Friday 9 December 2016

Recovery of sorts is still far from being safe as houses

An economy with merely the potential to grow is a sterile thing — consumers need a break

Published 29/06/2014 | 02:30

Repossession is more likely for homes that are in 'positive' equity
Repossession is more likely for homes that are in 'positive' equity

Remember the era of "jobless growth"? In the summer of 1994 - twenty years ago - as Albert Reynolds's government staggered from one crisis to another, although none of those crises had anything to do with the economy, the economy was an underlying source of discontent and instability. For seven years, Ireland's rates of economic growth outperformed those in Europe. And for seven years unemployment was stuck close to 20pc, while consumers were stretched.

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A different mismatch is happening now. For the first time, house prices are registering double-digit growth. Nationally, average prices are up by over 10pc in the last 12 months. A boom, it is not. But as a recovery, which, of sorts, it is, it is a very odd one.

Yes, house prices are rising. But outside of the public sector and a few parts of the private sector, incomes aren't rising to match either the higher cost of house purchase or rising property taxes. Yes, interest rates remain historically low. But if you can't get a mortgage, that's not much use. Prices are undervalued, significantly so. The IMF recently put this undervaluation at 7pc but prices have further to rise. Lumping Irish house buyers in with countries where renting is the norm and population is stagnant as the IMF does, leads to it understating our equilibrium house-prices level. Even in Dublin, prices are barely half of peak levels and they need to reach around three-quarters of that before normality returns.

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