The Central Bank's new deputy governor delivers stark warning over the effects of crash
HOUSE prices could take decades to recover from the property crash even if the economy starts growing, the new deputy governor of the Central Bank of Ireland warned last night.
Experience of booms and property crashes in other countries suggests the economic recovery here will be slow and house prices will recover even more slowly, he said.
Central Bank deputy head Stefan Gerlach made the comments at a conference on housing markets and financial stability at NUI Galway.
It was Mr Gerlach's first major speech since the appointment of the Swedish economist last December sparked controversy, when it was revealed that he is being paid €50,000 over the Government's "€200,000 salary cap" for public-sector jobs.
Last night in Galway, Mr Gerlach said Ireland had experienced a classic housing boom. House prices here rose faster and higher than in most booms but the bubble and burst is in line with the pattern seen around the world, he said.
It means experience elsewhere could help forecast the likely trend here over the coming years.
That evidence points to a sustained housing slump, because credit-fuelled booms are typically worse than other booms and the combination of a housing crash with a financial crisis is especially damaging.
"Recessions that coincide with a housing bust are, on average, longer and more pronounced that others," he noted.
A study comparing crashes in the likes of Scandinavia with in Korea and Japan revealed the wider economy recovered much faster than house prices, where they recovered at all.
"While gross domestic product (GDP) in this sample of countries typically recovered to peak levels within six years, the recovery in house prices was much delayed," Mr Gerlach said.
"In the Nordic countries, the recovery took between 10 and 22 years, house prices have not yet recovered to pre-crisis levels in Korea and continue to decline in Japan.
"Overall these graphs suggest that economic activity in Ireland will recover only gradually, and that it may take a long time before house prices return to their level in 2007," he said.
That evidence may in part explain why the Central Bank has signed off on plans for so-called "negative equity mortgages".
The new mortgages will let people bring home loans with them when they move house- even if they sell for less than they paid.
It could see people end up with mortgages of as much as 175pc of the value of their new home -- as they end up carrying much of the old mortgage to their new home on top of any new borrowings.
That flies in the face of efforts to rein in property lending by insisting on tighter discipline, but if the Central Bank is convinced house prices are set to stay low there is little point in waiting for a property recovery to lift people out of negative equity.
That makes more extreme ideas such as the new-style mortgage more palatable.