NCB report offers good news for homeowners

Many people will have been delighted this week with NCB's latest report on the housing market which offers some reassurance on the possibility of a bust. Following two years in which the prices of houses in Dublin rose by 82 per cent, many are wondering whether this bubble is likely to burst.

The report argues that the pace of demand for housing is sustainable and there are few if any of the conditions needed for a bust. But some key commentators warn there is still the chance of a slowdown and that the authorities should guard against complacency.

One of the report's key arguments is that the risks to the Republic from world slowdown are mitigated by favourable domestic conditions. At the same time the underlying demographics are stable and migration flows are likely to remain positive, while household sizes continue to fall.

It also argues that house prices are likely to rise further as Government measures to increase the supply are bound to be slow. Reduced tax breaks for investors which the Government introduced on the recommendation of the Bacon report have simply resulted in higher rents, while measures to subsidise access to the market tend to result in increased prices.

There is also little chance of a large rise in interest rates which was one of the key factors which triggered the British property slump a decade ago.

One reason that even a global slowdown will not have a huge impact, according to NCB economist, Mr Eunan King, is that the multinational sector employs just 120,000 out of a workforce of 1.5 million. And only 7,000 jobs out of a total of 29,000 new jobs in 1997 were in these export sectors - most people were employed in services. The result according to Mr King is that while Gross Domestic Product growth may slow, domestic demand will remain strong, broadly protecting the housing market.

In addition, the Asian crisis has not affected us in the way it has Britain as large parts of the multinational sector are reliant on a highly-educated workforce involved in more than basic assembly, which means that much of the manufacturing cannot simply be transferred to Asia, he says.

Other commentators are less bullish. Mr John FitzGerald, research professor at the Economic and Social Research Institute, believes there is around a 30 per cent chance of a slump in house prices. All it would take, he says, would be a major turndown in the US economy. This would lead to some job losses in the high-tech sector here and a slowdown across the rest of the world.

He points out that at the moment people are dashing out to buy as they believe prices will continue to increase. But if prices stopped rising or even fell a little, people would stop buying. Even if this were to go on for six months it could lead to a major slowdown in the housing market.

Mr FitzGerald argues that a global slowdown will affect Irish companies across the board as a lot of Irish multinationals are either selling to multinationals here or are exporting their goods or services abroad.

"We simply cannot guarantee that the world economy will continue to boom forever," he notes. "And if the ball is set rolling downhill it will begin spinning faster of its own momentum."

The other major issue highlighted by the NCB report is the simple unavailability of housing for people on average incomes. One of the reasons given for a bust being unlikely is that lenders are switching away from low-income borrowers. And indeed, according to the statistics presented by the paper, there are few people on average incomes or even slightly above who are getting onto the housing ladder.

The average income of borrowers grew by an astounding 13 per cent in 1997, almost the same level as the average loan - which rose by 14 per cent. The average income of borrowers is now £24,700 (€31,362), significantly above the average manufacturing wage of £16,000. As Mr FitzGerald points out it is probably for this reason that large numbers of people are now signing on local authority housing lists across the State who would never have done so in the past. And the only long-term solution to this is of course on the supply side. More land must be made available for housing, transport and other infrastructural links must be put in, whether the homes are local authority or for the private sector.

But one factor which should underpin the market even if prices fall is the overall low levels of borrowings. Despite rapid increase in the price of houses only 33 per cent of first-time buyers are borrowing 90 per cent of the value of their home. This undoubtedly points to some caution by the lenders in lending to people on lower incomes and evidence of increasing amounts of cash being given by parents to children to help them to get onto the ladder and the 6,000 or so homes bought every year by returning migrants who are selling a house abroad.

Even the anecdotal talk of large mortgages does not appear to be borne out by Irish Permanent's experience. The average loan to value ratio in the Republic last year was 62 per cent compared with 72 per cent in Britain, while the ratio for first time buyers was only 74 per cent compared with 89 per cent in Britain. Second time values were a very low 52 per cent compared with 65 per cent in Britain.

As Mr FitzGerald notes, these figures are at least reassuring. If they prove to be correct across the board, even if the worst were to happen the result should not be the same meltdown as the south of England experienced in 1988.