Saturday, 23 May 2009

Time To Pay For Excesses Of Past...

We will have to pay for excesses of the past...

RECENT economic reports have a hint of desperation about them as they struggle to suggest the battered economy will revive in two years time.

The bit between 2009 and 2010 is being glossed over, as the economy is expected to plunge to its worst recession ever in modern history.

If it’s true, the 9-10% fall in output this year is from a high base and even if growth reverts back to 2005 levels then that would be no bad thing.

That was the year before we built a record 96,000 houses and employment doubled towards 2 million over a 10-year period.

That’s all positive, but the reality check still has to kick in. One report from West Cork suggests house prices in some areas are in desperate trouble. One source has reported that 10 houses built in 2007, achieved prices of €400,000, some bought with €390,000 mortgages.

But as the market tanked, unsold houses were bought for €180,000, leaving many in negative equity territory.

It is also a fact that houses built as holiday homes 10 years ago can now be rented without restriction. Rental periods were quite tight under the old tax rules that boosted the housing splurge in the first instance.

With pressurised buyers needing income to keep up repayments, many homes will come on the market, damaging it further.

The problem is that with people quitting the country as the economy slows, we actually have more homes than the economy needs.

Overall, the attitude driving some economic reports is to accent the positive.

The ESRI last week talked of growth of 5% out to 2015 starting to take hold in 2011. A new all-Ireland report from Ernst & Young also says we will kick into recovery in 2011.

It does point out, however, that 250,000 jobs will be lost on construction by 2010. It notes that the impact of the property collapse may be generational and it could be 2021 before house building recovers.

And a report yesterday from Merrion Capital had also some chilling figures on the housing front. It said 76% of house builders are currently not building, with 36% expecting to deliver zero completions in 2009.

The overhang of housing stock is expected to take until the second half of 2010 at the earliest to clear and Merrion expect housing completions of 16,000 this year and 14,000 in 2010.

Almost all respondents see selling prices continuing to fall year on year.

The report concludes that the much talked about NAMA was "causing effective paralysis in the industry".

The unpalatable reality is that construction and banking in this country is on its knees and the pain involved in correcting this mess will hit us right between the eyes over the next two years.

Up to 500,000 people could be unemployed before any recovery starts.

As dole queues rise the possibility of social unrest, with angry unemployed Irish turning their fury on those welcomed here with open arms during the boom cannot be ruled out.

An RTÉ programme this week featured migrants living happily here now getting the distinct feeling they are no longer wanted.

The stark message is that we have to pay for the excesses of the past. To that extent the budgets just gone and the planned cuts for next year are at least honest, because they recognise that we cannot afford our current standard of living.

It is reckoned that the budgets of 2009 and 2010 will take about 7% of GDP out of our pockets.

We will recover. We have the infrastructure and flexibility that are the hallmarks of a modern economy.

But remember that Japan, which conquered the global economy from the 1960s, had a 20-year recession before it recovered.

We will have to suffer the pain and uncertainty that comes with living beyond our means before we start to see the light.

Report by Brian O’Mahony - Irish Examiner.

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