House prices may fall further


The Central Bank has set tough economic scenarios for stress testing Irish banks, including one suggesting house prices may fall by 62 per cent from 2007's peak before bottoming out in two years' time.

The figures were released as Minister for Finance Michael Noonan and Minister for Public Expenditure and Reform Brendan Howlin met IMF officials in Dublin today.

Ireland's banks are the root of the fiscal meltdown that forced the previous government to seek an €85 billion EU-IMF bailout package last year. The stress tests, which are to be published at the end of the month, will tell how much of the €35 billion earmarked for the banks will be required.

Mr Noonan said this week he would be surprised if the €10 billion already set aside for recapitalisation of the banks would be sufficient in the light of tests, which will be published at the end of this month.

The Central Bank said its baseline scenario assumes a 55 per cent peak to trough fall in residential property prices between 2007 and 2013, with commercial property prices marked at a 60 per cent fall. The adverse scenario puts the residential property drop at 62 per cent and the commercial fall at 70 per cent.

To date, residential prices have fallen by 38 per cent from the peak in 2007.

The Central Bank said in a statement the tests - which will also set the banks specific loan-to-deposit targets - were using the European Commission's growth forecasts as a baseline, figures that are weaker than the Government’s.

The European Commission predicts that Irish gross domestic product (GDP) growth of 0.9 per cent this year and expects the economy to grow by 1.9 per cent in 2012 and 2.5 per cent in 2013. The Government has forecast growth of 1.7 per cent this year.

The banks said its adverse stress test scenario would assume a fall of 1.6 per cent in GDP this year, growth of 0.3 next year and a rise of 1.4 per cent in 2013.

Mr Noonan and Minister for Public Expenditure and Reform Brendan Howlin met an IMF delegation headed by deputy chief of the IMF's European department, Ajai Chopra in Dublin. The talks were part of a regular quarterly meeting.

After the meeting, Mr Noonan said it was agreed the terms of the bailout deal would be altered, as long as the financial targets remain the same.

“What was being discussed in general terms was our proposal that the conditions and the memorandum of understanding would be changed for alternative conditions which are in the Programme for Government,” Mr Noonan said.

“And they have agreed to that principle. The detail then of the change will be discussed subsequently.”

The talks were a forerunner to the first formal review of the international bailout deal next month.

Mr Noonan said the teams did not object to reversing the €1 cut in the minimum wage devised by the previous government.

Mr Howlin said it was a "getting to know you" meeting and that there were no unilateral decisions to be made. "We're going to engage not only here . . . but internationally, with ministers abroad," he said, adding that it is important for Ireland's partners to understand the pressures Ireland is under.

"It's in everyone's interests for Ireland to succeed," he said.

The meeting also included representatives from the ECB and the European Commission.

The Government had already stated its intentions to seek changes to the terms of the €85 billion bailout deal agreed last year.

However, German chancellor Angela Merkel and French president Nicolas Sarkozy have pushed for Ireland's corporate tax regime to be brought into line with other states in exchange for improved terms on the EU portion of the bailout fund.