Economy will survive fall in house prices

THE rate of borrowing increased to 30.3% in June, as €5.8 billion was loaned to consumers by banks and building societies, according to the Central Bank.

This is the highest rate of borrowing since March 2000.

For the second month in a row non-mortgage borrowing exceeded mortgage borrowing.

The Central Bank considers this a worrying trend as it could indicate that people are borrowing to finance their lifestyle.

Mortgage lending was the highest this year, bringing the total of outstanding residential mortgage debt to 110.8 billion. These figures are particularly worrying with interest rates increasing.

This week the European base rate is expected to go up by another 0.25%, which will be the fourth consecutive rise, bringing the rate to 3%.

Two more increases before the end of the year are expected to raise the base lending rate to 3.5%, which is the rate at which the European Central Bank loans money to banks in the street.

This is further complicated by the continuing rise in house prices, despite repeated predictions that the rises were about to level off.

According to the Bank of Ireland, house prices rose by 12% in the past year to bring the cost of a house in Dublin to an average of €532,000, while the figure for the rest of the country is €395,000.

The figures published yesterday by the TSB/ERSI indicate a massive difference when contrasted with the Bank of Ireland figures, with average house prices in Dublin at €402,000 and at €260,000 in the remainder of the country. The discrepancy in the prices is explained by a different set of statistics, and methods of calculating them.

The Bank of Ireland figures related to all houses sold, whereas the other report was based on mortgages provided by the TSB, whose customers would seem not to be spending as much money in purchasing houses.

Despite the lower prices, the TSB report actually reflected a more positive trend.

It indicated that house prices increased by 16.1% in Dublin and 15.2% in the rest of the country in the past 12 months. Prices paid by its customers are increasing faster than average.

The Irish Property Review of the Bank of Ireland, in its quarterly analysis, indicates that the housing market continues to show strong growth with various indicators showing positive trends.

It predicts that housing will set new records for prices, completions, and mortgage lending in 2006, but the market should begin to slow down before the end of the year due to the impact of the interest rate increases.

Next year it expects the increases to level off in line with the expected rate of inflation.

The review attributes the strong housing demand to a growth in both employment and population. There was an increase of 90,000 jobs in the 12 months ending in the first quarter of 2006, and the Irish population has grown by 8.1% in just four years. This is 10 times the average growth in the EU.

Although the Bank of Ireland again predicts a distinct slowdown in the rise in house prices next year, the overall economic prospects still appear very good, with the maturity of the SSIA scheme likely to inject billions of euro into the domestic economy.