Are we heading for a property crash?
YES:
In Ireland between 2000 and 2006, house prices doubled relative to income and rents. Based on what happened after other European booms we can expect prices here to halve in real terms over the next few years.
Ten per cent of housing units in Irish cities are vacant, and almost none of the 70,000 or so new units built this year have been sold: a Dublin estate agent told me that whereas last year they had sold over 3,000 new units, so far this year they have sold fewer than 100. With Dublin house prices down about 10 per cent already, there is a real risk that panic-selling by investors and builders will spark a price crash.
Eliminating stamp duty will not help: so long as there is a large stock of unsold houses, buyers will stay out of the market for fear of further price falls, and these expectations will be self-fulfilling.
Commercial property also looks shaky: investors are now borrowing at 7 per cent interest to buy offices and warehouses that yield rents of 4 per cent. With rising vacancy rates and increasing supply, we can expect sharp price falls.
On the face of it, a fall in house prices should not be a disaster. The value of mortgages to buy your own home is only 50 per cent of national income here, compared with 75 per cent in Britain and the US, and 125 per cent in Switzerland. Massive transfers of wealth from the young to the old in Ireland are a figment of journalistic fantasy.
(Admittedly, mortgages to buy investment apartments and join commercial property syndicates equal another quarter of national income, but the gambling losses of the rich and greedy should not be near anyone's conscience.) But a large minority of borrowers have crushing, unsustainable mortgages and large negative equity will force many borrowers into bankruptcy As competitiveness has fallen, the prosperity of the Irish economy has come to be based on selling houses to each other. Nearly 15 per cent of our national income comes directly from building houses, three times as much as other industrialised economies. Large falls in employment are inevitable as building slows to a saner level, and do not forget that only 15 per cent of building workers are foreign born.
With spending on house building 10 times as large as spending on roads, no conceivable increase in infrastructural spending can compensate for job losses in residential construction.
While housing starts have halved since last year, the surprising thing is that any new houses are being started at all given that few, if any, are going to sell. The reason is that banks are owed so much by large developers that they cannot allow them to fail, and are allowing them to go on borrowing as if nothing is wrong.
Irish banks are now more exposed to property speculators than Japanese banks were when they imploded in 1989. Banks have lent almost €100 billion to developers, compared with only €80 billion to people to buy their own houses.
With no new houses being sold, it is unclear how developers are coming up with annual interest payments of around €6 billion (or 4 per cent of national income). Were one large developer to be allowed to go bankrupt, the value of the land used as collateral by other developers would collapse in value, setting off a spiral of bankruptcies.
The Irish economy is now looking eerily like the Nordic economies in 1992. Norway, Finland and Sweden all had house price and building booms in the late 1980s that encouraged banks to lend heavily to developers. But as house prices fell, developers walked away from their loans and banks collapsed.
The Finnish collapse was particularly spectacular, with unemployment going from 3 per cent to 20 per cent, national income falling by 15 per cent, house prices and share values down 50 per cent, and land prices falling by over 75 per cent. Recapitalising its banks cost the Finnish government over 20 per cent of national income.
While our football and rugby teams have disappointed lately, our builders and bankers may yet do us proud and effortlessly clear the bar for catastrophic avarice and stupidity raised by the Finns nearly 20 years ago. Morgan Kelly is professor of economics at University College Dublin
