House market’s pot of gold could lose gloss
Being told the boom is back isn’t exactly news. Two key economists (key because I agree with the line) Dermot O’Brien of NCB and Dan McLaughlin of Bank of Ireland, never believed the boom was over.
They said that consistently and have been vindicated despite massive scepticism. In fact, that debate is old hat. Ireland looks set to grow by up to 5% per annum, the forecast made by NCB several years ago in its major assessment of what lay ahead for us.
It was a bullish prediction that has never wavered and that has been delivered on even in the alleged year of no growth in 2002 when the nay sayers shifted their definition of economic growth from Gross Domestic product (GDP) to Gross National Product (GNP).
Even in the so-called three years of low growth in the global economy, Ireland continued to create jobs, not bad for a country said to be caught in the backlash of the US downturn. We did go through some nerve-wracking times. The loss of Gateway and other e US multinationals did not inspire confidence, but overall, the economy held the line and we will continue to enjoy solid growth in the years ahead.
Of greater concern, however, is the refusal of the house price bubble debate to go away. The International Monetary Fund and the Central Bank took the gloves off this week.
Central Bank officials failed, despite four different sets of analyses to conclude that we were about to be upended with a housing market slump, despite producing one assessment model suggesting houses were 30% or more over hyped.
It was interesting, too, that the bank avoided a prediction of by how much prices could fall. Were we to deduce that prices would fall 30% from the statement that prices were 30% above what the economic model suggested?
The Central Bank was doing no more than covering its back on house prices.
On the international scene, the IMF concludes that Ireland, along with Britain and Spain, are in danger, suggesting prices here are up to 20% above what the economic conditions in the State justify.
Last year, the Economist magazine suggested a similar level of overpricing, while Colin Hunt of Goodbody Stockbrokers says the housing market could bring the economy to its knees.
Meanwhile, his paymaster, AIB Bank, is one of the most aggressive lenders to the market and its only concern is that it is well protected in the event of any collapse.
Beyond that, the message from the top in AIB seems to be a “we couldn’t care less” stance.
Having lost $690m in the US without suffering any serious hiccup to its financial base one can see where the smugness comes from.
It’s the kind of attitude that drives ordinary consumers daft with rage and underpins the Irish financial sector as being one of the most self-serving segments of society. So it is a case of buyer beware. The house price bubble may be the wrong debate.
For those getting involved hoping for a major capital gain, the bottom line is they have missed the boat.
House prices have to slow down and are slowing down from unprecedented rates of 20% per annum.
They will probably do 10% this year but thereafter, the reality is that as supply meets demand, prices will inevitably soften.
Rentals have already done so and for sale signs are not moving as fast as they did previously. All that does not constitute a bubble. It takes rising interest rates and rising unemployment to unsettle the housing market insofar as we can judge.
However, over the medium term, it is misguided of anyone getting involved in the market here to expect it to deliver what it has done in the past 10 years.
It would take more than another Celtic Tiger to do that. It is unrepeatable.
Buying for strong capital growth in housing is going to leave a lot of disappointed people out there.
The housing market could end up doing what the stock markets have done and leave thousands of hopefuls disappointed when they reach retirement.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
