Property dilemma - House prices prediction is a real worry

TODAY’S prediction that house prices will fall by 50% in the next decade will cause anyone with a mortgage to shudder but the reality is that we should all shudder.

Despite the Taoiseach’s weekend reprimand directed at those he condemned as “merchants of doom” and “nay-sayers” the figures are stark and when you consider the actuality that house building activity accounts for 15% of our national income they become startling.

Simply put that means that three out of every 20 teachers, nurses, guards or any other public sector employee you care to offer benchmarking to is paid for by revenues generated through the building sector.

Of course there are tens of thousands of people in the private sector equally dependent on the sector’s wellbeing. There are many thousands more who invested substantial proportions of their capital in a rising housing market as an alternative to funding a pension. This decision, if the predictions are even partially accurate, may prove disastrous and add to an already looming pensions’ crisis.

The prediction, made in a report written by UCD professor of economics Morgan Kelly and published in conjunction with the ESRI Quarterly Report — though with the caveat that the views are Professor Kelly’s and not necessarily reflective of the ESRI’s position — can only cause concern.

However, one thing is certain we must do something more than we are doing. Squatting like the bewildered rabbit in the auctioneers’ headlights is not an option. Neither is a little bit of tweaking here and there, implemented as pressure points become volatile.

Professor Kelly has advanced his pessimistic arguments before and has been challenged by sections of the financial, auctioneering and building alliances, as well as politicians of all hues, but he has illustrated his contentions with conviction and references to other housing markets.

Referring to Arizona’s contracting building boom, he describes how housing starts between May and November of last year fell from 8,000 per month to 3,000. Such a change in fortunes in our market would be nothing short of disastrous.

A position far less unnerving than Professor Kelly’s was advanced by Friends First economist Jim Power at the weekend when he contended that the current slowdown is very desirable. He also said he believed that over the next five years we will see house prices rise at about 3% per annum.

So, who do you believe, Professor Kelly or Jim Power? Should Professor Kelly’s dire warnings prove accurate there will be a lot of burnt fingers and considerable angst among investors and ordinary mortgage holders. However, it is far less disturbing to buy into Mr Power’s view when he says: “We are entering a more modern economic growth environment. Over the last 10 years, we have been involved in a huge level of catch-up, now caught up and we are now starting to settle down.”

As ever, there are only two things certain in the housing market: prices change and the banks get paid. A more transient certainty is that we have too many of our eggs in one basket; the housing market has a disproportionate influence on our economic wellbeing.