogy, because cookies don't steal mess. People think that cookies steal mess. They don't steal mess.

Sean Keyes: 6:06

That's your real problem with this. It's ornithologically inaccurate. It's just by the by you are enhancing.

Rick: 6:12

Did you ever wonder why they called it a cuckoo clock? Apparently as the call is so distinctive, a two-tone call. It's unusual in the animal kingdom and it was a type of innovation in the clock world back in the 18th century by using a bellows and a whistle. It was a technological leap to have a clock make that sound instead of just a bell clanging. That might be useful information for a pub quiz sometime.

Rick: 6:33

Next scene that this podcast is just going to be about birds. It's not going to do anything about building, but just stuff like that. So somebody came up with that because they're like cookie fund, that sounds great and everyone thinks the cookie steal mess. So they're stealing houses To say that it's totally bottom up. I get it, but things like that. To me it's distilling it down into an inaccurate argument that can be very easily repeated and spread, which just amplifies wrong information, which then reaches policymakers who do things like pull the bill to rent planning regulations just because of outrage, not because of any actual objective fact. Get rid of co-living planning regulations again because of outrage.

Sean Keyes: 7:17

All of these things are driven by this, I think there's a thing with housing where the worst if you've got a problem with your housing system, it'll probably it has a tendency to get worse and worse and worse. I think it's because there's a quirk in human nature where we just something about housing breaks our brains. There's a piece that actually had that title housing is breaking America's brains, or something like that, and then it was referring to this research that was out a year or two ago about attitudes to housing supply and what that did to the housing market. And the researchers asked people, asked Americans if you came up with a lot of extra oil or corn or cars, what thing that would do the price. And 80 or 90% of people said well, more cars would make the price of cars go down. But when you put the same question to them about housing, it was way more evenly divided, and about 30 to 40% of Americans believe that if a lot of new housing was built in their region, then rents and home prices would rise.

Sean Keyes: 8:23

So there's just something in Asian people that housing just doesn't. It's not intuitive to them, and so the reason I think it gets worse is because when the system starts to malfunction, you get this kind of confusion, which is resulting from people's misunderstanding of housing economics. So if you have a system that's working way quietly in the background and there's no need for debate and there's then less debate, then the fewer bad ideas are getting tossed around and implemented and yeah, so that's. I think it's something like that, and I think it's very difficult to get to kind of make any progress on it, because people are intuitively quite hostile to new housing.

Rick: 9:07

But you the stuff that you've written in about property and, in fairness, the currency generally haven't gone down this road of there's a bad guy or a bogeyman, and here it is and you have attempted to explain all of these things because, contrast to right, with another emergency when we had the pandemic and when the the pandemic came up first, right, none of us have any clue. I mean, it was remarkable, actually within two weeks, how many experts there were about infectious diseases that just crawl out of the world, and that happens every time. But what was interesting about the pandemic was a lot of that stuff of the armchair guy or the person who just decided they're an expert. That got pushed aside like relatively quickly, and the press focused on a couple of headline people and actually took huge stock in what the government were saying, which was interesting, because that's not normally the approach that the press takes. They have a healthy skepticism what the government say, but the housing crisis has been going on for much longer, but there's almost complete skepticism about what the government say.

Rick: 10:20

There's complete skepticism about what industries say and there there doesn't, and maybe you're right, it's breaking people's brains, but there doesn't appear to be any attempt to be like, okay, no, here's an example of where this was dealt with. We should be doing these things. Here's an explanation as to why it's not as simple as clicking your fingers and having 50,000 houses 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 few attempts to explain things, but generally, that's not what's happening no it's.

Rick: 10:51

Here's a quick fix, here's a quick fix, here's some magic beans. Look over here, dazzle, dazzle. There'll be loads of houses. If only we can be elected, or if 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 and use that money to build housing? You say REITs, the shareholders pay tax. They don't pay the tax because. But no one even wants to explain, like even a little bit. Are people that unreceptive like the ordinary going street? Are your? Your readers are obviously going to be more receptive, but do you think that people generally are that hostile to it, like the American thinking more houses mean more expensive houses?

