Surplus housing ‘threat to economy’

THE pill has yet to be invented to cure the economic hangover from which Ireland is suffering after the collapse of the property and banking sectors, says a leading economist.

The overhang of surplus housing will hamper growth not just in construction, but in the economy as a whole, UCD economist Joe Durkan told the audience at the Kenmare 2009 conference in Kerry over the weekend.

“Even when the sector improves, housing demand is unlikely to increase to warrant the construction of 63,000 houses, the average number constructed per annum from 1999 to 2008 against population-based needs estimates of 40,000-45,000,” he said.

In a talk comparing Ireland’s economic present economic collapse with the bubbles of the 1980s and 1990s, Mr Durkan traced the explosion in property prices to the shortage of housing in the mid-1990s.

This was exacerbated once monetary union began, as the monetary union led to an easy availability of credit, funded by external borrowing by the financial sector.

Here lies the germ of the aligned property and banking crises in Ireland. And state policy must take the lion’s share of the blame.

As Mr Durkan explains: “Taking medium fertility and medium migration projections, the CSO’s 1988 projection saw the population decline continuously, while that carried out in 1995 still indicated a decline from 1991 levels until the 2006-2011 period.

“These projections informed decisions about housing and education facilities. In the case of housing, one projection suggested that in the period 1991 to 2001 ‘perhaps 14,000 will be sufficient’ per annum’.”

However, by the mid- 1990s, with the recovery in the economy well under way, with total employment at record levels, state policy shifted. Increased demand for housing resulted in a dramatic price increase from the mid-1990s. The ensuing price increases fed into state policy changes, and several measures to improve supply were introduced.

“While the general economic performance was very good from 1987-1999 there were emerging constraints. The most obvious was an acceleration in house prices, initially perceived as a Dublin or the greater Dublin area problem, but which quickly spread to the rest of the country,” he said.

The country’s impending problems were veiled by the short-term wellbeing of the economy, but would eventually spiral out of control as house prices were brought into line with real world property values.