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Monday, 10th August 2020
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EDITORIAL Back  
The fourth annual Finance property survey comes after a year of heightened debate and controversy. This was not just political controversy over what the government of the day should do about rising property prices for first time buyers. There has also been an unusual level of controversy about the very economic model that should be used to understand the dynamics of the Irish economy and, in particular, of house prices within that.

Rehearsing the questions shows how extensive the debate has been in the last 12-18 months. Is there a bubble in house prices? Are banks over-lending? What is the potential for negative equity? Is supply going to meet demand? Is there oligopolistic behaviour and profiteering in relation to land? Is the public administration system likely to deliver on public housing commitments? Is the Planning and Development Bill going to deliver the acceleration in the rate of building that all desire?

In the last year, the Central Bank and its economists have commented on house price increases with greater frequency. The ESRI produced its medium term review in October. The National Development Plan was finalised in November. The Programme for Prosperity and Fairness was agreed in January. All of these events and statements affected or commented upon the housing market in significant ways.

This is the context in which the Finance survey of economists’ expectations for residential property prices is produced. The panel’s predictions or expectations in past years have erred, if anything, on the side of underestimating the continuing strength of the economy and of the consequent rate of house price increases. The important thing is the direction and tone of the central view, not necessarily the precise numbers.

The strongest message coming from the survey is that the potential for a serious reversal of house prices is clearly so remote, in the panel’s minds, as not to figure even in the ‘bearish’ scenarios requested for comment. Price increases are expected to taper off in a so-called ‘soft landing’ (although it is sometimes difficult to see why this metaphor is thought to be apt to the Irish economy at all). There is no variation around this view. It is not an central view made out of widely diverging opinions from close watchers of the economy. It is as robust as any view of future economic prospects could be. If they are all proven wrong by 2004, then that will be a rare incidence of an complete outlier view proving right. One can never discount the possibility, of course.

Financial consequences
A consequence in the financial area of the degree of agreement among the economists on the central view is that the potential for negative equity among householders, even new housebuyers, is very low. Only one forecast in the bearish scenario - ascribed on average a 25 per cent possibility - had a net decrease in house prices over five years to 2005, and this only by minus 3 per cent.

If this, the worst case scenario among the panel, occurred, very few householders would be faced with negative equity. The growth in mortgage loan approvals and lending in 1999 was highlighted by the Department of Environment and Local Government annual housing statistics report, and strong growth is set to continue.

A rise in housing demand to 51,500 annually and the parallel increase in values means that mortgage lending in Ireland is likely to remain a safe business for banks. A continued and sustained increase in equity release financing is also likely, even though it is difficult to assess accurately the part of household wealth made up by housing. Moves towards a reliable measure of the composition of households’ wealth are welcome. Nonetheless, the indications are strong that housing will continue to form a significant and even dominant asset in households’ balance sheet going forward.

Any threat to mortgage lending profitability will come, not from bad debts, but from lower margins and enhanced competition. Insofar as foreign banks grasp the real dynamics of the Irish economy and its housing market, competition can be expected to increase. Ironically, the best thing incumbents in the market could hope for would be that misplaced scepticism about the Irish economy will stop new entrants, a small consolation, perhaps, to the spectre of share prices being held back.

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