Sean Keyes: 11:28

yeah, we do, we think so. That's that's what makes it so hard to fix. You've got to start from a situation of incredible skepticism and you know some of it 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't trained economists. And then other parts of it are, elements of it are. You know, the planning system obviously plays a big role and you know people do have legitimate reasons not to want housing near them. Yeah, you know, it's just self-interested person. If someone's going to build an apartment beside my house, that's not good news. You know it's parking is going to be harder, construction noise, it's not. You know it'll be busier, all the things. Like you know, most people would 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 to development for a mixture of reasons, and any solution should just look at those facts in the face and come up with ways to kind of help us to create win-wins, you know, create a scenario where housing doesn't get rammed down the throat of people who don't want it in the interest of the greater good. Not just because that's, like you know, lousy on the guy, but it's just it's not likely to work. It's not likely we're going to pass laws. No, politicians aren't going to vote 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 who don't want it. In my mind, it's like asking a child 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, Sean talked about something called street plans, which you're going to hear about in a later episode. I do think he's right. The politicians won't want to vote for laws that anger their constituents. Just look at the recent attempt at reform of the Planning and Development Act, which more and more looks like lipstick on a pig, but it's still called reform. I guess Bismarck was right If you like laws and sausages, then you shouldn't watch either of them getting made. But let's back up for a second. Does any of this even matter? You've heard me complaining about the medias treatment of investors, but do the investors care?

Pat Farrell: 13:54

I started off my life in the public health service and in fact I worked on capital projects. So I was involved in the Northwestern Health Board and a lot of their capital programs at the time. And then I

Rick: 14:05

That's Pat Farrell. Pat is the head of Irish institutional property or IAP. They're like a representative body for large property investors. Pat's been around, he's experienced, 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 all this is that we're in a political war at the moment. The next election is in prospect, probably a year or two away. It will pivot on who believes who can do the best job in terms of housing. So there's a big prize to be fought for here.

Pat Farrell: 14:34

And, of course, when a war begins, the first casualty of war is truth, and what has been said, for example, is that, say, all of the apartment developments that were funded and delivered by institution funds were somehow snatched from would-be first-time buyers, which is not true. The cost of developing and funding these kind of developments is beyond the reach of somebody who wants to actually build them and sell them to individual homeowners. So all stock is good, be it for the rental market or for our home ownership. So this is additionality and has provided more stock for the market. So, beside all that, like all of the other, house builders are also getting institutional money to enable their developments as well, which is providing additionality into the market. So this is about institutional investment, which is actually providing meaningful additional housing supply at a time when we all know the supply is the big issue and therefore I think that's the way I would look at it and I think that's the way it needs to be viewed.

Pat Farrell: 15:32

The other thing we need to stand back and realize is, like the whole country's economic model and our success is built on foreign direct investment, foreign capital. But when you suddenly associate foreign capital with housing the toxic political issue of the decade it's suddenly bad. And I've only recently discovered, with the row that started over the Gresham house and the forestry deal with Quilchia, there's only one thing more pejorative in Ireland than a foreign fund, and that's a British fund. Yeah, that's absolutely correct. So I mean there's a lot of misrepresentation, there's a lot of misuse of language, but it's all to do with a political war that's effectively on and which won't end, and even won't end until the next election, because then we'll begin a whole new cycle again and that's the other point of this right that two years from now, three years from now, four years from now, this problem is not solved right under 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 build enough residential property in the next three or four years to come 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 houses per thousand of population. Today we're building four. France and Belgium are building about seven. So we're way behind the ballpark.

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 the housing market post the crisis, for a whole decade we had no new housing at all built in the country and over that same period we had a 30% increase in the population, so we created the so-called perfect storm in this country. We have a massive deficit to make up. You mentioned the election. Regardless of who's in power after the next election, we're still going to have the same fundamental issues we're not building enough houses and we're going to need a huge amount of capital in order for to build those houses.

Pat Farrell: 17:21

And for sure, the state has a role to play. And the state has a bigger role to play and is actually most recently starting to play a bigger role. And you can hear in the headlines and some of the announcements pre-budget that there's obviously going to be more capital, probably supplied by government. But, that said, no government, regardless of whatever political view, is going to make any meaningful headway on solving the housing crisis unless they continue to facilitate a meaningful role for the private market and for institutional capital, because it's beyond the capacity of the state, even with the current burgeoning tax receipts to be able to allocate enough resources to deal with this comprehensively. The members I represent have invested plus to 20 billion and it's across hospitality, commercial logistics, retail and particularly housing, and it has been a huge enabler of the Irish economic recovery and it has also been a huge contributor to additionality in terms of housing units and this country new housing units.

