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Green shoots overseas welcome, but fallout from property bubble will take longer to sort out

Oliver Gilvarry, Head of Research, Dolmen Stockbrokers

7th Jul 2009

Oliver Gilvarry, Head of Research with Dolmen Stockbrokers, commenting on the latest Daft research on the Irish property market.

The outlook for the Irish housing market continues to deteriorate, with asking prices falling an average of 20% year on year according to the latest Daft report. The scale of the decline in the Irish housing market is following the decline in Irish economic conditions. Recent Irish economic data has continued to be weak, with Q1 GDP falling by 8.5% and Live Register figures for June reaching 413,500 with a figure close to 500,000 very possible before the end of the year according to the Taoiseach. This is on the back of talk of "Green Shoots" in some of our major trading partners such as the US and UK.

The concept of "Green Shoots" should be compared to the scenario where investors believed that financial markets were about to collapse and the world economy was facing into a 1930's style Depression scenario. Policy makers' efforts to provide stimulus via fiscal, monetary and unconventional actions are beginning to prove successful and reduced the systemic risk that was so prevalent at the beginning of the year. As a result we believe the worst of current crisis is behind us. This is most certainly a positive, but economic growth will remain weak for the next number of years as the excesses of the credit bubble are worked out of the system. We expect the recession Ireland and its major trading partners are facing will be prolonged due to the problems stemming from the banking crisis.

The open nature of the Irish economy, recovery in our major trading partners, US and the UK will benefit us significantly. This benefit will be offset somewhat by the fallout from the housing market. The creation of NAMA will be of assistance to the economy as it will stabilise the banking system, but it will be an expensive solution. Unemployment will remain high, with some estimates of 10%, when the economy returns to more normalised growth patterns. The structural deficit that will remain with taxpayers will be another burden on the economy and will require higher levels of taxes and less government spending that was experienced between 2002 and 2007.

Therefore from a fiscal point of view, the Irish economy will be very different to what was experienced over the last decade, with higher taxes and unemployment prominent features. The collapse of the housing market will also result in a large number of social issues that must be faced by the government. Falling prices have resulted in large numbers of home owners facing negative equity, a situation not seen in Ireland on this scale previously. Following the UK property bust in the early 90s, homeowners had to wait almost a decade in some cases to move out of negative equity.

The effect of negative equity is to confine individuals to areas, resulting in lack of mobility in the workforce. If taking a new job means moving house, a person in negative equity will not be in a position to take the new role. A large majority of apartments built in the Republic over the last number of years were not of the kind young couples could raise families in easily. Again the burden of negative equity will prevent some couples moving to larger, family-suitable houses. These types of situations highlight the need to prevent residential property bubbles in the future, and need to be considered by policy makers to prevent such situations occurring in the Irish economy again. The government will also need to contemplate how to help such individuals once the economy is stabilised and economic growth returns.

The over supply of housing in the last number of years will keep rents under pressure this year and next. The comments recently by the Minister for Social and Family Affairs indicating that the rent allowance will be lowered further will also impact on rents across the country.

The "Green Shoots" being seen in other major economies will be a positive for Ireland in helping to stimulate growth, but another positive they will bring is reducing our unemployment levels. The automatic stabiliser of exporting our excess labour will come into play next year as graduates and other workers, both Irish and non-Irish, leave to look for work in other economies which are recovering more quickly than Ireland. This will further impact on rents as the numbers looking for rental accommodation will fall.

One factor that will provide some floor to the rental market is the number putting off buying a home due to the belief that prices will fall further, uncertainty over their take-home pay and /or fear of being made redundant.

The outlook for the Irish economy remains poor for this year and next, but the worst is over for our major trading partners with the proviso that Europe could weaken further as the policy actions taken by the Euro-Zone have not been as proactive as the US and UK. NAMA should be in place by the end of the year, which will stabilise the Irish banking system. This will cost the Irish taxpayer, but without a stable banking system no sustainable economic recovery can emerge in Ireland.

Pressures on house prices will continue this year and into early next year. With further tax increases likely this year, uncertainty over a property tax and civil servants facing further hits to their pay, buyers will remain in the background until they begin to see certainty on what their take home pay and employment prospects are like.

A more medium term issue relates to the impact of negative equity on individuals in the Ireland. This will restrict movement and leave young couples in housing that is not suitable.

Policy makers must become aware of these issues when formulating policy. While considering such policies, government must also ensure measures are put in place to prevent the re-occurrence of property bubbles on the scale that is currently facing the Irish economy. To paraphrase Wilde, to create one property bubble is unfortunate, to allow a second could only be carelessness.


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