Shock, horror! Philip Lane warns house prices may go down as well as up

Cantillon: Central Bank governor mentions property and gets everyone’s attention

Philip Lane, governor, Central Bank. Photograph: Nick Bradshaw

Philip Lane, governor, Central Bank. Photograph: Nick Bradshaw

 

Irish economic forecasts typically come with caveats, warning of possible downside risks to the projection. They usually come in this order: Brexit; a disruption to global trade; changes to the global tax environment; and/or a period of higher interest rates.

They’re trotted out with such regularity – like the terms and conditions attached to a financial product – that nobody really listens anymore. You can only hear warnings about the potential destabilising impact of Brexit so many times before you switch off and take it as given.

For policymakers genuinely exercised about these potential banana skins, focusing minds on the horizon can be a challenge.

That’s why Central Bank governor Philip Lane last week chose the ultimate fault line of the Irish economy to rouse us from our current lethargy – house prices.

All he really said at the Oireachtas Finance Committee was that house prices can go down as well as up, a pretty basic economic point, but it was enough to grab the headlines. Brexit is one thing but falling house prices, what dystopian nightmare is this?

Multiple reasons

There were multiple reasons why the current momentum could go into reverse, he said, the most obvious being a significant housing supply response. The Central Bank is projecting about 23,500 unit completions this year and 28,500 in 2019. If they materialise – and that’s a big if as the figures are widely contested – they would represent a big upswing on the previous period.

Lane pointed out that in the first decade of this century, a big house-building response to supply shortages was, at least in part, responsible for the market crash after 2008.

He said he was exasperated by the assumption – in some quarters at least – that prices would keep going up on the basis of market fundamentals.

So unlike his pre-crash predecessors who peddled a soft landing theory of house prices late into the day, Lane is getting out ahead of the Dracula economists, talking of a correction even as property-price inflation accelerates to almost 13 per cent.