Rick: 18:17

So institutional property. Just for people who are listening. You maybe don't work in industry and I want to understand. You said it there. It's pension funds. Pension funds typically will come along. They will invest in real estate in order to get a stream of cash flow. So when normally a pension fund would buy government bonds, they say we'll lend the government money, the government agree to pay them interest every month or every quarter and they use that difference to fund their obligations to their pensioners. When you buy property, that's similar. So these institutional investors are investing in property for the cash flow from it rather than speculating in it. It's not the same as a developer. So that's really, it's fair to say, a good description of institutional.

Pat Farrell: 19:02

Yeah but I suppose it does go beyond that, because you also have institutional investment money backing non-bank lenders who are providing debt and equity funding to developers, and they're a feature of the market as well, and that's obviously higher risk capital and it does carry a higher coupon, higher than the one you just described. It's not just in that particular area. You have the institutional investors acquiring and owning themselves, but then you also have them providing finance directly to developers Because, as you know, now in this market post the crash again, any developer in this country, unless they have own funds or own equity, they're going to require an equity slice to embark on any kind of residential development, for example. And if they don't have that funding themselves and their own resources, they're going to have to find a partner and inevitably, in a lot of cases that will be a non-bank lender who is backed by some form of institutional capital.

Rick: 19:54

All right, can you continue to indulge my amateur ornithology for a second? What institutional investors are doing is much more like the social weaver. You may not have heard of this bird. They mostly live in Southern Africa. The social weaver is unique in that it builds compound nests cooperatively. They come together and they build enormous nests capable of holding as many as a hundred pairs of birds. It's a lot like an apartment building. It even has multiple entrances. You should look up some of the pictures of the nests on Google. They're amazing. Funny thing, though, about the social weaver they also migrate.

Pat Farrell: 20:28

Well, you've brought me onto a very interesting point, because that's the other thing is that all global capital is highly mobile and they will only invest in markets where they get stability and policy certainty. And if you just think about that issue alone, we had the implementation of RPZ in 2016. We had a cap in a 4%, followed by a link then to inflation, then followed by a recap. We had about three, four policy left field swings in a boat less than a few years, and that is just so damaging to investor confidence.

Rick: 21:01

And it's damaging to renters too, because there is this thing out there again, the schizophrenia where it's seen as, oh well, screw the developers and the landlords, we're not helping them. You say, okay, sure, if you want to take that view, that's fine. But the reality is those policies don't hurt us as much as they hurt all the people who are not in a rent-controlled apartment. Because when you crimp supply, okay, the guy who's in the rent-controlled apartment, his rent doesn't go up by more than 2%, good for him. But the guy that doesn't have an apartment, right, the guy who's 20 and is coming out of college, or is 18 and is going to college for the first time and is renting for the first time, he's now going into a market where supply has been crimped, rents have been driven artificially higher because they have risen dramatically in the last five or six years. That wouldn't have happened if you had the supply.

Rick: 21:54

And I was to give the example of Finland. I don't know if you interact with your colleagues in Finland. Finland is almost unique as being a wealthy country in Europe that does not have any form of rent control, and rents are falling in Finland and everywhere else in Europe they're rising, but Finland's the only place where they're falling. And why is that? Because they over supplied the market. Now, what's worse for the developer An over supplied market or an under supplied market? It's obviously an under supplied one because you can have higher prices. What's better for the renter? The over supplied market? They have nowhere in control. They got the over supplied market. We put rank control in. They put it in Scotland, they put it in Germany, they put it in Spain. All of these places are suffering terribly from this.

