Monday 21 May 2018

In 2007 Alan Ahearne called the 'bust' - now he predicts what's coming next...

Dr Alan Ahearne was the first to shout stop - but he says today's housing market is different, writes Niamh Horan

SOLIDLY UPBEAT: Economist Dr Alan Ahearne. Photo: Andrew Downes
SOLIDLY UPBEAT: Economist Dr Alan Ahearne. Photo: Andrew Downes
Niamh Horan

Niamh Horan

This Thursday, May 17, marks an important day in the economic calendar. Economists and property commentators have traced the date, in 2006, as the day the boom died.

It was the first sign the market had turned. And the house was No 21 Ailesbury Road.

Fast forward 12 years, Ireland is through the recession and looking bullish. Average property prices have risen by more than €100,000 in a year amid fears of Celtic Tiger-level rises.

Philip Lane, the governor of the Central Bank warned in recent days that house prices could fall as supply picks up over the next two to three years and other factors, such as higher interest rates and Brexit, come into play. In his starkest warnings to date, Mr Lane told the Oireachtas Finance Committee there is now a "material risk of a reversal in prices".

So what's next? Perhaps there is no one better positioned to answer this than Dr Alan Ahearne.

Known as "the man who told you so", he left behind a top job in the US Federal Reserve to move back to Ireland and wasn't long in throwing cold water over our party vibes.

He joined the ranks of Morgan Kelly and David McWilliams when he laid out his predictions of doom on RTE's Future Shock: Property Crash programme in April 2007. But despite the governor's warnings, this weekend Dr Ahearne is in more optimistic form.

He believes Ireland is in a market akin to that seen back in 2002, and he says the landscape is very different to the pre-bust period of 2006.

He maps out what went wrong: "Back then, the European Central Bank started to raise interest rates and by the end of 2006, interest rates had doubled from 2pc to 4pc. I remember looking at that and working out that it really constrained a lot of people.

"Also before that, in 2002, house prices were expensive but justified by the fundamentals. The problem didn't start until the run-up to 2006 when the increase in house prices morphed into a speculative bubble."

He describes what happened: "Rents were extremely low. People were not getting high rents for the investment in the properties. A lot of investors were buying houses and leaving them vacant. You would think now 'that is crazy. How are they getting a return on their investment?' They didn't need rent because house prices were rising by 12, 15 and 20pc per year and therefore they were getting the return from capital gain. It was a pure speculative bubble. Irrational exuberance took over.

"And the banks lent into it, they were the key to the fuel that allowed that speculative bubble," says Dr Ahearne.

"They were lending mortgages to individuals with very low deposits and in some cases no deposits. The massive ramp-up in lending or credit borrowing, that was a sign, in red flashing lights."

He says: "There was also no shortage of properties between 2003 and 2006. We were building 93,000 properties a year so you couldn't say, 'ah sure, of course house prices are getting expensive, because there is a shortage'. There were loads of them. But people were buying them up because they were buying second and third homes and they were speculating with them."

Today, he says, there is a world of difference in the market.

"To me, this is more like Ireland in the year 2002 because I can point to a shortage of houses. I can say of course that's why house prices are rising. The economy is also growing fast. People's wages are rising, so I would expect house prices to rise in these circumstances.

"Now look at the credit available. There is hardly any credit growth, it is barely positive. We don't have a credit explosion. The banks are not lending massive amounts of money to speculative property developers."

He says the only problem would be if "the banks are about to let fly for the next four years with massive lending".

Then, he says, "I would be really worried. Then I would say we are going to make exactly the same mistake. But I am confident that will not happen because the banks are not allowed to irrationally lend thanks to the fact that the Central Bank has new mortgage rules in place."

According to Dr Ahearne, European interest rates trends also look positive.

He says, "at some stage the ECB will increase rates, we know that. But if you look at the markets, they are betting every day on when the ECB is going to raise them and they don't expect that to happen until the middle of next year or mid-2020. Then they expect the ECB to raise them very, very slowly. On top of that, the markets don't expect interest rates to get anywhere near 4pc in the next decade."

Another positive fundamental driving house prices he says, is that the economy is in buoyant health. "We are creating 1,300 new jobs a week. We will be in full employment by the end of the year. Household income is rising around 5pc a year.

"There are still some people out there who are heavily indebted, but people in their 20s, who didn't get caught up in the last bubble, they are getting decent jobs, they don't have that level of debt. They have to pay high rents but they don't have the debt. So they are the people who, if they can save some money, will be buying properties."

And so the million-dollar question. Would he buy property in Dublin now?

He is upbeat: "If I needed a place to live and I saw a place I liked, I would [buy it]. I would not be concerned that there is a speculative bubble that is about to burst or could burst soon and therefore say 'I'll just wait for that and buy it cheap'. I don't think that is logical or sensible.

"Places are expensive and hard to find, but if a place came up, and it suited my lifestyle and I could afford it, even though it might be a bit of a stretch, I could get a loan and the bank would approve it, then yes, I wouldn't back away from it because of a fear that we're back in 2006. We are not."

He says: "At some stage interest rates will rise and people need to factor that in and if they say, 'OK, I can just about afford this property with the mortgage repayment this month at current interest rates', then that spells trouble for them. So people need to be stress-tested by the lending institution and by themselves."

He advises prudence: "If people take into account their own personal finances, and I can't advise anybody on that, but if they are comfortable in their own finances then I don't think people should fear an overall speculative bubble at the moment."

Asked if there are red flashing lights to watch out for, he is pragmatic: "A lot can go wrong in the world. President Trump could change US tax policy or create a trade war with Europe and China but that is impossible for anybody to say. So saying, 'I am going to run my life by things that might go wrong in the world', you can't live like that. I don't think that is a sensible approach.

He continues: "Could a bad shock hit the economy? Of course. That is always true. That's why people need to look at their own circumstances and factor that in.

"One of the problems back in the boom years was that people stretched for very low deposits. Now people need to make sure that if they are borrowing for property, it is sustainable - that they are putting down good deposits. They have to because of new mortgage rules, but that will protect from a bad shock."

On the impact of Brexit, he says: "A hard, disorderly Brexit would hurt the economy but if it is soft, it won't have a big effect overall and it would have even less effect on Dublin. It would cause more harm to agricultural counties."

So what should potential home buyers be wary of, that is looming on the horizon? "I would be wary of Brexit and also the US economy," he says.

"The US economy is growing strongly and that will almost certainly continue over the next few years because President Trump has done a fiscal stimulus, but that runs out in about 2020 to 2021."

Also, he says, "This summer will mark the longest expansion of the US economy. If you believe, and I think I do, that the business cycle is still a reality - ie: economies go into recession and then they grow strong - then, at some stage we're going to have a downturn in the US, and within the next few years, and if we have that I think that could cause a global recession.

"It's probably early next decade. But that is something worth keeping an eye on - the US economy in 2021 or 2022."

As for what the government needs to do to help supply, he says: "Density in Dublin could be higher. We need to use the land more efficiently. It also looks to me to be a very low city. If you had taller buildings, you would have a lot more property. If you fixed those two factors, then prices would stop rising, maybe even come down and people wouldn't have to queue overnight."

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