| Economists’Property Poll 2002 |
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| Assumptions for a bullish scenario include average annual GDP growth of approximately 5 per cent, stable interest rates and strong income growth. |
Q. What are the assumptions you would make for a bullish scenario and why have you chosen these growth rates?
Eoin Fahy: This bullish scenario assumes that the Irish economy returns to real growth rates of about 5 per cent p.a. The US economy has already emerged from recession, business and consumer confidence are improving around the world, and Ireland seems well placed to take advantage of the improving global economic climate. Meanwhile, we already know that demographic factors will also continue to support the housing market, so a combination of strong economic growth and demographic support should be sufficient to produce house price increases of 10 per cent to 12 per cent per annum over the next few years.
Bernard Feeney: The growth in real consumer incomes is tapering off. It is assumed that the impact of this trend on consumer confidence is deferred until late in the year. The boost to residential market occasioned by the Budget changes is assumed to lead to price increases in the first half of the year, with relative stagnation thereafter. The longer term prospects are for price increases to stagnate, as the economy slows down further through 2003, real income growth falters, and employment growth and net immigration cease.
Austin Hughes: At its most basic, this envisages the forces underpinning demand for property will continue to exceed those supporting supply. Clearly, the key driver will be the performance of the broader Irish economy. Strong economic growth, say of the order of 6 or 7 per cent over the forecast period would boost property prices in a number of ways. First of all it would imply incomes would rise strongly. Second, strong growth will underpin confidence. Third, it would likely imply significant immigration. Sustained growth at this pace would also place strains on infrastructure, which would test the capacity of the building industry to meet demand across all types of construction activity.
This scenario also assumes ECB interest rates move no higher than 5.5 per cent by 2006.
Because Irish inflation would probably average 4 or 5 per cent and possibly higher if activity is so strong, the 'real’ cost of borrowing here would remain low.
In a sense, this scenario is largely an extrapolation of the experience of the past five years.
Because (1) the step-down in interest rates that followed EMU entry would not be repeated, (2) the scope for tax cuts looks more limited and (3) the demand-supply imbalance is not as pronounced, the impact on house prices of even a very supportive macro backdrop would not be nearly as intense as in the past.
Eunan King: The bullish scenario assumes that interest rates are not raised soon and when they are increased it will not be an aggressively. It also assumes that builders and investors do not get carried away on the current optimism since demand and supply may now be more in balance than any time in the last five years.
Dan McLaughlin: The Irish economy has emerged from the cyclical downturn that saw growth slow sharply in the second half of 2001. With the exception of the public finances, the economy emerged relatively unscathed from the downturn, particularly the labour market. Going forward, GDP growth is likely to average around 4.7 per cent over the next 5 years, the labour market will remain close to full employment and the ECB’s base interest rate is set to average a relatively low 4.5 per cent. This economic & interest rate background should be conducive to ongoing strong demand for housing, when combined with supportive demographic factors. On the supply side, 50,000 new houses are likely to be built every year over the next 5. The net result is that the demand/supply imbalance will gradually narrow further. Consequently the rate of house price inflation over the next 5 years is likely to average around 8 per cent per annum. A key assumption underlying this forecast is that there are no more damaging official interventions in the housing market. Such intervention has seriously distorted the market over the past 5 years.
