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Property and the election

Internationally property as an asset class has assumed some of the attractions traditionally associated with bonds and equities in that market conditions since the end of 1999 have highlighted its benefits. It has shown an asset price resilience absent from equities since the end of the long bull market at about that time, and it has shown some of the income and yield characteristics of bonds.

That said, property in Ireland has led the international upswing seen in an increasing number of countries, not least in our neighbouring island, where property has continued to put a performance reminiscent of that in Ireland in the late 1990s. UK analysts as a result are asking with increasing regularity when and where the peak will be. (The answer, we believe, will be about 10 p.c. from here, when sterling and euro interest rates converge).

This sense of peaks approaching makes it all the more important for potential investors in property to have a realistic view of the potentials. Since 1997 Finance has assessed the temperature of the Irish property market by means of our annual poll of financial market economists on the five year outlook for property. This year’s survey shows that, for the third year in a row, the panel have reduced their forecasts - nevertheless, they remain quite bullish on the whole.

The average prediction that prices will rise on average by 5 per cent a year still would suggest property is an attractive investment option, because, when added to yields ranging from 4 to 7 per cent in the Irish market, such total returns of 9 to 12 per cent per cent compare well with the prospective returns from other asset classes, some of which may represent riskier investments.
The poll does display however a widening divergence of opinion, with the ‘bulls’ and ‘bears’ quite far apart in fact - Eoin Fahy’s annual average of 9 p.c. comparing with Eunan King’s annual average of less than a half of one per cent. The overall conclusion to be drawn from this widening of opinion is that uncertainty is greater now than it was. The global outlook certainly is, as equity markets and corporate profits remain bogged down.

The domestic environment is uncertain too, and this is highlighted by both the extravagant promises of many politicians, and the steady worsening of the exchequer finances in the run up to the election.

In Finance two months ago, we published the views of economists on the parameters ahead of the election - their forecasts concluded that, on average, a projected future growth in current expenditure of around 7 p.c. p.a. might be contemplated, assuming no major shocks.

What we did not elicit was their recommendation if things turned out worse than expected. This month’s poll shows our panel’s weighting between bullish and bearish is about 65-35 - the balance, happily, continuing to favour the bullish.

However, with a risk probability of things not working out as high as 35 per cent it would be appropriate to cut back the 7 per cent forecast - by a similar amount -, say, to 4.5 per cent - a figure that could be said to equate with a responsible forward spending projection. Unfortunately, no political party, in its election budget arithmetic, plumped for a figure this low.

Clearly, the astronomical claims for expenditure on health, for example, (a bottomless pit for spending, if ever there was - after all, we are all doing to die eventually, no matter how much we spend on health) - supposedly ‘the no 1 priority’, cannot be accommodated within the economic constraints now facing the Irish economy.

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