Pat Farrell: 22:42

And I mean we did a study with Ronan Lyons back in 2020, which demonstrated this very clearly, because he showed that at any time in Dublin where we had an excess of 4,000 units available for supply in Dublin, rinse fell and then when it went below that figure, rinse rose Absolutely undeniable fact. And in fact, we did have a period in the 80s when you had the section 23 where there was a big, big run of apartment development in Dublin at that time and there was an excess of supply in the market and rinse actually stabilised and didn't fell for a period at that time. But then obviously we got back into scenario again where after that, where supply became scarce and obviously there's a reaction to that and, as I said, the only answer to the current high levels of rinse is to bring on more supply.

Rick: 23:35

Yeah, we touched on there a couple of minutes ago about stability, policy stability and things like that. What's your member's view on Ireland now in terms of attractiveness, the political situation Does that get discussed at all? Does the whole idea of them being called pejorative names in the media affect their view on whether or not they would come and invest further sums here?

Pat Farrell: 23:59

Yeah, it's an interesting one. I mean, if you actually think about the last 12 months, the terms we've talked about have been less and less in use in the media. So I think there's a slow but steady understanding that institutional funds have a role to play, that they're long term patient capital. I remember when we launched 2019, some of the media commentary was that, oh well, these investors are just in and out, in and out. Well, guess what, like the members that I represent have been here for well over a decade now.

Pat Farrell: 24:24

The other thing is that we are going through a correction in the real estate market. I think the fact that we've the presence of such a large representation of institutional investment in real estate is a steady in influence on the market and doesn't allow you to mimic the kind of effects of what we had when it was entirely debt funded back in 2000. So that's another positive but for sure. I think, if investors look in at our today, they still attract by the fundamentals of Ireland, which are extraordinarily strong, and then the fact that we such a strong economy. But the kind of things that I think they find frustrating are times are the slowness of decision making at times and the issues with the planning system as we know, that are well chronicled and the kind of constant chopping and changing with policy.

Pat Farrell: 25:07

But look, that said, there have been a number of very good initiatives by the government in recent times Cree, cona, project, tossi, the Star initiative time will tell, but they're only betting in. But I think they've been good developments and the fact that the government actually brought out a comprehensive housing policy, housing for all, which for the first time took a holistic view. I think slowly but surely it's starting to crank up and starting to get momentum. I think the big issue now is for to accelerate that progress, to invest more money from the public side and then to keep encouraging the presence of the institutional investors and the private market and have a much more effective collaboration between the two, because there always hasn't been the level of collaboration that there should be. But I think if we can work on that then we can start to up the delivery both for rental and for private ownership and slowly but surely start to make progress. But there's a huge amount of time.

Rick: 26:05

But the point is that this development would only happen because of the presence of this institutional capital, because it's not there domestically, right? The domestic banks are very restricted on what they can lend and then there isn't a huge stock of domestic investors. Yeah, I know you've explained it very well.

Pat Farrell: 26:23

And another lens to look at it too is say, for example, if we take, say, the government's own target at 33,000 homes per annum, the Department of Finance themselves have estimated and it's probably out of date, this estimate, because it was pre the current hyperinflation we've had in construction that it was going to cost about 13 billion a year to fund those 33,000. 33,000 houses. So if you look at where does the money come from? The government says it's spending about 4 billion a year, but there's probably about a billion of that is HAP, so that's up X rather than CAPEX. So we're talking maybe 3 billion, maybe less than 3 billion capital supplied by the government of the 13.

Pat Farrell: 27:00

And then we have banks which, as you rightly pointed out, are absolutely limited in how much they will be allowed to lend due to regulations, so that's about another 1.2, 1.5 billion. So now you have this big gap of about 6 or 7 billion, and the only way that gap can be filled is by institution investors or non-bank lenders, and they are the people that are supplying that balance. And then, if we accept the higher numbers which as are yet unpublished but had been referenced from the housing commission of 50,000 homes per annum. Well, the numbers are jumping now maybe to 15 to 20 billion, but the size of the gap between, say, banks and the government and this big void that needs to be filled, can only really come from institutional capital. So institutional capital is absolutely critical if we're to make headway on housing and indeed in all the other real estate classes that are necessary for a functioning economy.

Rick: 27:48

For the love of God, did you hear that? 20 billion euros per year and the government is going to spend about 4. And, in fairness, that's a lot. Where on earth is the rest of it going to come from? These numbers are big. Ireland is awash with cash at the moment, but can we really afford to spend that kind of money every year? For years, I asked someone in the know.

