Property market in need of tough love
Taking the real estate plunge in 2008 should be based on sound economics not prophecies of doom, writes Marc Coleman
So what does 2008 have in store for the property market? Would you -- as David McWilliams suggests -- be off your rocker to buy property in 2008? And just who should you listen to when it comes to taking property market predictions seriously? As David also points out, the motives of various commentators differ greatly. Who can you trust?
The answer to the first question is that this year should see overvaluation in the market eliminated. The answer to the second question is a flat no: provided you are not paying 2007 prices, 2008 could be an excellent year in which to buy. The answer to the final question is that when deciding whose view of the property market should be trusted, you should look at two things. The first and obvious thing to look at is their previous forecasting track record, ie were they right about the past? The second is to assess whether their forecasts for the future are based on reliable facts and data. Given the current state of the market, serious analysis now commands a premium: bar-stool comment belongs in the dustbin.
Now let's look at these answers in turn but, before we do that, let's recap on the last five years in the Irish property market. As I wrote in September 2005 -- and as OECD research confirmed -- the property market at that time was about 15 per cent overvalued. Since 1996, average national house prices had risen by 350 per cent. Most of this rise -- the threefold increase between the spring of 1996 and the spring of 2003 -- was perfectly sound. Economic growth in that period was competitiveness-driven, while borrowers were adjusting behaviour to the blessings of a permanently lower interest rate regime. More significantly still was the fact that the country was undergoing a demographic rebound unseen since the 1830s. After settling to normal growth rates in 2003, a speculative resurgence of house price inflation later in that year -- driven by investors -- pushed prices over the top in the ensuing two years.