Housing market collapse now 'a significant risk'

A collapse in the housing market is now the most significant domestic risk to the economic outlook, according to Goodbody Stockbrokers. It argues that the sooner house price growth falls into a more sustainable range of 5-7 per cent, the lower the chance of prices actually falling as the market eventually seeks a sustainable price level. Cliff Taylor, Economics Editor, reports.

In a broadly positive economic outlook, Goodbody focuses the bulk of its concern on the housing market. "Mortgage credit growth of 26 per cent and house price inflation of 13 per cent are clearly incompatible with disposable income growth of some 4 per cent," it says in its spring 2004 review.

The latest Irish Permanent TSB index shows annual house price inflation running at 13.3 per cent, continuing a trend that has seen prices increase by 211 per cent since 1996.

"Even allowing for a substantial increase in employment of close to 25 per cent and the historically low interest rate environment, such a rate of increase is stretching fundamentals," according to Goodbody.

The increase in prices in the 1996-2002 period was justified during the "Celtic Tiger" boom, the broker says, but "the underlying macroeconomic landscape is much different now".

Looking to the future, both interest rates and the tax burden are likely to rise, wage growth has moderated and the rise in employment has slowed sharply.

With 69,000 houses built last year, supply has caught up with fundamental demand and building cost inflation has eased. While interest rates look set to remain low, other factors are changing. Household income growth has slowed significantly and debt levels have risen sharply, according to Goodbody.

Rents have fallen by 7 per cent over the past two years and this is forecast to lead to a reduction in investor demand. However, demand for houses for personal use will remain robust.

The likely and desirable scenario, the broker says, is for price growth to ease to a more sustainable level of 5-7 per cent.

"Failure of this scenario to occur would seriously increase the chances of house prices adjusting to fundamental value by way of a seriously damaging disorderly correction."

Elsewhere, Goodbody is relatively upbeat on the outlook, saying the Republic has been "remarkably successful" in recent years, adjusting from a spectacular growth surge to a slower trajectory "without generating the stresses and strains normally associated with the ending of a boom".

The broker forecasts that gross national product growth will be 3.9 per cent this year, roughly similar to last year but showing a better balance across the different areas of the economy.

Consumption is expected to show its best outturn since 2001 - rising by 4 per cent in real terms - with investment spending rising by 5.1 per cent.

Meanwhile, global growth should boost exports, even if foreign exchange developments are a cause for caution, with the rising euro posing a threat to companies selling outside the euro zone.