Economist echoes housing crash fears

THE heavy reliance of the economy on the housing market remains a huge cause for concern, economist Jim Power warned yesterday.

Mr Power was addressing a half-day conference held by Real Estate Alliance in Dublin.

Mr Power said this left the economy open to a severe correction down the line and he said it was imperative we prepared for the time when construction would go into decline.

Mr Power was echoing comments he made recently when he published his quarterly review in his role as chief economist with Friends First.

At the time he described the economy as a “bird flying one wing” and further warned that “a significant correction to house prices would have a substantial negative wealth effect on consumer confidence and would undermine the overall economy”.

But Mr Power was less circumspect when he addressed an audience of more than 200 people in Dublin. While he made known his reservations, he forecast the market would stay strong.

Overall, Mr Power said the impact of the housing boom was quite emphatic, but that impact raised serious concerns about who takes up the slack when the downturn inevitably comes.

However, he told delegates yesterday he foresaw housing demand to work out at 65,000 a year up to 2010 which might imply the market was in a bubble.

But on that issue Mr Power said: “No I don’t believe it’s a bubble because a bubble is defined as something that defies logic”.

While stressing the danger of our over-reliance upon construction, Mr Power said underlying demand, low interest rates and rising employment still continued to underpin the market going forward.

In six years, mortgage debt has shot up from €25bn to €125bn with annual growth in borrowing hitting record increases of 30% in recent months. The impact on the economy to housing is very significant in many respects, he added.

Last year, VAT accounted for €2.6bn of tax revenues and stamp duties €100m which constituted 10% of the total tax take last year, Mr Power said. In the meantime, rising house prices have pushed the value of housing stock in the country up to €560bn which compares with €160bn for our total economic output, or our GDP figure, in 2005.

That figure has had a “hugely beneficial impact and is an important driver of economic confidence”, he said.