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Sunday, 21st April 2024
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House prices: McLoughlin riposte to Slattery Back  
William Slattery's article in February's Finance on private sector credit growth and house prices provoked a sustained debate in the media. The strongest contrary view came from Dr Dan McLoughlin of ABN AMRO Stockbrokers who wrote an initial riposte in his weekly 'Trader' note, and published a longer analysis of house prices with his colleague, Eamonn Hughes, provocatively titled - 'Housing in Ireland - cheap at the price'. The following was McLoughlin's analysis directly following Slattery's article.
The strength of economic growth in Ireland continues to confound the pessimists but the air still seems to be filled with commentators uttering the word 'crash' and speculating about an imminent property price collapse. Leaving aside that such cries have been heard for 2 or 3 years now, the interesting point is that the supposed catalyst for the collapse has changed over time, from a 'world recession' through 'rising interest rate' to the latest which is 'excess credit'. However, the latter theory does not bear much scrutiny.

Credit to the Irish private sector amounted to some Ä90bn at the end of 1999, and ABN AMRO's estimate of GDP is Ä87bn, implying a ratio of 103% (GNP is not an appropriate measure as credit is clearly determined by the output of the economy which is measured by GDP). Is this ratio excessive? The answer is no one knows as international experience suggests a wide range of ratios are tolerable (similarly there is no optimal ratio of national debt to GDP).

For example, total private sector credit in the eurozone amounts to some Ä5.6 trillion, against GDP of around Ä5.8 trillion, giving a ratio of 97%. Consequently, Ireland is not out of line with the euro average. Interestingly, the private sector credit/GDP ratio in Germany is over 120%, and few people are looking for an asset price collapse in the Federal Republic.

Another uncomfortable fact for the 'crash' school is that spending by Irish consumers has not kept pace with the rise in disposable income in recent years i.e. the savings ratio has risen. For example, Irish households saved over 11% of disposable income in 1998 against only 7.9% in 1994. The ratio is now one of the highest in Europe (Germany was 11% in 1998, with the UK at 6.6%) with the implication that Irish consumers have not eaten into their rising wealth to fund a spending binge.

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