Bertie Ahern's optimism regarding property prices and the economy is out of synch with a more troubled consensus among economists and house buyers, writes Laura Slattery
Seven years of warnings and arguments about an overheating construction sector have taken their toll on Taoiseach Bertie Ahern.
Crashes, bubbles and uncontrollably spiralling consumer debt: he's heard it all before and he doesn't believe it. The property market is doing just fine.
Speaking in Druid's Glen in Co Wicklow last week, the Taoiseach criticised the analysts who predicted a downturn in the market in 2005 and 2006, noting that people who avoided buying property on the basis of their "glass half empty" gloom would now face higher prices.
The economy's high dependence on the construction sector, in which one in eight workers are now employed, was really nothing to get too upset about, he implied.
From Vienna, Minister for Finance Brian Cowen chipped in with a prediction that house prices would tail off rather than slump into an alarming decline. People are building houses because people are buying houses, he said.
Feverish demand for housing in the Republic would seem to indicate that not many first-time buyers have been put off buying property as a result of economists' solemn notes of caution.
With housing completions likely to reach 85,000 this year, surpassing last year's record 81,000 units, it appears people are more than happy to pile in and put their names to a minimum of one shoebox apartment in the vague vicinity of some community services - at the very least a quality bus corridor or a Spar.
But does the frenzied consumer demand for housing reflect the Taoiseach's "risks, what risks?" view of the market or the "if not now, never" feeling that buying property, especially within Dublin's ever-expanding commuter belt, will very soon be beyond their reach?
The Central Bank, AIB's economic research unit and the combined forces of IIB Bank and the ESRI all published reports this week pointing to the re-acceleration of house prices.
The Central Bank said the fresh escalation in house prices since last autumn was driving consumer borrowing at an unsustainable rate. The IIB/ESRI report said 50,000 borrowers could face "an unpleasant shock" if the European Central Bank (ECB) decides to increase interest rates quickly.
And AIB's chief economist John Beggs described the market as a "hot house" that was pushing the price of houses beyond the reach of first-time buyers and could eventually kill off demand.
Property prices are now increasing at an annual rate of 11.1 per cent, accelerating from rates of 6 per cent last autumn, according to the Permanent TSB/ESRI house price index.
Bank of Ireland's chief economist Dan McLaughlin believes annual house price inflation will exceed 13 per cent over the next few months, despite the record levels of supply and prospects of rising interest rates, while AIB this week raised its forecast for house price growth in 2006 to 12 per cent.
Worryingly, Beggs believes the Permanent TSB/ESRI house price index may be underestimating the strength of price inflation, particularly for existing houses in the Dublin area. It recorded a 10.9 per cent rise in this market in 2005, falling far short of the increases of over 20 per cent reported by estate agents Sherry Fitzgerald and Douglas Newman Good.
"I don't believe the estate agents are hyping it," he says.
It hasn't quite happened yet, but affordability will inevitably become a problem, he says.
"Prices cannot continue to rise at two to three times the average rise in wage incomes without eventually killing off a large number of potential first-time buyers, irrespective of the support they may receive from parents and other sources," says Beggs.
The ratio of house prices to incomes now stands at 11 to one, compared to just over seven to one in 1998. "In the UK, they fret when it gets to five to one."
The question is, will so many people be priced out that demand collapses, and with it the housing market, the construction sector and the wider economy?
Beggs does not think the market is going to crash, landing homeowners in deep pits of negative equity and lenders with a queue of defaulters.
A soft landing of between 0 and 3 per cent average price inflation would by definition mean some properties would lose value, but this does not mean we are trapped in a bubble that is about to burst.
"Can you describe something as a bubble when it's the result of all these rational decisions by builders and buyers?"
He does note that solutions to accelerating prices are thin on the ground. First-time buyers, who are fighting their way onto the property ladder for very good reasons, have no bargaining power.
Investors, on the other hand, do. They may simply exit the market. Or the rising costs could force them to bump up rents, having a knock-on effect on the immigration the economy has come to depend on.
"At some point, Ireland will become too expensive for migrant workers and they will just go somewhere else."
Employment growth drove nearly all of economic growth in 2005, the Central Bank pointed out on Wednesday.
Net immigration accounted for almost half of the increase in employment, while the construction sector accounted for around a third.
The current levels of housing completions are not sustainable, the Central Bank warned.
Eventually, there will be a contraction to about 60,000 new units per annum. But a rapid downsizing in the construction sector will both hammer employment growth and cut the exchequer's tax revenues.
As long as the rest of the economy is strong, it should be able to carry the construction sector if activity dips, the Taoiseach reassured the Irish Management Institute conference.
Cowen's remarks have been considerably more cautious than the Taoiseach's, however. Although there will always be economic risk, much of it coming from the global economy, a cooling off in the property market would certainly be in everybody's interest, he conceded.
But it is the Central Bank that has been the most forthright of late.
"The pick-up in house prices is a worrying development and increases the risk of a sharp correction," says Tom O'Connell, the bank's assistant director general.
The "unjustifiably high" price inflation has coincided with a year-on-year increase in mortgage lending of almost 30 per cent in the first two months of 2006 and has helped the ratio of personal debt to disposable income creep up from 115 per cent at the end of 2004 to 132 per cent today.
"I don't think that any country in the euro zone would be happy with rises in personal debt of 30 per cent," says O'Connell.
Mortgage lenders routinely stress test borrowers when they are applying for their loans, checking that they can still afford to make their mortgage repayments if interest rates rise by 2 per cent.
But the lenders haven't exactly helped quell consumers' insatiable desire to immerse themselves up to the neck in debt, the Central Bank implies.
The marketing of 100 per cent mortgages, the promotion of interest-only loans and the availability of longer terms have helped make credit more freely available.
"I'm not sure you can attribute the increase in house prices directly to an easing of credit conditions, but maybe it's not a coincidence that that's occurred," says O'Connell.
So what happens next?
From May, the Irish Financial Services Regulatory Authority will require mortgage lenders to set aside additional capital for loans of more than 80 per cent of the property's value.
The Central Bank has also launched a new round of stress tests of financial institutions in order to assess their vulnerability to economic shocks such as jumps in interest rates and mortgage defaults.
The last round of stress tests led to a crackdown on lenders who were not properly verifying borrowers' incomes.
House prices, meanwhile, could be further inflated by maturing Special Savings Incentive Accounts (SSIAs).
IIB chief economist Austin Hughes estimates that a flow of €2 billion of SSIA money into the Irish property market, plus additional borrowings, will boost prices by up to 10 per cent.
Many economists feel that more exuberance in the market, whether rational or irrational, is not what the economy needs.
But the analysts who cried wolf about the property market's prospects during the industry's boom years may now find it difficult to convince borrowers - and the Taoiseach - that too much debt can be a bad thing.
