Predicting prices is academic


CityLiving: Reports that property is overvalued are nothing new, says Edel Morgan

While the news from the OECD that the Irish property market is overvalued by 15 per cent may have sent shockwaves through the home-owning population of Ireland, in other quarters, it failed to provoke even a ripple.

One of Ireland's leading economic commentators, Jim O'Leary, greeted the finding as "no great news or insight".

"If it is objectively the case that house prices are overvalued by 15 per cent, we can all relax. If it's only 15 per cent, we don't have a terribly serious problem. That kind of overvaluation can be worked out of the system over a number of years as house price growth slows down."

The OECD's finding - part of an economic survey of Ireland due to be published in January - is only one of a spate of analyses and reports which have estimated that the market is overvalued by anything from zero to 60 per cent. The IMF put the figure closer to 20 per cent, the Economist magazine estimated 40 per cent, reducing over a number of years, while others have produced figures of between 5 per cent and 10 per cent.

We've also been alerted to a series of prospective dips and crashes. Last year the Economist issued apocalyptic forecasts of a potential world recession on the back of the property "bubble" finally bursting.

Some less sensationalist reports have agreed that Irish property prices are out of line with fundamentals - prices have risen by around 180 per cent since 1997 - but say while they might stagnate or even gently decline, they should be easily absorbed by the wider economy, resulting in a soft landing.

The OECD uses complex econometric equations which relate house prices to a number of factors known to influence prices, including demographics, disposable income and interest rates.

"At the end of the day different economic models come up with different conclusions," says Jim O'Leary. "These models are all very well but there is no substitute for common sense. House prices are extremely high and some people are under enormous pressure with the burden of debt they take on when they buy a house. They sometimes don't realise that if interest rates rise, they will be in trouble. You don't need to dabble with models or sophisticated econometrics to work that one out."

Sherry FitzGerald's economist Marian Finnegan believes the OECD's finding is "academic. The OECD might think the economy is overvalued but it doesn't mean anything unless something is going to bring down the market. Unless there is a huge shock to the economy, something bigger than September 11th, it is academic whether or not house prices are overvalued." She believes it would take something cataclysmic to cause a market crash in a thriving economy, which has a strong demand for housing, high levels of migration and employment, and low interest rates.

The Central Bank has denied it agrees privately with the OECD findings but suppressed the information for fear it would destabilise the market. Finnegan believes that if the Central Bank had any cause for alarm "it would have said it".

"It may have thought the OECD's research was an interesting exercise but didn't want to take it any further because it was irrelevant to the market. In my experience, it is has always been very quick to come out and say it if it has any concerns, as it did when it warned the banks about overlending."

The Central Bank's Financial Stability Report of 2005 said, as the rate of increase in house price has moderated, the risk of a sudden fall in prices may have receded somewhat, but "cannot be dismissed". If house prices were to reaccelerate, it cautioned, this would increase the risk of a sharp correction in house prices in the future.

Whether the Central Bank is afraid to rock the market by revealing its agreement with the OECD is a matter for debate, but Dermot O'Leary, an economist with Goodbody stockbrokers, believes that perception can play a big role in a property market. He points to the UK market, which saw static house prices after a period of decline that began in mid-2004 when Mervyn King, the governor of the Bank of England, sent out a warning to potential homebuyers about the high cost of property.

Unsurprisingly, a number of estate agents and professional bodies have issued press releases refuting the OECD's claim. Gunne Residential says its conclusions amount to "scaremongering", and even lambasts the Central Bank for its warning that prices "may have receded somewhat".

Simon Ensor, a director of Sherry FitzGerald, says the evidence on the ground is that demand continues to outstrip supply. "I don't see a problem as long as that continues. The building output of new homes has increased dramatically and is close to satisfying demand, which will stop inflation for people trying to buy, but there is still a pent-up demand for second-hand houses closer to town. Whether or not the OECD is right or wrong to some degree is irrelevant , that's the reality."