Housing market warning signs still unheeded

EARLIER this week the Economic and Social Research Institute (ESRI) warned the risk of a house price bubble had increased.

On April 1, the Financial Regulator announced it had instructed the banks to set more of their money aside to deal with a bad debt crisis down the line.

Its chief concern was that the housing market would implode leaving devastation in its wake.

Other concerns such as a possible hike of 1% in ECB rates over the next 18 months is also a factor given the huge level of personal debt in this economy.

The most recent Central Bank credit figures suggest neither the banks nor the citizens of this state are giving the slightest attention to such grim warnings.

By the end of March the total level of borrowing for house purchase was over €100 billion, which is nearly one third of the total outstanding figure of private sector borrowing of €271bn.

Despite the threat of higher interest rates, that look pretty certain down the line, borrowers are heedless of that reality and continue to chase the homes or apartments of their choice.

Another significant figure on the market yesterday was the revelation that close to 22,000 housing units were built in the first quarter of 2006.

That implies a figure of 90,000 homes being built in the current year well up on the recently revised figure of 85,000. The latter figure was based also on revised figures suggesting house completions this year will be 10,000 more than originally anticipated.

Where will it all end is a question that has exercised the minds of the best forecasters in the country for some time.

“In tears!” is generally the conclusion of many economists. But then many of them warned that the economy generally was doomed after the stock market crash of 2001 in the US.

They were wrong and there are those who argue the pessimism over the housing market is well off the mark too.

What seems incontrovertible however is that this mad home buying frenzy will leave thousands exposed when the bubble or the sharp slow down bites.

For those who saw leaner times the phenomenal rise in borrowing is hard to fathom.

It is incomprehensible to many of the older generation that people can take out 35-year mortgages and place themselves in hock to unscrupulous financial institutions who are bending over backwards to facilitate anyone out there who wants to buy that house.

The Central Bank and the ESRI have warned of the dangers of a bubble in the market. So too has the Economist and the International Monetary Fund.

The Economist has been crying wolf for years about Irish property.

So far it has been wrong. Four years ago it ran a cover story telling us the world was awash with oil.

More recently it ran a cover story saying the total opposite.

It strikes me the truth lies somewhere in between when it comes to the Irish housing market.

However a speculative element has been buying to let for many years now and some of the ones who have bundled into that market in the past few years could be heading for deep trouble.

Rental incomes have levelled off and in many cases no longer pay the mortgage.

At this point it looks if rates will be shoved up by at least 0.5% in the months ahead and a possible 0.75% by the year end.

And what will they do then, whose rentals are already failing to meet their repayments?