How the Products of Architecture; Buildings; are Financed
This essay examines the nature of the financing of Building in relation to the timelines of recent property market collapses across Ireland and Spain.
Ireland Timeline
1991 – 2001 Irish GDP; the amount the population is incentivized to work and produce per capita; is increasing. The workforce increases. The workforce becomes prosperous. House prices increase as the country becomes more prosperous.
2000 – Ireland builds 75,000 housing units per year. Land is zoned to allow for 460,000 more homes.
2003 – 2007 The number of household loans taken out increases. The number of European banks backing up the Irish Bank loans increases.
2000 - 2006 House prices double and then peak
Increased speculative construction occurs. 110 billion euros of investments are put into the Irish property market as loans to builder and developers.
Allowing for a 4.2 million population in the Irish republic and 1.7 million in northern Ireland gives a total estimated population of 5.9 million. This equates to an approximate house loan debt per head of population of 19,000 euros approximately 2.5 times the average wage in the 1990’s.
The average wage in 2006 was 30,000 euros. By 2007 house prices had climbed to 11 times the average wage.
The dual currency state of the combined countries of North and South Ireland was unable to offset the level of debt.
2004 12% of the Irish workforce is involved in construction.
2007 – 2010 Global credit crisis.
2007 Property prices stabilize as supply meets the existing demand for housing. When demand falls but the supply keeps being added to the house prices fall.
Houses become unoccupied since they are unable to find purchasers.
The value of these vacant properties reduces the value of any new building work being carried out.
Eventually it is not viable to carry out construction work since the value of the completed houses does not cover the costs already absorbed in carrying out the land purchase, materials, labor or approvals.
Construction work collapses. The construction companies default on their own loans. The workforce are laid off and default on their own loans. Banks reduce the ability for loans to be taken out. Funding in the construction sector collapses.
2010 Property prices collapse. Loans reduce. Mortgage lenders go into arrears and default.
The Banks take over the property on the defaulting mortgages but the value of the property continues to fall reducing the value of the banks investment profit or their ability to get its original investments back.
2013 Property prices are recovering.
Source: http://www.irisheconomy.ie/Crisis/KellyCrisis.pdf
Source: http://www.irishleftreview.org/2010/06/08/irish-housing-wages-1977-2006-portrait-scam/
SpainTimeline
1980’s house ownership encouraged.
1985-1991 house prices triple.
1986 – Debt is 35% of disposable income.
1992 – 1996 house prices stabilize.
1996 – 2008 house prices increase.
1997 – Debt is 52% of disposable income.
2000 – 2009 5,000,000 new houses are added to the existing housing stock of 20,000,000.
This equates to approx.556,000 houses per year.1,523 per day. 190 per hour over an 8 hour working day.
Allowing a population of Spain in 2000 of 40.5 million and a population of Spain in 2009 of approx.. 46.75 million.
This allows for 1.6 persons per house. Approx. 2 people per house.
This indicates that the 5,000,000 extra houses were added when the 20,000,000 existing housing stock could have still accommodated the increase in population in the same time period.
2005 Debt is 105% of disposable income.
2005 to 2011 Sub Prime Mortgage loans increase.
2006 Private debt is 832.289 billion euros.
2007 - 2010 house prices fall.
2010 Private debt is 1 trillion euros.
Spain is left with too many houses, constructed with to much investment, that are losing value in an economy where the population cannot repay the debt levels accrued.
Source: World Bank.
Source: https://en.wikipedia.org/wiki/Spanish_property_bubble
Source: https://en.wikipedia.org/wiki/Spanish_property_bubble2007 – 2008 Global credit crisis.
Foreclosure laws relating to defaulting mortgages in Spain allowed the defaulter to be evicted, their home seized and the remainder of the loan to be still made the liability of the defaulter to pay.
People lost their home, location from which to get work, water, food, family base and then still had to find a way to pay back the loan.
This extended the duration of the debt crisis in Spain.
Conclusions
The construction industry is founded on investment. This translates as bank loans. For each project the mortgage vendors, banks, client, design team, contractor, builder, sub-contractors, suppliers, manufacturers and resource extractors and suppliers must all first go into debt to carry out the work required. If the work takes several years then the additional costs on all materials, labour and time must be allowed for year in each of their loans, bids, tenders for the works. This is impossible to forecast with certainty. The investment dependency results in financial failures during the works.
The mortgage vendors, banks, client, design team, contractor, builder, sub-contractors, suppliers, manufacturers and resource extractors and suppliers will all be paid in stages as the works are completed. However they will never be able to recover and pay back the full value of the investment.
They all exist to use the project; list of projects; to allow them to get loans to retain the same economic, social and business levels in society.
The industry should compare construction investment with final sales or valuation for the property and be paid the balance of the final value plus the cost of construction. Only in this way can the original and ongoing investment be repaid and the economy re-financed.
The construction of a house is also inherently depleting in terms of environment, energy, and resources. Construction of houses should therefore also be limited or prevented to allow adaptation to the effects of the current context of a century of climate change, depleting fossil fuel use and depleting energy, resource and environment humans are having to adapt to.
( See also Why House Building should be limited or prevented in the UK in 2016 Article 170 on this web site)
Ian K Whittaker
Website: https://sites.google.com/site/architecturearticles
Email: iankwhittaker@gmail.com
08/09/2016
14/10/2020
1009 words over 2 pages