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The Return of Ireland’s Housing Bubble

ZURICH – After having endured the collapse of its housing market less than a decade ago, Ireland has lately been experiencing a blistering recovery in prices, which already have risen in Dublin by some 50% from the trough in 2010. Is Ireland setting itself up for another devastating crash?

It’s no secret that the collapse of asset bubbles carries massive financial and social costs. With construction activity and investment spending grinding to a halt, sharp recessions – which cause tax revenues to fall, even as surging unemployment demands increased social spending – are unavoidable. Taxpayers may even be asked to shore up financial institutions’ capital base. The last time that happened in Ireland, it cost more than €60 billion ($67 billion), or about 40% of GDP.

Housing bubbles are not difficult to spot; on the contrary, they typically make headlines long before they pop. Yet they are far from rare. Bubbles in Ireland, Spain, the United Kingdom, and the United States collapsed after the financial crisis that erupted in 2008. After the Asian financial crisis erupted in 1997, property prices in Hong Kong, Indonesia, Malaysia, Philippines, South Korea, and Thailand sank by 20-60%. And a decade earlier, Sweden, Norway, and Finland experienced property-price declines of 30-50%.

The obvious question is why nobody stepped in before it was too late. The answer is simple: while the bubbles are inflating, many people benefit. With the construction sector thriving, unemployment falling, and banks lending freely, people are happy – and politicians like it that way.