Ministers prepare for toughest budget in years

Thu, Oct 9, 2008, 01:00

THE CABINET moved into the final phase of framing the budget yesterday at a meeting which lasted for more than four hours. Ministers will not meet again until Tuesday.

A Government spokesman said yesterday that nothing would escape the microscope in these particularly difficult times. He added that Ministers were preparing for what will probably be the toughest budget in many years.

Another indication of the very difficult economic background to this year’s budget emerged last night in a review of the construction industry for 2007 and the “Outlook 2008–2010”, conducted for the Department of the Environment by DKM Economic Consultants.

The review published by the department forecast that house prices would continue to fall significantly over the year ahead and that the number of housing units built would fall to 25,000 in 2009 from 43,000 this year and 78,000 in 2007.

“The stark reality now is that the deterioration in economic conditions over recent months plus the contraction in residential investment to date this year are likely to see real GNP decline by up to 1.5 per cent. The recovery in 2009 is also now expected to be delayed. Moreover, international economic events are not helping the situation,” it added.

The review said that the root of the problem lay in “the substantial correction in the housing market”, which began about the end of 2006. The housing market was currently experiencing weak demand, low sales rates, increased cancellation rates and falling house prices.

“While housebuilders have responded by cutting production, the stock of unsold homes has risen to levels well above historical norms.

“With only 15,386 dwellings commenced in the first seven months of 2008, house building levels are expected to drop to 25,000 units in 2009 from 43,000 this year.”

Residential construction is expected to fall back to only 9 per cent of GNP this year from 16 per cent at the peak in 2006.

“Domestically as average house prices fall, Ireland is expected to follow international experience in respect of property cycles, implying that average house prices would need to drop back by some considerable amount.

“Depending on the severity of the drop in house prices, the average house price could fall by anything from 20 per cent to 46 per cent, reflecting the increase in real house prices in the run up to the peak.

“However, the Irish housing market has already lost virtually all of the gains made in the three years up to the peak (January 2007) as real house prices had fallen by 18.5 per cent from the peak by July this year. But further losses seem inevitable.”

The review said confidence levels in the construction sector were at an all-time low as new business levels continued to weaken, the pace of employment losses was accelerating and companies remained pessimistic about the future outlook.