Rate rises take toll as ECB cycle nears end
On the good news front, there is a growing belief that the current interest rate cycle may be closer to the end than some suspect.
Whatever difficulties remain about trying to decipher which way the ECB will jump next time, a growing number of economists are saying another hike in March, if its happens, will see the end of the bank’s tightening cycle.
Failing that, just one more rise in 2007 to bring rates to 4% will definitely be the end of the line.
Whatever about trying to read the signals up ahead from the ECB, there is no escaping the reality that Thursday’s was the sixth increase of 0.25% in bank and mortgage rates since December 2005.
And there is no denying that the rate rises are finally starting to impact on house prices, with Gunne Residential forecasting a national rise of 3%-5% in prices next year compared with 15% for 2006.
In its assessment of the post-Budget market Gunne also sounded quite defensive. It took a swipe at negative comments in the press suggesting that a house bubble burst was still lurking due to interest rate pressure, and recited a whole range of reasons — well chronicled elsewhere — as to why rates will not undermine demand but will bring a more realistic approach to house prices.
It is accepted that in 2008, when economic growth may slip to 3.5% from roughly 5.5% next year, that 77,000 dwellings will be built following a delivery of 88,000 in 2007.
By historic standards that still represents a lot of houses and also testifies to the reality that the market for homes is not the issue, but that the price for thousands of would-be buyers has become a major concern.
Given the way this market was racing analysts and commentators were right to urge caution.
A strong argument exists which says that if supply and demand had hit equilibrium well before now, the surge in the cost of domestic accommodation would not have been remotely close to present prices.
That is still a concern. And even if we have a soft landing, and prices stabilise and start to grow say at mid single-digit levels, that is no guarantee prices overall may not slump in a few years if the markets get hit by global recession.
And there are plenty of signals out there suggesting that such an eventuality cannot be ruled out.
Oil prices remain a big issue and demand will continue to push supply to breaking point in the coming years with serious consequences for us all.
The United States has been living on the never-never for the past six years and with rising interest rates it could yet teeter on the brink.
Consumers have provided the engine for growth in the US as rates were slashed from 6% to 1% after the 2001 slowdown.
That did the trick but it meant US workers kept the economy from going over the brink by borrowing as if there would never be a day of recompense.
Even if they are not hit by repayment problems at this stage, a good case exists suggesting they have been financially mugged and can no longer keep spending as they have done over the past five years, unless of course they have no intention of paying what they owe.
So while the US gathers its breath the rest of us may have to slow down for an indefinite period and in that scenario house prices could go flat or indeed fail to match the inflation rate.
We have had irrational exuberance in the Irish property market and perhaps it was that thought which was lurking in the Gunne subconscious when they penned their rallying cry for the Irish property sector.
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