Housing market set to implode, warns IMF

AN International Monetary Fund analysis has added to the increasing concern that the housing market is about to implode.

Recently Davy Stockbrokers warned we were in a “bubble” of dotcom proportions while the Central Bank this week said recent home buyers were at risk as interest rates start to rise.

One economic model used by the bank suggested prices could be overvalued by 30%. But it said the lack of a proven forecasting model made it difficult to stand up any claims about the threat facing the Irish market.

Others have been less tardy. In its analysis, the IMF estimates prices are overvalued by between 10% and 20%. It makes the claim in its upcoming World Economic Forum.

Prices in this country cannot be justified on the basis of the strength of the economy and the market will face testing times in the coming years as interest rates inevitably rise, it said.

Last year The Economist warned the market in Ireland was at least 20% overvalued and said a correction was inevitable.

IMF said spiralling property values here reflected similar patterns elsewhere attributable to global economic growth.

Like the Central Bank, the IMF warns that high house prices will come under pressure as borrowers struggle to meet their repayments.

The Central Bank pointed out Irish investors were open to such a risk which could destabilise the banking sector if prices fell sharply.

Davy Stockbrokers recently said “on valuation grounds, Ireland’s housing market bears some resemblance to the bubble period in equities in the late-1990s”.

It said investing in property in such a high-risk environment could only be justified on the basis of high capital growth prospects.

NCB’s leading economist Dermot O’Brien agrees with the latter sentiment.

“Those who invest in property at this stage in the cycle may well be disappointed,” he said.

Critically, Mr O’Brien disagrees with the pessimism on the overpricing front. “If we continued to build houses at the rate of 80,000 units per annum there would be problems down the line. But my information is that there is little if any speculative building taking place.”