Saturday, 16 August 2008

Irish Property Crash Get's Even Crashier...

The fundamentals of the Irish housing market point to more sharp falls over the next two to three years...

WITH HOUSE prices falling fast and likely, come the autumn, to fall even faster, no sane person would currently even think of buying a house. But this immediately raises the question of how long the crash will last. In other words, how long will it be before you can buy a house and not regret the decision for the rest of your life?

Looking at past collapses in house prices abroad, we can see that they fall into two broad groups. In the first group, that includes Japan and Switzerland, prices suffered a long, slow decline of a few per cent a year for a decade. The second group, that includes the Netherlands and Finland, saw real prices halve in three to four years, and then fall gently for a few more years.

If this second pattern repeats in Ireland, given that we are already one year into the crash, we can expect two to three more years of sharp falls. After that, prices should stabilise and it will be safe for buyers to return to the market.

But between now and then, to paraphrase a former taoiseach, the crash will get even crasher.

The reason is that, alongside self-fulfilling expectations of continuing price falls, all of the fundamentals of the Irish housing market - income, population, credit and housing supply - are pointing to sharply lower prices.

The building boom allowed Ireland to enjoy Scandinavian levels of consumption and Government spending despite scarcely better than Mediterranean levels of productivity.

We are facing a decade of recession, of the sort Germany is just emerging from, as our incomes are brought back into line with our productivity.

With prolonged recession, emigration will resume, further reducing housing demand. In fact, as Brendan Walsh has pointed out, the collapse in the birth rate during the 1980s means that, even with zero net emigration, the prime housebuying population of 20 to 40-year-olds will fall by 10 per cent in the next decade.

The house price boom of the last decade was in large measure due to loose bank credit. It would not have been possible for house prices to double as they did relative to disposable income without banks sharply increasing the amounts they were willing to lend to people.

However, banks are now returning to their old policies of 80 per cent mortgages of a maximum of three to four times income, and house prices will fall accordingly. This rediscovered prudence has little to do with tightness in international credit markets, and everything to do with the realisation that, short of living on bread and water, no one can afford to repay mortgages of five or six times their salary.

Based on the US experience, where each stage of the crash has happened about a year ahead of here, more and more people will stop paying their mortgages as their houses fall in value and they slip into negative equity.

However, the immediate threat to the economy comes from the scarcely believable €25 billion that banks lent to builders back in the days when nobody thought the boom would ever end. As new houses stopped selling, builders have been unable to repay these loans, and banks are now pressuring them to pay up by the autumn or face bankruptcy.

Builders usually borrow with recourse, which means that if they cannot repay a loan they lose literally everything, bar the fillings in their teeth. Facing personal ruin, builders desperate to sell will slash new house prices in the coming months and this collapse in prices will ripple through the entire market.

Taking its cue from the Health Service Executive policy that the best way to deal with a problem is to deny that it exists, the Central Bank has quietly been approaching banks and asking them to go easy on builders.

Whether banks pay any heed is immaterial. Either way, they have a €25 billion hole in their balance sheets, and an autumn banking crisis is a real possibility. Banking crises are like pile-ups in the Tour de France: one careless rider suddenly goes over and brings the rest down after him.

While media attention has focused on banks, the first casualty is more likely to be any lending institution that has over-extended loans to the building industry - perhaps by as much as 15 per cent. In this worrying situation, what advice can we offer to house buyers and sellers?

For sellers, the important question is to ask: do you really want to sell? This means, are you willing to accept a good deal less than the guy down the street got two years ago? If you are not, save yourself a lot of grief and stay out of the market. If you are, then find an estate agent who understands the importance of selling quickly.

It is vital not to delay for months, and above all not to rent out, in the hope of a better offer. With prices falling about 1 per cent a month, every week you postpone selling a €400,000 house will cost you €1,000.

Advice to buyers is easy: stay out of the market. With prices on course to halve, the hundreds of thousands you save will more than cover any rent you pay for the next two or three years. And, just as valuable, you will sleep a lot better at night.

Report in Irish Times Newspaper by Morgan Kelly is professor of economics at University College Dublin

Monday, 11 August 2008

It Never Rains But It Pours - Summer In Dublin Ireland...

Dubliners are bracing themselves for further flooding as heavy downpours are predicted in the coming days.

The news comes as residents in many parts of the capital are today coming to terms with the damage wreaked by Saturday's intense rainfall.

Met Eireann says heavy and thundery rain is likely in Leinster tonight, with flooding a real possibility in many areas.

And the outlook for the coming days does not look much better, with heavy rain predicted for Tuesday and Wednesday.

Meanwhile, a senior Dublin City Council official has admitted the capital's drainage system cannot cope with the "freak" rainfall which occurred over the weekend.


City engineer Tom Leahy said the system was designed to deal with normal or even heavy rainfall. "It cannot deal with these extreme events," Mr Leahy said today.

A top climate expert warned that Dubliners will have to get used to the heavy rainfall and flash floods that hit the city on Saturday.

Dr John Sweeney of NUI in Maynooth said the monsoon-like conditions were a product of warmer sea and land temperatures.

Meanwhile, a resident in Balgriffin in north Dublin told today how she and her family had to clamber out the window of their bungalow to escape the rising water.

Alice Geraghty said by 7pm on Saturday the lower part of her split-level home was under water. "By eight o'clock, after numerous calls to the fire brigade, we had to leave via one of the windows," Mrs Geraghty told RTE's Morning Ireland. She described the situation as "very traumatic and distressing".

"We returned to a scene of utter devastation," Mrs Geraghty revealed, saying that her garden had been destroyed.

"The smell and dirt in the house is incredible," she added.

Dr Sweeney said it was "probably the most intense rainfall event in eastern Ireland since Hurricane Charlie in 1986".

And he said we will have to get used to it happening more often in the future.

"We have to expect we will get more of this," Dr Sweeney added.

He said when the sewage comes up through the drains in a town like Celbridge in Co Kildare you "have to blame the local authority". A huge clean-up operation was continuing today after the mass floodings over the weekend.

The harsh weather on Saturday evening caused extensive traffic congestion across the capital and the cancellation of a number of sporting events.

Record levels of rainfall, at 76.2mm, were recorded at Dublin Airport over the 24-hour period between Friday and Saturday night.

Several routes around Dublin were made impassable over the weekend as a result of the rain.
Flooding affected many parts of Leinster, with a river bursting its banks in Laois, and flooding reaching over two feet in some housing estates in Celbridge, Co Kildare.

In Dublin, the city council put in place its crisis management plan when the severity of the situation became clear.

Dublin fire brigade received some 800 calls over an eight-hour period -- the equivalent of a Halloween night. Staff who had been on holidays were drafted in to help.

A spokesman for Dublin Fire Brigade said crews spent most of the night rescuing people.

"People would be ringing up saying their houses are flooded. Some were trapped in cars and needed to be rescued," he said.

The severe flooding affected the north- and south-bound lanes of the M50 as well as the south-bound part of the port tunnel, which was close for a time over the weekend.

The M50 was especially badly affected between the Finglas and Ballymun exits, while the M1 was closed at Shantalla bridge.

Report by Cormac Murphy - Evening Herald