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