David Tilson: 28:09

David Tilson from Canterford Gerald. My title with Canterford Gerald is head of debt capital markets. I guess that's effectively looking at the bond market, the interest rate market and effectively advising companies who may wish to raise debt.

Rick: 28:24

We hear about the bond market. Can you tell me what the bond market is?

David Tilson: 28:28

Yeah, sure, I mean at its simplest level. The bond market is where I suppose, bigger and sometimes more sophisticated organizations go to raise funds. So you know, individual small companies will go to their bank for a loan. Governments and larger corporates might tend towards the bond market. So they will issue a bond which will have a maturity date, just like a loan, so say five years. There'll be an interest rate on that bond, generally fixed and that's known as the coupon. So they might decide they will go out and issue funds for five years at 5%. They can also issue at a floating rate. In Europe that floating rate is called URIBER and those type of bonds are called floating rate notes or FORNs. But generally it's the issue into the bond market at fixed rates.

Rick: 29:20

Okay, so any government would normally issue a fixed rate that they can't stand away from 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 and they collect the money and spend it. And then, if they don't have enough tax income coming in to pay for everything, they go out and they borrow the money from someone else who is assumedly willing to lend it. Right now everyone is talking about the surplus, that there's a budget surplus, so what does this mean for government debt? Like, if right now we're taking in more money in taxes than we're spending, then presumably we don't need really to borrow any money, but we're still borrowing money. So what's going?

David Tilson: 30:07

on. Yeah, I mean, it's a really good question because, as you say, at face value it might make sense, but there are probably a few things at play. Last year was an 8 billion surplus, in 2022. This year was going to be potentially around 10 billion. And the NTMA, who effectively managed the government's debt. So the National Tritory Management Agency, colloquially known as NTMA, go out and manage the debt on behalf of the government. They have 25 billion approximately in cash as well on the book. So, again, why are we going out and issuing it?

Rick: 30:45

So there's 25 billion in cash and there's projected to be another 10 billion in excess receipts. So that would mean at the end of 23 we have 35 billion, and yet we're still going to borrow money.

David Tilson: 30:59

Yep, I'll tell you why. Okay, so firstly, there's a lot of debt has been accumulated over the years. So the national debt in Ireland is €233 billion. So we have a lot of debt on our books and that debt will mature and will have to be paid off and will probably be rolled over. In other words, the government will, as a bond matures, they'll go out and issue an issue again. So there's a stock of debt there that actually needs to be looked after.

David Tilson: 31:30

The second thing I'd say is that, with these windfall corporate tax coming in, the government has basically said look, we're going to put some of these away into a rainy day fund. So they've already set up the National Reserve Fund, or the NRF, and there should be €8 billion in that by the end of next year. And separately, they're also talking about setting up another fund more longer term. A lot of countries do this. They're called sovereign wealth funds, so the Saudis might do it with their oil resources. They recognize that things are great at the moment, but in 40 or 50 years time, potentially, things from a.

David Tilson: 32:10

Saudi perspective may not be as rosy, so they squirrel money away there. So again, a lot of the money being raised is actually potentially being put away for the long term as well. So that's another reason. And then, finally, the NTMA want to keep liquidity in the Irish government bond market, so rather than stepping away from it completely, it will continue to fund itself there, albeit not in huge size, to keep the natural functioning of that market going.

Rick: 32:43

Okay. So because if they stop issuing new bonds, then people won't be interested, and then when it comes 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 pay that down? Do they say, well, that's how much money we owe, so as long as we keep growing our economy, we don'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 debt generally grows with it. That's why the likes of markets and rating agencies tend to look at the debt to GDP ratio. So, in other words, how much debt do you have relative to how fast you're growing or how big your economy is? And that's a measure that a lot of people look at.

Rick: 33:35

Debt to GDP. We hear a lot in the media about how our GDP figures are kind of bullshit. Right, Like, the GDP here is dramatically inflated by the number of foreign companies that are in Ireland, and that's how GDP is calculated. So during the crash and all that, when Ireland needed to bail out, the debt to GDP ratio was really really high, but now it's really really low technically when you look it up. Right, that's right. It's kind of interesting how that happened. Right, Because the debt went up. I mean, we don't owe less money now than we did in 2011 during the bailout, right, we actually owe more money.

