Is a soft landing the silver lining in property bubble deflation?
Much hinges on the trend of house prices in the future
LONDON banker Dario Perkins was stunned when he visited Dublin on business and a colleague said: "Who cares if house prices fall 30pc? That's just two years' worth of capital gains."
Whether in Ireland or the United States, Spain or Australia, the headlines these days forecast a far gloomier finale to the biggest international housing boom on record, one of collapse and ruin that could even trigger broader economic recession.
That might be overdoing it, although the good times may be about to end after a boom lasting at least a decade which has pushed real house prices 110pc higher on average across the industrialised world, according to OECD figures.
Perkins, a London-based economist at ABN Amro bank, argues that Ireland, and Spain where house prices have also exploded, will not see their domestic property markets crash even if the ECB raises interest rates further than expected. In a note after his Dublin trip, he said the European Central Bank was expected to raise eurozone rates to perhaps 3.75pc by mid-2007 from 3.25pc now, but that even 4pc was bearable for Irish and Spanish mortgage holders.
"I think this bearishness is overdone," he wrote. "It would be astounding if these economies saw anything more than a minor short-term wobble."
But even a wobble could affect growth in the eurozone, according to Charles Dumas of Lombard Street Research. The housing-led boom in Spain is so strong that it accounted for almost 40pc of the growth in eurozone domestic demand in the last four years - despite making up just 11pc of the zone's economy.
Another 40pc contribution came from France, Europe's second largest economy, and much of that was based on construction and a "wealth effect" from rising prices, says Dumas. "But construction seems to be slowing and the growth in domestic demand must fall back," he says.
Ireland led the pack in the latest housing boom with a 265pc rise in real prices in the 13 years to end-2005, while rises upwards of 130pc have occurred in Spain, much of Scandinavia and Britain, OECD data show.
By comparison, the increase in real US house prices, or price rises without counting inflation, is just 60pc in the 10 years to the end of 2005, by the OECD's count.
If and when the market peaks, evidence from past downturns shows that actual prices rarely fall. Drops in nominal prices of the kind seen in Britain in the early 1990s or the Netherlands in the 1980s are unusual.
Deutsche Bank noted in a recent report that surges of 80pc within five years preceded the nominal price drop in those countries. US home prices have risen less in the latest upturn, over twice as long a period.
Paul van den Noord, an OECD economist who created a sort of downturn-detector, reckons there is a 50-50 chance that the US housing market peaks soon, a peak being defined as a high followed by six successive quarters of decrease in real prices.
Drops in real prices of 15pc or more occured in two-thirds of the housing peaks analysed by the OECD. The lower the actual inflation rate, the greater the risk that a fall in real prices produces a drop in actual prices, which can have a bigger effect on market confidence.
"The US authorities hope now, and also expect I suppose, that the construction industry will manage to work away this excess supply overhang and as a result prices will not go into a tailspin, but level off," van den Noord says.
Denmark and France may be more at risk now than when he made his calculations for a research paper published in June, he says, although the situation may have improved in Britain and Spain, he says.
He remains hopeful on Spain because housing demand will remain strong because of large inflows of immigrants, a factor also at play in Ireland.
In Britain, talk of a big crash was already rife a couple of years ago. But the British housing market has not peaked, as far as van den Noord's definition is concerned. Real prices have not declined for six quarters, and what looked like a dramatic slowdown a year or two ago has stabilised.