Property market is running on more than just positive thinking
Ulster Bank economist says jobs are essential for home sales
Published 17/04/2015 | 02:30
Looking back at Ireland's economic crash with Ulster Bank Chief Economist Simon Barry is a bit like realising you've been all caught up fussing over the damage to your car - rather than the fact that its just been hit by a freight train - with you in it.
"OK, if you had made a long list of all the things that could possibly go wrong for a small open economy like Ireland, then every single box on that list got ticked, every one. Ireland got caught up in the perfect storm during which the worst type of domestic meltdown occurred and then it coincided perfectly with and collided with the worst type of global economic crisis that could occur."
Described like that, Barry puts what many of us casually term "the downturn" into an entirely different context. If he is sometimes called "the cheery economist" perhaps it's because from his position he can see how lucky we are to have found ourselves emerging from it in reasonably good shape and how decent our general prospects are a result.
So while we Irish have a tendency to dwell on the scratches and dings, Barry is looking at what's coming next. And he says it looks good.
"Don't get me wrong, as an economist I have to point out that there is always the possibility the unexpected out there could upset everything. Lehman Brothers' collapse was an unexpected event of huge magnitude and no one could have predicted it," says Barry. "And at the moment there is risk to the world economy from the situation in China, and from the situation in Greece, or there could be from any other unexpected event beginning to unravel that we don't yet know about. But what we can control and what we can see is generally looking good and the bigger picture regarding our prospects for continued growth and the overall prospects of the euro zone economies are healthy."
As chief economist for a bank it's Barry's job to keep an eye on all the global variables as well as the local ones. And as the economist for an Irish-based mortgage lender, he pays plenty of attention to the property market, where he asserts the prospects are also positive overall for further recovery - despite figures showing stalls and slippage in Dublin prices in particular.
While so many in the property sector are focused on housing supply and issues which have been holding up construction of the homes we require, Barry is looking somewhere else when he thinks about the single most important indicator of property sector growth: jobs.
"Headline economic growth gets a lot of attention but there is a lot of other stuff going underneath the bonnet and influenced by the multinational sector, namely nine consecutive quarters of rising employment. I am taking particular encouragement from the fact employment growth has been steadily sequential, but also that it has been particularly strong most recently - in the second half of 2014 the run rate has pitched up substantially.
"Better still is that it's all about full-time jobs. Early on in the recovery there was evidence a lot of the work was part-time or temporary, but this is now being swapped for full-time employment of the sort that gives people confidence. It also shows employers are more confident because they're prepared to make that commitment to new full-time positions.
"Another positive is that it's definitely not just a Dublin phenomenon. Dublin did begin to recover first and a bit more strongly at first, but the evidence shows that the rest of the country is now catching up. Unemployment in Dublin is now right down to 8.6pc from a peak of 13.4pc, while outside Dublin we're talking about 10.5pc; still high, but right down from a peak of 16pc.
"It's that kind of backdrop that's really important for the prospects of growth, not just in the economy generally, but in the property market particularly. So it's not just a coincidence the property market began to turn up when the labour market did early in 2012."
"What's also important is how much they're being paid. Aggregate compensation fell by 15.5pc through 2009 and 2010, while employment was clobbered in the same period. Now its going up. Again it's not the total picture, but it's an absolutely vital part of it."
It means that not only are newly employed or promoted or pay-raised people ready to go looking to buy a house but those who have been in loan arrears are becoming better able to get out of the mire.
He also takes solace from the increasing numbers of home sales, indicating a fast normalising market.
"Transactions are improving steadily - we turned over just 0.9pc of housing stock in 2011 but last year we turned over 2.1pc. I'd expect this to rise again based on historic norms. Because we have only the property register to look at and this data is just four years old, we can look at the UK which is currently running at about 4pc. There were just 18,000 transactions in 2011, while last year there were close to 43,000. This is also good."
On the contrary, Barry asserts that "sentiment" as a variable is overplayed in the fortunes of the property market - "by this I mean the attitude which sometimes prevails that says 'if only we had confidence then everything would be fine'. Of course it might play a small role but the most important factor by far are the components of finance for households - that they have money in their pockets.
Unlike others, Barry is not so critical of the Government's role in the market. "I think the rebound caught up on Government a bit more quickly than they were expecting. However, we are coming up to a point in society where supply is now causing a big concern - that for the first time in memory there are some real worries that our basic ability to actually accommodate the population is now at risk.
"Rents, as well as prices, are rising to levels people are struggling with and people are also struggling with availability of homes. There's no doubt we need to get to a better equilibrium and the Government needs to incentivise home provision and clear the planning obstacles to enable us to achieve that necessary equilibrium.
"Another reason to be positive for the outlook of the property market is the underlying demographics trend - if we look at the population and household formation we can see there is demand in place for 20,000 to 30,000 houses per year required until 2030. Last year, we built 11,000 in total, so that's obviously not enough and there's been a pretty substantial supply shortfall. And because the prospects for the economy as a whole at the moment are good, I believe property prices are going to continue to rise."
In this positive thesis he isn't overly concerned about recent evidence of flatlining and falling prices in Dublin. "After a period of rapid price growth, particularly in Dublin - which is what we've recently had - it was always going to be the case that some cooling was to be expected, especially after the Central Bank introduced its lending measures."
While he views these measures as being largely unnecessary ("we put measures in place to address credit demand in a market that was actually not suffering from an over supply of credit") he does believe the Central Bank was reasonable in what it did implement. "I think it was the right compromise to allow first-time buyers a deposit of 10pc instead of 20pc given that they have less financial commitments and generally greater spending power.
"The other mistake people make is thinking of the property market as one entity. There is no national property market as such and we've been seeing that more clearly recently. Demand has been strongest in Dublin and the urban centres, and we're seeing some of the other cities bouncing back.
"There has to be an onus on Government to prioritise the streamlining of the local planning systems to sort out the problems holding up housing provision where shortages exist - to deal with unreasonable requirements for minimum sizes, aspects of apartments, numbers of car parking spots and to deal with the number of vacant sites.
"A levy on disused land would be good to stimulate the provision of housing. What drives an economy like ours is the consumer not the Government, but the Government should at least ensure that the system in place is workable and free of obstacles."
So, as a former economist with Bank of Ireland when the crash occurred, is he not concerned - like so many others - that with fast rising prices (at least in the rest of the country at this point) history could be repeating itself with the property market?
"Like I was saying, as a small open economy, we can only look at the things we can influence and put them right. We can never account for the big global surprises. But the one big mistake we made in the past - and hopefully we've learned from it - was that we lost touch with the basics. We didn't pay attention to the current account of the balance of payments. We were running large deficits and spending too much when the economy was heated.
"The country was also investing too much on housing based on borrowing too much from abroad, and we were building 21 homes per 1,000 of population - which is almost unheard of. The key to avoiding that type of problem again is paying attention to these basics - and good controls over the medium to long term by the Central Bank."
Simon Barry speaks at "Housing the Next Generation," a conference event held on April 30 next at UCD to discuss the future of the property and housing market. Organised by the Irish Independent, Ulster Bank is key sponsor.