Global bubble has not gone away

BANK OF IRELAND has joined the growing list of banks offering 100% mortgages to first-time buyers.

This development may well be seen in hindsight as one of the most socially responsible acts ever by the financial services sector.

On the other hand, it may go down as a grossly irresponsible act with banks lending money to vulnerable people, who it can be pointed out cannot afford to save a brass farthing towards a deposit but are deemed to be eligible for a 100% loan on a property.

Arch conservatives will argue that in the good old days people saved before they splashed out on major investments. It was once a requirement of building societies that those looking for mortgages had to have a savings account with them for two years.

That was ridiculous. Now it looks as if we have gone to the other extreme and we are prepared to shell out 100% mortgages to those who are obviously stretched financially.

With the Economist magazine warning the globe is sitting on the biggest bubble ever, it is time to urge caution. In the past two weeks the Central Bank and the Financial Regulator have issued stern warnings about spiralling personal debt.

However, Irish investors refuse to take any heed. The bigger the boom, the bigger the eventual bust, the Economist said in a commentary on the state of the global housing market.

It was mouthing conventional economic wisdom in saying that. Similar views were expressed about the US economy after the dotcom bubble when it had gone through its longest period of sustained economic growth since WWII.

Most economists here insisted after the boom there would be a serious protracted slow down. They were wrong. The US economy slipped into two quarters of recession put then picked up. If the doom merchants were right, the bust would still be in progress.

The Irish economy felt the chill winds of the US slowdown, thousands of overseas jobs went and serious concerns grew that the economy was about to go under. It never happened.

Davy Stockbrokers, in a commentary after the CSO figures were released, said the economy did a lot better in recent years than had been thought. GNP growth in 2002 was 2.7%; it was 5.1% in 2003 but fell to 4% last year from an initial projection of 5.5%.

In 2002 those who were adamant that the economy was in deep trouble, due to the US bubble, estimated the Irish economy declined in 2002, but later revised the figure up to 1.5% GNP.

Three years later they are now telling us that the previous two estimates were wrong. To highlight its concerns, the Economist is arguing a hike in interest rates is not necessary to cause the bubble in house prices to burst.

The magazine noted that prices have fallen in Australia, Holland and Britain without sharp interest rate rises. In the Irish context that is an important point.

So far those who rubbish the possibility of a bubble here cite low interest rates to back their case. They have argued also that it takes rapidly rising interest rates and rising unemployment to cause a slump.

In an Irish context that is difficult to prove as we are in totally unchartered territory. What the Central Bank and the Financial Regulator have been at pains to point out is borrowing here has been going up alarmingly and those getting in on the property act are seriously exposed if the markets tank and interest rates start to rise sharply.

How the banks can square their 100% mortgage lending against that backdrop is puzzling. But this economy has already weathered the post dotcom bubble better than most imagined.

Whatever about us hitting a worst case scenario down the line, the days of ordinary punters making huge capital gains from domestic dwellings are long gone.