Things can only get worse . . . before they get better
Thursday March 29 2007
It's the property market of course. All the surveys now agree on the touch down. House prices, which twelve months ago surprised everybody by rising at an annual 15pc, are no longer moving at all.
The latest survey from Bank of Ireland puts the monthly increase over the three months to January at just 0.3pc.
Over 12 months, such a rate of increase in house prices would come to a miserly 1pc. This may be bad news for sellers - including that deserving group, the builders. But buyers, especially first time buyers, may think it is not such a bad thing at all. Except that there is other, unwelcome news for them.
This comes from Frankfurt, where the European Central Bank is likely to look aghast at yesterday's figures for growth in borrowing and the related increase in the supply of money. One has to go back 17 years to find the last time the 13 countries which now share the euro saw money supply rising by 10pc a year.
That looks bad for inflation, which means it looks bad for interest rates. Most economists now think that interest rates will go up again in June, bringing mortgage rates to over 5pc. But a growing number also think that will not be the end of it. If they are right about June, the cost of borrowing will have doubled in 18 months. That not only makes the cost of a mortgage higher, it also reduces the amount which a wise bank will lend.
Unlike last year, when they were chucking money around, the banks have suddenly found wisdom. The sight of their opposite numbers in the USA being hit by a wave of defaults on foolish loans, has concentrated the Irish banks' minds wonderfully. For the first-time buyer especially, the loan approved is often simply not enough to buy the house.
That seems to be the main reason why prices have stalled. It also explains the rise in rents, as more people are forced to give up their dreams of purchase.
Election
Things have not been helped by the foolish blather of politicians offering cuts in stamp duty after the election. Who in their right mind would buy now, if they could possibly wait until the autumn? Or will it be the December Budget?
None of this is any help to existing owners who have seen their mortgage costs rocket, and who may be in for more unwelcome news from their bank. They are in even deeper trouble if they are among the thousands who got special introductory discounts on their mortgages, or went for short-term cheap fixed rates.
As these expire, buyers can find themselves going straight from a mortgage rate of around 2pc to one of 5pc plus. This phenomenon is behind many of the defaults in the USA. There, prices of existing homes are down 5pc and builders are stuck with eight months' supply of unsold new ones. For a country as large and diverse as the USA, that is a hard landing indeed.
Severe
It may, though, be the only ray of sunshine for Irish owners and buyers. If the US central bank, the Federal Reserve, starts cutting interest rates, it should help put a cap on how far the ECB raises them. Optimists think June will be the last such rise. Even if it is, the full effects will be felt well into next year. There will be widespread pain but widespread inability to pay off mortgages looks unlikely in Ireland. So does a severe fall in prices. The British experience may be a better guide. When the Bank of England began to raise rates, house prices stagnated, and even fell for a while.
But buyers and lenders got used to the higher rates and house prices are rising again by 10pc a year. Ireland is still in the early stages of correction. Disaster will probably be avoided, but things will get worse before they get better.
- Brendan Keenan