Rick: 34:19

And yet the debt to GDP ratio has fallen from 100% to something percent to 40%, simply because we revised up the GDP figures.

David Tilson: 34:27

So the NTMA themselves will publish figures based on we're not trying to get too technical but GNI star, which is basically gross national income modified, which they feel is a more accurate reflection of the domestic economy. So debt to GDP is near 40, whereas debt to GNI star is around 90%.

Rick: 34:50

That's a more accurate number, okay, and is it the case that when it gets to 100%, I mean it's kind of a crude measurement, but when it gets to 100% that you're like you know countries who are going to struggle above that? Or? But there are examples, like in Europe, 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 debt piled down. But Greece's debt to GDP is 170%, so it's still at a very, very high level. Very historically, it's been in a similar boat.

Rick: 35:30

It's 145% at the moment, so very, very high levels and 145% of what a much larger economy too. So in the overall size of the it's a WIO 230 billion. I know it's kind of waving away 3 billion euros there. Let's just call it 230 billion. How big is in Europe? How much debt is there for governments?

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 to GDP ratios is high right, it's 90.

David Tilson: 36:29

So the eurozone average is around 90%. Okay, and yeah, germany is more or 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 during COVID. There was these euro kind of collective bonds. Right, they were issued to help all the different countries do economic stimulus. If there was a huge call for more money, is there a capacity out there for governments to borrow a lot more?

David Tilson: 36:58

Depends on defying a lot. But yes, there is. I mean, the bond markets are very, very liquid. Governments have been issuing for a long time in the bond markets. They're well known. The history of default is very low. So, yes, what the market will do, whoever it is, it will require a higher price for that. So the more you issue. So there's a reason why Italian debt yields higher than German debt, for instance, and it's because their debt to GDP ratio is 144%, whereas Germany's is at 90%.

Rick: 37:35

So the risk of lending to Italy is higher, perceived to be higher, in the sense that they have less capacity to pay the bill for that. That's exactly it, germany, okay. So then, just turning back to Ireland 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 borrow money from foreigners, Like we're happy to have them come here and open factories and make Botox and computer chips, but when they come build housing we lose our shit. And that domestic, like that could 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 my previous role, will also hold Irish sovereign bonds.

Rick: 38:28

And that's part of their capital structure. Like that, they have Part of their 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 interest rates down to negative numbers, it went down to minus a half a percent and it was felt that that was probably the bottom. They couldn't go any lower. So what the ECB did and actually the US Federal Reserve and the Bank of England did similarly at different times was actually go out into the market and buy bonds to try and drive down the price of debt.

David Tilson: 39:05

A few other technical reasons why they did it, but effectively the ECB has ended up owning 40% of the eurozone bond market, so 12K to 5 trillion. 40% of that is owned by the European 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 with money that they invented. We just change gears for a little bit. That's all very helpful to know. So we owe 230 billion. The government's going to try and raise between 7 and 10 billion something like that this year, and that's for a lot of reasons. One, to keep the market open. Two, because prudence keep raise the debt. You have the cash. You don't want to be stuck for the money. In simple terms, that makes a lot of sense In the UK.

Rick: 39:58

Liz's trust became prime minister. We all remember this. Right, she went a bit mad with her chancellor and they started pledging to cut taxes, raise spending. And then we all know what happened. Right, there was a lettuce. The lettuce won and Liz was gone. I think it was 50 days or it was something shockingly short. I think the only other person to last less time actually got either got assassinated or died in office of a heart attack soon after being elected. So it really was pretty terrible. But it was stunning to watch to see how quickly the whole world turned against the UK. The UK is a very big economy. They have debt the same way everyone else has debt, but it seemed to be like in a couple of days, people were starting to talk about the solvency of the UK From 10 years ago, it not needing any bailout. It in fact lend money to Ireland directly, didn't it? As part of the bailout, and to Greece and in Europe generally before they decided to leave. How does something like that happen?

