Money men are flip-flopping again
The penny is finally beginning to drop about the failing housing market, says Jerome Reilly
So the economists have finally cottoned on that huge chunks of the property market are in the toilet and the landing has been made needlessly severe by self-fulfiling prophesies of doom.
First out of the block was Pat McArdle, who has been neither among the most bullish nor pessimistic of the money men. He has consistently cast a cool eye on the unfolding crisis while many of his peers were verging on the hysterical.
McArdle's blunt assessment arose from the Ulster Bank Construction Purchasing Managers' Index (PMI), a measuring index which is seasonally adjusted to measure the overall performance of the construction economy.
McArdle admitted that a weak housing sector was expected in August but the readings for commercial and civil activity were also surprisingly low.
It is worth remembering that most analysts have been saying that while residential construction would slow down, the commercial and civil sectors of the construction market would remain buoyant. McArdle commented: "The only unusual factors were the weather, which was the poorest for many years, and the general sense of gloom which prevailed as reports of construction lay-offs were plentiful.
"The PMI confirms that August was the first month of significant employment falls," he said. The index fell to its lowest level for over four years. Now it appears that 10 per cent of all home owners are suffering because of the rising interest rates.
Research by IIB Bank predicts that house prices will fall by up to 2.5 per cent this year but it forecasts prices could rise next year. They believe the global interest rate cycle is reaching a peak and the cost of borrowing could begin to ease in 2008.
Tom Foley, who heads up the mortgage and home loans division of IIB, suggests that although higher rates have been the key driver of a slowdown, a loss of confidence is now a considerable threat to the Irish housing market. He is convinced that we have reached a critical point and that with some "sensible" policies and less pessimism, the Irish housing market should experience a bounce back.
IIB's chief economist Austin Hughes says the sharp rise in borrowing costs are now coming to an end, although one more painful rate rise can't be ruled out.
But what would the impact be of another half a per cent rise on the financial situation of ordinary householders? According to IIB research, such a rise would mean 10 per cent of us would see a "substantial deterioration" in our day-to-day finances if interest rates rose by 0.5 per cent.
Mr Hughes believes the Government can act to soften the blow of an "unnecessarily hard landing" of the housing market.
Easing the burden of stamp duty and stepping up mortgage interest relief to 25 per cent, rather than the standard 20 per cent should be on Brian Cowen's agenda for the next budget, Mr Hughes believes.
An alternative view comes from Alan Ahearne of the Cairnes Graduate School of Business and Public Policy at NUI Galway who delivered a bleak and dismal view of current events to the Fine Gael parliamentary party last week.
He says the moribund housing market will only recover its previous vivacity if house sellers slash prices. "The market is seized up. It's a classic symptom of the boom-bust pattern. Sellers are trying to offload their houses but demand has evaporated. There is no one around prepared to pay the kind of money sellers are demanding. The problem is that it takes a while for sellers to come to terms with the reality that their houses are no longer worth what they think they are worth.
Ahearne is convinced that the market is only going to repair itself when sellers drop their prices and the same is true of developers.
"They will resist as long as they can but after a while they will be forced to cut prices.
"I am hearing that banks are already putting the boot into developers who will have to repay the money they borrowed and that will mean cutting prices to shift stock."
He differs sharply from commentators who claim that the global credit squeeze sparking a worldwide recession and leading the ECB to cut interest rates would be good for the Irish housing market. "I don't agree with that or understand the logic."
He explains: "When interest rates rise it puts people under pressure but usually homeowners still make their mortgage payments. They may have to cut spending elsewhere but they don't want to lose their homes. However, when people lose their jobs which could be the result of the global recession, then they may default on their payments. What kills a housing market, what turns a bust into an all-out crash are big increases in unemployment."
Ahearne worked at the US Federal Reserve in Washington and during that time studied 44 different episodes of boom-bust property markets over a 35-year period.
"Typically when the bust follows the boom, house prices continue to drop over a period of four to five years after the peak. What we are talking about is declines in real, inflation-adjusted house prices. I don't see any reason why Ireland should be any different," he said.
That Irish consumers are not immune from the global credit squeze was brought into sharp contrast on Friday, when the Bank of England had to step in to provide an emergency loan to UK mortgage provider Northern Rock after it ran into difficulties raising money on the wholesale financial markets.
Northern Rock has substantial operations in the savings market here. The bank has around 25,000 internet and telephone account holders in Ireland who have around €2.4bn on deposit.
Northern Rock needed to borrow money from other banks to stay in business. On Friday the supply of those loans appeared to dry up, forcing the Bank of England to step in.