Ireland remains robust in face of housing slump
DESPITE recent falls, Irish house prices may have further to drop, but the economy is less vulnerable to the property market than those of many other countries, researchers at the International Monetary Fund (IMF) say.
A special analysis of housing markets for the forthcoming IMF World Economic Outlook finds that Ireland had the biggest unexplained rise in house prices of 17 rich countries studied.
However, this analysis does not include the effects of immigration or household formation -- both of which loomed large in Ireland in the 1997-2007 period studied.
On the figures as presented, house prices in Ireland, Britain and the Netherlands were about 30pc higher than justified by financial fundamentals. France, Spain and Australia are among those with 20pc "over-valuation". But the USA, where prices are already falling, shows only 12pc over-pricing.
"Ireland, the UK, the Netherlands and France look particularly vulnerable to a correction in house prices," the report says. Ireland is one of the few countries where real house prices (after subtracting inflation) are actually falling. High inflation of close to 5pc means the fall in real prices of close to 10pc is the biggest in the study.
But Ireland's housing market fares better under other headings. Despite the fact that house building, at 12pc of GDP, was a bigger part of the Irish economy than any other, all of the building seems justified by demand. Denmark appears to have the biggest over-supply of housing, followed by Spain.
The fall in Irish house-construction since 2006 may have brought it back to its trend levels, the analysis says. "However, this does not mean that residential investment will not experience a further decline," it warns. "Residential investment appears to lead the business cycle in many advanced economies."
The IMF agrees with Irish economists who say that consumers here have not relied on the rise in house prices to boost spending as much as in countries like Britain and the USA. It ranks Ireland second last in terms of consumption based on house price changes, with only Italy showing a smaller response.
One reason is that the Irish mortgage market is one of the most restrictive among the countries studied. Ireland ranked 12th out of the 17 in terms of access to mortgage credit, whether for house purchase or equity release. "Spillovers from the housing sector to the rest of the economy are large in economies where it is easier to access mortgage credit and use homes as collateral," it says.
In separate analyses, IMF staff say the boom in commodity prices is giving more of a boost to the developing countries which produce them than was the case in the past. "Exports -- especially of manufactured goods -- and investment are growing more rapidly, while governments are borrowing substantially less then before."
On climate change, researchers say the costs of combating global warming can be held to feasible levels.
"It will be crucial to aim at a framework which is sustainable and provides incentives for broad country participation," it says.
- Brendan Keenan
