Property: bottoming out -- so it's time to spend
Sunday March 30 2008
The worst for the economy isn't over yet; a rake of recent economic forecasts prove it. But they also prove that it won't be long before it is. From a rate of around 5 per cent last year -- well above the eurozone average - most forecasters expect Ireland's economy to grow by between 2 and 3 per cent this year. Although still above the eurozone rate, figures like this have caused a minor laundry problem for some commentators. Irrationally, the idea that Ireland's economy could spend a year or two behaving like a normal developed economy scares the living daylights out of some people. Perhaps that's because the world's economy is also slowing down.
To be sure, from a very healthy 4.5 per cent last year world growth might slow to "only" 4 per cent this year. The slowdown in the US economy is sharper and scarier. But its significance is also overhyped. Europe's largest economy, Germany, is weathering the global financial storm well, pouring ever more exports into Asia's rising economic sea. We could worry about America. Or we could be a lot smarter and start copying some of the virtues of "Old" European economies like Germany. Whether we do or don't, Ireland's economy will benefit from the fact that, unlike the last serious slowdown in the world economy in 2001 -- when the entire global economy was slowing -- Asia and the eurozone are now a stronger counterweight.
Since then the Irish economy has become less dependent on the US (although the US is still our biggest trading partner and investor). What that means is that, after taking the Olympic gold medal for economic growth in almost every year since 1994, we might have to spend a few years settling for bronze or silver. And although Ireland's food and manufacturing exporters are suffering serious consequences from a stronger currency -- which can't be ignored -- service exports are booming. If the Government can help workers to retrain from old to new jobs then any rise in unemployment can be contained and our growth rate could be back above the 4 per cent threshold.
The reason this rebound will happen is the same reason this year's slowdown happened. A temporary build-up of housing inventory, caused by overly rapid investment in housing during 2005 and 2006 is unwinding. Less about a boom and bust, Ireland's current economic story is more like a property bulge passing through the gullet of our economy. In a process that takes about two years to complete, house building is slowing, house prices are falling back to sustainable levels after the credit binge of 2005 and 2006. Having fallen by around 9 per cent last year, house prices should fall by around as much this year but even here, the worst may be almost over: As Wednesday's latest ESRI house price index showed, the rate of monthly decline almost halved from 1.5 per cent in December to 0.8 per cent in February. As this is happening nominal incomes -- what banks assess when handing out mortgages -- are rising by around 5 per cent a year. And even if interest rates don't come down, once the ECB thinks that the risk of temporary inflation (caused by oil and food price hikes) has passed, it will signal that they have at least peaked and this will support the property market.
In response to this benign scenario, some have pointed to what they see as the number of houses that remain unsold which, they say, will drag prices further down: A recent report in the Sunday Business Post, for instance, said that 171,000 new houses had been built in 2006 and 2007, one third of which were unsold. In fact 166,000 houses were built in this period. Of those around 25,000 were either social housing units or replacements for existing homes. Of the 140,000 that could have attracted mortgages, at least 116,000 did so. That leaves the number of unsold dwellings at 24,000 at the very highest but, for technical reasons too boring to mention here, that figure is likely to be an overestimate.
Even if it was, the figure is almost irrelevant: As overlooked by almost all commentators -- with the honorable exception of NCB stockbrokers -- out of a population of 4.25 million souls, this state boasts a million people between the ages of 14 and 26. Nothing less than an army of housebuyers is marching towards the economy and they are going to need somewhere to live. What is more they will be having children. In the 12 months to April 2007 alone the State's population rose by 106,000 persons. The number of births exceeding deaths was just shy of 40,000 while net immigration was around 67,000. Even allowing for slower immigration, to say 20,000 persons per year, the conservative CSO reckons that our population will hit five million within the next 10 years if not sooner, creating at least another 700,000 to house. (Note that I am not even relying on the projections for population growth in my book The Best is Yet to Come in which I argue that Ireland's population growth will follow world trends by rising by around 50 per cent before the century is out). Owner-occupiers should not be afraid to buy now if they can get late 2005 prices. That is good value.
On their own, the more conservative and short-term projections of the CSO are enough to make us confident that if it isn't already cleared the overhang in unsold properties is due a short life span. The question soon won't be whether we have too many houses to go around (as it happens we know from EU home ownership data that we have a lower rate of houses per capita than the EU average). Rather it will be how soon our builders can ratchet housing output back up to build houses for a burgeoning population (not to mention provide jobs for workers).
According to the Construction Industry Federation, building commencements will start to pick up in the autumn next year although, for technical reasons -- namely that many won't be completed within that year -- this won't show up in terms of housing completions by 2010. As a result of time lags in house building, the number of houses completed could start falling below what is required to meet demand as early as this time next year which is when, at the very latest, house price growth should turn very modestly positive for the first time in two years.
Of course, there are problems to be confronted. All forecasts and scenarios are subject to risk. Until the Government abolishes stamp duty fully, turnover in the property market will continue to be lower than it should be, leading to the risk of a much slower recovery in prices.
There is also the risk that the Government will not only fail to respond adequately to the downturn, as it should by cutting taxes, but actually try to increase them. But with world economic growth running at a healthy rate, Ireland has every chance to exploit what is, literally, a world of economic opportunity and ensure that the Irish economy is back on track by 2009. The ball is in the Government's court.
Marc Coleman is Economics Editor for Newstalk 106 to 108.
- Marc Coleman
