Warning on falling house prices

PropertyUp to 60 per cent could be wiped off the real value of houses over the next eight years if the Republic's housing market follows the same pattern as those in other countries, a new paper suggests.

Morgan Kelly, professor of economics at UCD, said the housing market could go into rapid freefall, with house prices falling by 5 per cent per annum over the best part of the next decade.

Adjusted for inflation, this would translate into an annual fall in real average selling prices of 6-7 per cent or 40-60 per cent over the next eight to nine years.

The bigger the boom in house prices, the bigger the subsequent bust, he said. In a paper published today by the Economic and Social Research Institute (ESRI), Prof Kelly argues that reducing stamp duty will not keep prices afloat.

As long as there is a large stock of unsold houses and falling prices, potential buyers will have an incentive to wait for further price declines before they buy, according to the paper.

Prof Kelly studied almost 40 property booms and crashes that have occurred in Organisation for Economic Co-operation and Development (OECD) countries since 1970.

"Typically, real house prices give up 70 per cent of what they gained in a boom during the bust that follows."

A housing bust in the Republic has the potential to be even more severe than those in other OECD countries because of the strong growth in the number of new houses built here in recent years and because 15 per cent of the housing stock currently lies empty.

House prices fell 2.1 per cent in the first five months of the year, according to the latest figures from the Permanent TSB/ESRI house price index.

Average national prices have now fallen for three months in a row and are expected to show further decreases over the summer months.

The mortgage lender said on Friday that it expected a recovery in the market later in the year to make up for these price falls, with the result that the market would finish the year flat or with growth of up to 2 per cent.

But the ESRI said yesterday in its quarterly economic commentary that it expected average house prices to decrease by 3 per cent in 2007.

The impact that a collapse in house prices would have on the construction sector is the main cause for worry, Prof Kelly said.

In most economies, the housing sector accounts for only 5 per cent of gross domestic product (GDP), but in the Republic, that figure is 15 per cent, the paper points out.

The ESRI said house completions would fall to 82,000 in 2007, down from 88,000 last year, and then fall to 76,000 in 2008.

However, Davy Stockbrokers recently issued a more pessimistic forecast, predicting that the number of new houses built this year would be 80,000, declining to 65,000 next year.