Economist admits it got it wrong

City Living. . . but two years on the magazine still warns of trouble ahead, writes Edel Morgan

The Economist magazine's economics editor Pam Woodall admitted at the Four Seasons hotel this week that her shock forecast two years ago that Irish property prices were going to plummet by 20 per cent over four years was wide of the mark and introduced her speech with: "So why don't I crawl into my little corner and leave you all alone?"

There were probably quite a few estate agents and assorted property people in the audience that were hoping she would do just that. The Economist's 2003 prediction that prices would fall as part of a worldwide tumble sent shockwaves through the Irish market and had a downward impact, albeit a temporary one.

This time around her groundhog day forecast that house prices will fall by 20 per cent over five years is unlikely to send the market into a tailspin. While she might be proved right, she's beginning to look like the girl who cried wolf.

We've become jaded by an endless barrage of predictions about dips, bursts and crashes by economists and various institutions. So far, the doom and gloom merchants have got it wrong but it might be a mistake to become too complacent. Woodall is unrepentant about her previous error. She might have got the timing wrong but she is sure it is going to happen. She was in town for a debate about the fate of the property market hosted by Simply Mortgages - which in reality was not so much a debate as two economists giving their widely divergent views of the market. How novel!

ESRI economist David Duffy put forward the moderate outlook that house price growth will continue at an average of 4.5 per cent per annum until 2010 followed by a soft landing. In five years, he says, the average house price will be €325,000. His forecast is based on a number of factors, including the strength of the economy, a high level of migration, a large house-buying population and high employment. He believes a hike in interest rates will not have a dramatic effect.

Woodall's more grim assessment of a slow puncture of the property bubble is based on a global view. She says property prices in countries around the world - including Spain, Sweden, the UK, the Netherlands, the US, Italy, Australia and Belgium - have either doubled or tripled in the period 1997-2005, with the exception of Germany and Japan where prices have been falling. "This is the biggest financial bubble in history, due to unsustainable low interest rates and at some time it's going to burst. Prices can't stay at these levels, interest rates are going to rise for the first time in five years and I think it will be significant." She warns that investors are "in for a big shock at some stage" saying their reliance on capital growth at the expense of short term profit could see them coming unstuck. If this happens, they will be bailing out of the market in their droves, causing a downward pressure on prices. "I am not denying there are factors pushing prices up, but I think prices are out of line with fundamentals."

She said house prices in Ireland are 16-17 times the average income, compared to nine-10 times in Italy, Germany and France. In her speech, Woodall kept harking back to the examples of the UK and Australian markets. "A year to 18 months ago, they were rising 20 per cent year-on-year. Australia has fallen, the UK is rising by 2 per cent. London and Sydney have fallen 10-15 per cent from peak."

One flaw in her argument is that, although the Irish and Australian markets are similar in many respects, she neglects to mention a series of anti-investor measures imposed in Australia which contributed to lowering prices. Working on the theory that what goes up must come down, she says Irish house prices are overvalued more than in any previous property boom, so have to fall more. "Inflation is so low that it will take many years to bring house prices back to fair value without a price fall."

Rubbishing the "consensus view" that prices are unlikely to fall, she says some economies rely on "common fallacies" to convince themselves they won't be affected. For example, she says the theory that a fixed supply of land and rising population mean house prices will always rise hasn't saved London from a falling market. When an audience member asks what the trigger of a dip in prices is likely to be, she again points to the UK, where the double whammy of an interest rate hike and a warning by the Bank of England governor Mervyn King that the market may suffer, has had a negative impact. "If the ECB raises its interest rate by a percentage point, and the Central bank issues a warning or a prominent economist, that could be the trigger."

If Woodall is right this time, few believe it. When she asked for a show of hands, most voted that there would not be a fall in the market - although most of the audience had a vested interest in not believing it. It remains to be seen whether Woodall will be back in another two years to say I told you so, or hoping it will be third time lucky for her prediction.