The hairdresser who ruined Tallinn
By Abdul Turay
Published in Postimees 24 April 2009
I met a traveller on a plane about two years ago who looked like a character in a romantic novel; tall, good-looking, urbane and rich. He told me of a conversation with two young Irish property “entrepreneurs” in a Tallinn pub.
These entrepreneurs were sure that the property market would take off, just like it had in Dublin and that they were going to be rich, or more accurately, richer than they believed they already were. The couple were so full of swagger and confidence that the traveller, a stockbroker by trade, was ready to invest in property in Tallinn himself...... for about five minutes.
Then he asked the entrepreneurs what were the yield rates. Neither knew what on Earth he was talking about. A little probing revealed the “entrepreneurs'” had day jobs. The man was a mechanic and the woman was a hairdresser.
We all know that the property market has gone to hell. Most people know it is a global phenomenon. Prices have dropped everywhere, 8.2 per cent in the United States, 16.5 per cent in the United Kingdom. It's bad for the world, for Estonia it's carnage. Property prices dropped 23 per cent in 2008, these are some of the worse figures in the world and there is no end in sight. In terms of the value of its real estate, Estonia is heading back into the 20th Century.
We have to ask ourselves the question, why is it worse here than just about anywhere else?
Some blame Prime Minister Andrus Ansip and the government's sloppy fiscal policy, others blame the greed of local people, still others blame reckless lending by the banks. It's clear there is no single villain, but there is one culprit that hasn't been brought into the light; the mechanic and the hairdresser.
The property contagion didn't start locally it was spread here by foreigners; Swedes, Britons and conspicuously the Irish. Already way back in 2002 before anybody in Estonia had ever heard of a Euro-loan, property mania had been sweeping through Dublin for years.
Foreigner investors formed the vanguard of the first wave of property speculators. When banks started to lend money to foreigners to buy property they were therefore lending on the basis of income earned in Cork, Dublin or Manchester. The value of property began to reflect average earnings in the UK or Ireland, not average earnings in Estonia. Prices went to the moon.
By 2005 it was common knowledge throughout the British Isles that Tallinn was the place to be.
“Investors are packing their bags for Tallinn to try to beat the rush,” trumpeted the Times of London on 29 April 2005.
By 2006-7, about the time the hairdresser showed up, it had become a feeding frenzy. The hairdresser turned what might have been a Copenhagen or Helsinki style bubble into a mega bubble.
By this time, the fly-to-letters hopping on planes were not real investors. They were just ordinary people with ordinary jobs who were seized with a get-rich-quick mania.
Some of them may have looked rich to a naive 20-year old girl in some place like Hollywood disco, but they were not rich in their own country. They were also not investing any of their own money. They were simply borrowing money from their over-inflated flats in down town Dublin and using that money to put a deposit on a pad in Central Tallinn.
It was an impossible situation, locals felt they had to buy as they wouldn't be able to afford to live in their own city and they began to charge into the market too.
Irish investors were particularly brash and confident. To understand why you have to know a little of Irish psychology. Ireland has been poor for centuries and they blame their easterly neighbours for their predicament. The truth be known, Ireland's land isn't particularly good for farming and it has few mineral resources.
That all change in the 90s when American companies began to invest in Ireland as a conduit into European markets. In the space of the decade Ireland went from being one of the poorest countries in western Europe to one of the wealthiest. Suddenly the Irish had something to be shout about. They had surpassed the British.
People from Estonia and the other Baltic states saw it as their El-Dorado.
Prime Minister Andrus Ansip was one of the people who bought into the myth of the Irish economic miracle.
In this decade the Irish economy continued to grow. The Irish believed that they had discovered a new economic paradigm. In reality since about 2002, Ireland's growth was based on consumption and construction. It was a mirage. There was no Celtic tiger, tigers don't live in Europe.
Now the party is well and truly over. Ireland economy shrank by 2.5 per cent in 2008 and it is expected to contract by at least 6.5 per cent in 2009. Irish unemployment is anticipated to rise to 15.5 per cent this year.
Now Ansip must realise that it was a mistake to hold up Ireland as a model for Estonia to follow.
It's ordinary Estonians who are having to suffer from the hairdresser's folly. If the currency is devalued or the European Central bank resets interest rates upwards to cope with rampant inflation, as some economists like Peter Schiff predict, tens may even hundreds of thousands of people will be stuck sitting in houses that are worth less than they paid for them and loans they can't afford. No doubt some will be sitting on the street.
As for the hairdresser herself, she is in deep trouble.
Take an acquaintance of mine, lets call him Henley. He seems to have everything going for him. He is well-groomed, married to a successful Estonian designer and facing bankruptcy.
“I was that mechanic, I was that hairdresser,” Henley says jokingly. He came to Estonia in 2004 bought his first property then he sold in 2005 for a nice profit. Then he got greedy. Once he had established himself as a good creditor with Estonian banks he was able to borrow money to buy four other properties which he rented out.
In the meantime he was establishing himself as an international mini-tycoon buying up properties in Bulgaria.
Now that the bubble has burst Henley is stuck with four properties the value of which is below what he paid for them. There is no point in selling them because he would still owe the bank money. And the rental situation is awful. Dublin and London have had a huge influx of migrant workers from places like ...well Estonia. Migrants may not be motivated to buy any more, but they still need a place to live, so rental incomes have held steady. Tallinn has hundreds of nice, empty, flats.
Henley is a worried man and looks it. If you think you are struggling to pay the loan on one apartment, imagine if you had four.
“You weren't actually a mechanic before you left,” I ask him. I assumed from his manner and financial knowledge that he was in business before coming here.
“No, ” he said: “I was a fireman.”