David Tilson: 41:06

The bottom line is the bond market actually has a lot of power and it can be extremely unforgiving. And in this case it looked at the plans. It said we think this is absolutely crazy. And it adjusted higher the cost of UK debt. So interest rates rose aggressively over two or three days and they immediately had to roll back. The plan was ripped up within two days. She was gone, as you said, very quickly the lettuce outlasted her and, yeah, it was akin to starting leaving the EOM back in 1992. The economy was like the whole edifices of the UK were being literally falling down until they did the EOTR.

Rick: 41:57

We do a thought experiment here for a minute. If she just said, nah, I'm sticking to it, what do you think would have happened? Do you think that after that would have got progressively worse and worse and worse? Interest rates would have potentially gone very, very high? The Bank of England did intervene. 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 of the bonds is falling because the interest rate was rising.

David Tilson: 42:27

Yeah. So suddenly they had their liabilities on one side, assets on the other side, the price of those assets as yields go up, prices fall. The prices of those assets absolutely collapsed. So you had potentially solvency question 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 to take 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 a possibility here at the moment because of how good everyone's flush with cash, the government have a lot of cash on hand and the economy is growing. There's a lot of love for Ireland and the bond market. I have to stand right now but there wasn't that long ago when that wasn't the case If the 10 billion of surplus went away tomorrow. So now the taxes are just covering expenditure and there's no surplus. And we put some money into the sovereign wealth fund. That's good, but by its very nature that's meant to be there. That's not meant to be spent. Right, it's meant to be there forever. So you can't really say well, we have put money into the piggy bank and then spend it because it'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 that surplus to disappear right.

David Tilson: 43:42

Well, three American firms decide that they're moving their headquarters out of Ireland. That surplus has gone immediately. Gone immediately right.

Rick: 43:48

So the surplus has gone and the government simultaneously decides it needs to undertake a huge spending program, and I mean not COVID, much bigger than COVID. The economy is softening, for example. Still we keep on this podcast. We're talking a lot about housing, a lot of money to be spent on housing.

Rick: 44:07

How fragile is the relationship between governments and markets, like what happened in 2011,? We obviously had unsustainable spending and we saw what happened to LISTRUS. They had a plan for what people judged to be unsustainable spending and lasted two or three days the idea that we could just decide here, or that we would get so comfortable here that we would decide we could spend whatever we wanted on infrastructure, like we heard the plan they're going to spend 50 billion euros on rail over the next 20 years, the amount of 50,000 houses to be built here, and the government are meant to be funding a large proportion of that in many different ways. All these things incrementally add up together. Is it possible that we could be in a situation where the bond market goes you can do this, but you're not doing that?

David Tilson: 45:01

You can never say never. I think one of the things and this is maybe the difference with LISTRUS piece is that if the market perceives that you're borrowing to improve the ultimately the productive economy productiveness of the economy and that longer term, actually, the market will be quite happy to fund you if it felt that that was the outcome. What happened in the UK was very different. It was like oh yeah, we're going to borrow a massive amount and spend it immediately. Guess what? The economy is going to be growing strongly in about three or four years time and that's all going to come back in again and the market went well. That's a fairytale.

David Tilson: 45:38

We don't believe that story. The circumstances matter is the point that I'm making. 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 the case and that became apparent quite quickly. But in this time around, even allowing for the over reliance maybe on corporate tax, the economy 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 going astray. In 2023, the government planned to spend €90.5 billion. That's on everything. Roughly €3 billion of it was planned for building new housing, so 3.5%. For the state to provide all of the funding needed to build 50,000 units a year, it would need to multiply its spending by seven the surplus Dave Tilson is talking about. Well, that's at the current tax take. Don't forget that just 10 companies, all of which are foreign, paid 60% of corporation tax, or €13 billion in 2022. If even one of them left or if the profit started to decline, then we'd very quickly be in a difficult situation. The tax returns in August declined. Hopefully that's a once-off and not a trend.

Rick: 47:09

Most of us can agree that the economy is in great shape right now and there should be some credit given to government for being careful with the budget. We saw what happened the last time. We partied like there was no tomorrow. As Colin McCarthy said in episode 106, it turned out there was no tomorrow. To avoid Leo versus the lettuce, the government can't spend €20 billion a year to build all of the housing. The private sector is needed. Institutional investors are needed. They are the social weavers. Someone who tells you different is simply living in Cloud Cuckoo Land.