Property price bubble myth laid to rest

IT was the proverbial elephant in the room for long enough in the Irish economic context.

But it got distinctly smaller this week after the publication of a major report by AIB Capital Markets.

It emphatically said there is no house price bubble, which is ironic given an AIB offshoot last year warned the single biggest threat to the Irish economy was the often threatened, but yet to be delivered, property bubble.

AIB Capital Markets was never in that category and its latest review is a pretty solid endorsement of the state of the housing market.

In essence, the report says demand is greater than supply.

It came as no great surprise that John Beggs, AIB’s chief economist, said the record 77,000 houses being built this year will be equalled in 2006 and 2007.

No hard landing is the message and if prices do slump in 2008 the fall won’t be enough to cause problems in the market.

AIB issued its edict from its plush offices at the International Financial Services Centre, built, ironically enough, on what was once a major eyesore on Dublin’s inner city northside.

What AIB say is significant in the context of where our economy is going.

Some economists are deeply fearful the consumer, who is currently driving demand in the economy, is seriously over-stretched financially.

Next week the Central Bank will hammer home that point in its latest financial stability report, warning we are close to being the most indebted group of consumers in the EU.

We are fast becoming the most borrowed nation in Europe, second only to the Dutch, with the level of debt to personal disposable income at a massive 150%.

The contrary argument is quite simple. If debt is one and a half times disposable income, the amount of assets built up by individuals is over seven times people’s disposable income.

What AIB continue to point out is the debt being chalked up is going on second homes or refurbishment or simply trading up.

As things stand 80% of personal borrowing in this state is tied up in property.

Figures released yesterday showing first time buyer costs rising twice as fast as the rest of the market puts a different perspective on AIB’s take on the market, but the bottom line is that demand is holding up.

The one difficulty about fixed assets is that they are illiquid and if mortgage repayments become an issue, the impact on house prices could be calamitous.

But with prices set to rise 7% this year and next, that kind of capital gain, even allowing for inflation, looks acceptable in the wake of the 2001 market crash that destroyed retirement prospects for thousands.

While the AIB forecast is bullish, it is not a forecast of a return to the boom times. Economic growth has slipped to half of what it was in the heady days of the Celtic Tiger.

It is a statistical fact however, that our population is continuing to grow. By 2025 another million people will live here.

For that reason talk of a price bubble still looks like an unwarranted fear.