Cowen told to dismiss property warning


THE DEPARTMENT of Finance advised then tánaiste Brian Cowen in 2007 there was “nothing new” in warnings of an imminent property collapse.

The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices.

The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels.

The memo was written in response to an article written by the UCD professor for the ESRI quarterly economic commentary for summer 2007, which made similar arguments to an article he wrote for The Irish Timesearlier that year.

The two-page document is the only record held by the department that deals with a spate of warnings about a property bubble made by a small number of economists during 2006 and 2007, including Prof Kelly and Dr Alan Ahearne of NUI, Galway.

In the response to Prof Kelly’s article, the document states: “It should be noted that this paper is nothing new – a version of the paper [ The Irish Timesarticle] received considerable media attention in recent months.”

It then summarises the argument made by the UCD economist.

“The analysis considers house price developments in OECD countries and finds a strong relationship between the size of the initial increase in prices and the subsequent fall. If the same relationship was to hold for Ireland, then real house prices would decline by 40 to 60 per cent over a period of eight to nine years. It is also argued that policy will not be able to address any decline in house prices; in particular, it is argued that stamp duty cuts will not change buyers’ . . . incentive to wait and see if prices fall further.”

The “speaking points” prepared for Mr Cowen in response to Prof Kelly’s article assert that people “must be careful that we do not overreact to the current easing from the very high levels of activity” in housing market.

“House prices have fallen back slightly in recent months,” states the next speaking point, before adding that “prices still remain about their levels this time last year”.

In the final speaking point, Prof Kelly’s analysis of a property bubble is rejected, pointing to other factors as the reasons behind the high property values.

It recommended that Mr Cowen say: “I share the view of most commentators that house prices increases in recent years have been underpinned by many factors including a strong economy, increases in employment and earnings, reductions in taxation and lower interest rates resulting from participation in monetary union.”

The then taoiseach Bertie Ahern was more explicit in his criticism of Prof Kelly’s articles during 2007: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.”

He apologised later that day for making the reference to suicide.

The FF-Green coalition introduced stamp duty reliefs for first-time buyers in 2007, but it failed to halt the slide in prices.

According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010.