ECONOMIST Peter Bacon has warned that Ireland faces a recession "more protracted and more severe than the one we are already in" if the Government fails to intervene in, and bring stability to, the property market.
"The market went to dizzying heights and now it's going to dizzying lows," Mr Bacon told the Sunday Independent, as he described how property prices were now being driven down by speculative forces in much the same way they had been driven upwards in the boom years.
"Just as it [the property market] overshot and went on a random walk on the way up, it is doing the same thing now on the way down. Now people will say it will reach a natural level, but there isn't a natural level.
"What you had were speculative forces driving the market up, and what you have now, in effect, are speculative forces driving the downward path that we are on at the present. It's within that nexus that an intervention is necessary if the Government desires to bring about stability in the market," Mr Bacon said.
Those who bought their homes at the height of the boom had been "ruined" financially, he said, adding that the problem of negative equity now being faced by individual households represented a wider threat to the economy and its prospects of recovery.
He said: "Those households who entered the market from the middle 2000s who have seen their wealth eroded or, worse still, are in negative equity, how does all that get worked through?
"Their wealth is eroded and their prospects are completely eroded. They face financial ruin if their balance sheets were to be realised. That's why a stable property market is crucial to bringing about a recovery in the economy.
"How the hell can you expect households to say, 'Look, we're going to spend more', if the principal assets they are sitting on are being knocked down in value?"
On the issue of debt forgiveness, Mr Bacon said any such solution would have to be agreed by the Government with the EU/ IMF/ ECB troika.
Asked if debt forgiveness would be a fair solution, he said: "The only thing you could say in terms of fairness is that it is the taxpayer who is living in these houses. So if you do achieve stability in the market, it does achieve stability for all households."
He added: "Without measures to stabilise the market, the game that is being played by Nama and the banks is a game that they are playing against their own balance sheets."