Housing slowdown puts breaks on economy
The markets continued to get pummelled, as investors continue to raise questions about the ability of the banking and building sectors to deliver good earnings growth under the strain of a deteriorating housing market.
The banks, and the Central Bank, have denied they have concerns about exposure to potential bad debts due to the fall in housing activity.
The CB, while citing difficulties in the international credit markets caused by US home loan lending again said at the launch of their quarterly bulletin they had no fears for the Irish banking sector.
However, officials at the International Monetary Fun d sent a broadside across the bow of the EU banking sector in general.
Central banks should pay greater attention to housing markets when setting interest rates, the IMF said.
In its latest World Economic Outlook, the IMF suggests many EU countries are facing substantial house price corrections.
It reckoned house prices are more than 30% above fair value in Ireland.
It said residential investment has been significantly above its historic trend in Spain, Denmark, France, Italy, Finland and Belgium.
Though careful not to predict house price crashes in any of these countries, the IMF said house price corrections are a distinct possibility.
While the CB yesterday cited the tightening of global credit conditions for the slowdown in the economy here to its lowest growth rate in almost two decades, the IMF warned housing markets where households were highly leveraged were at serious risk. Not for the first time the CB was forced to rush to the defence of the banks yesterday, who would become vulnerable if the housing market does collapse.
Last week one developer announced he had run out of funds and the fear is how many more face the same fate.
The impact of the slowdown is becoming palpable this year with about 30,000 jobs due to go, dragging economic growth to the lowest it has experienced in nearly 20 years.
Alan Ahearne, economist at Galway University, said the housing crisis will shove the economy into recession this year.
There will be no growth, not even of the modest kind being forecast by the CB and the ESRI.
Mr Ahearne worked with the US Federal Reserve with chairman Ben Bernanke and believes as the US goes, so goes Ireland.
It will be most interesting to see who turns out to be right.
Mr Ahearne is out on a limb on this and if he is proved right then the big funds who have been selling off banking shares since the middle of last year, will be vindicated.
Before coming back to Ireland, Mr Ahearne was a senior economist in the International Finance Division of the Board of Governors of the Federal Reserve System in Washington DC.
During his seven years at the Federal Reserve Board, his duties included preparing notes for and presenting briefings to chairman Alan Greenspan and other board members. He was also the principal economist at the board covering the Japanese and Chinese economies. Mr Ahearne has taught economics at Carnegie Mellon University, University College Dublin, Dublin City University, and the University of Limerick. He began his professional career with Coopers & Lybrand and also worked for Bank of Ireland Group Treasury.
It is ironic his forecast for this year is seriously at odds with Dan McLaughlin of Bank of Ireland.
It is a time for strong nerves as the prophets of doom loose faith in the economy that has delivered so much over the past ten years or more.