Alan McQuaid: National house prices appear to have stabilised again after a few months of downward pressure resulting from the weakening of the global economy. The bottom line though, is that it is clear the climate for people considering a house purchase is exceptionally strong. The recent fall in house prices, together with the low interest rate environment and the recent changes announced in the Budget for investors in residential properties have combined to create an exceptionally positive climate for anyone considering the purchase of a primary or investment property. Furthermore, the major mortgage lenders have seen a sizeable year-on-year rise in mortgage applications in the first few months of the year, suggesting the economic downturn is over. That said, there is no doubt that the economic slowdown is having a negative impact on house prices in some sectors of the market, for example houses in the IR?300k+ range, but house prices have had a very good run in recent years, and are now in a correction phase. Positive demographics and the low interest rate environment should ensure that the demand for houses remains quite strong in the short to medium term, and I don’t see any great fall-off in house prices in the ?150-300k over that period. The ESRI in its most recently published medium-term review predicted a fall in house prices of up to 15 per cent in 2002, before returning to moderate growth over the medium-term. Given the slowdown in economic growth, there is certainly the chance of overall negative growth in house prices this year, though at the same time there is every possibility of an overall single-digit increase in prices in 2002, if the Irish economy picks up momentum quickly, and employment prospects remain favourable. Another key factor is the level of interest rates. With the Euroland economy picking up, it looks like we are now entering a phase of higher Eurzone rates, which should in theory dampen demand in the housing market. That said, the demographic nature of the Irish economy will continue to keep the demand for housing fairly high. Because current interest rates are still very low by Irish historical standards, and because demand will remain relatively strong for a few years yet, I think house prices will continue to grow over the medium-term, albeit at a slower rate than in recent years. I think 10 per cent growth is a fair assumption, which is roughly half the rate of increase seen in period 1998-2000.
Jenny Pollock: The demographic forces (age profile, increased rate of family separations and higher proportion of single person households in general, along with limited net inward migration) that have been supporting the housing market in recent years remain in place. Furthermore, successive years of undersupply against the background of strong economic growth have left the legacy of a significant supply / demand imbalance.
Meanwhile, on the basis of a sustained rebound by the US economy, there should be a marked pick up in economic activity in Ireland over the course of 2002. By year end, growth should be running at over 5 per cent per annum. Resultant employment growth should serve to further bolster the housing market. Confidence in any event has been quick to recover after the downturn in the latter part of last year.
The budget measures have also seen a re-emergence of investors. This in turn has seen the return of first time buyers who had been holding off in hope of lower prices. Wage increases in excess of inflation should lead to continuing strong growth in real disposable income helping to fuel house price inflation. Furthermore, the ECB would appear to be reluctant to increase interest rates and mortgage rates generally seem likely to remain low in the next couple of years.
Jim Power: The Irish economy has emerged from the cyclical downturn that saw growth slow sharply in the second half of 2001. With the exception of the public finances, the economy emerged relatively unscathed from the downturn, particularly the labour market. Going forward, GDP growth is likely to average around 4.7 per cent over the next five years, the labour market will remain close to full employment and the ECB’s base interest rate is set to average a relatively low 4.5 per cent. This economic and interest rate background should be conducive to ongoing strong demand for housing, when combined with supportive demographic factors. On the supply side, 50,000 new houses are likely to be built every year over the next five. The net result is that the demand/supply imbalance will gradually narrow further. Consequently the rate of house price inflation over the next five years is likely to average around 8 per cent per annum. A key assumption underlying this forecast is that there are no more damaging official interventions in the housing market. Such intervention has seriously distorted the market over the past five years.
Q. What would be the assumptions for the bearish scenario and why have you chosen these growth rates?
Eoin Fahy: This scenario assumes that supply has finally caught up with, or even surpassed, demand for housing, and that the Irish economic recovery is muted. The number of houses being built in Ireland is at a record high, perhaps in reaction to planning and tax changes, as well as the high level of house prices which is encouraging land owners to sell land for housing. If this continues, the upward pressure on house prices will be significantly reduced. But this scenario also assumes that Irish economic growth runs at around 3 per cent p.a., instead of the 5 per cent rate of growth assumed in the optimistic case, again reducing, at best, the upward trend in house prices. Even on these quite negative assumptions, however, I am forecasting modest positive returns, as the strong demographics, as well as the Irish cultural attachment to property, will still be sufficient to push up prices.
Bernard Feeney: This scenario assumes that the boost to house prices in early 2002 will be short lived and that stagnation of the market will occur earlier. The longer-term trends evidenced in the bear scenario are therefore brought forward.
Austin Hughes: It remains the case that the prospects for the Irish economy are fairly favorable, even if they pale in relation to the performance of the past five years. In comparison to buyers’ experience and perhaps even still, their expectations, ‘a balanced’ scenario might appear bearish.
A truly bearish scenario would involve some significant negative shock hitting the Irish economy.
In an exercise such as this it is easy to conjure up the apocalypse. However, the resilience of this economy and the large part of the Irish property market shown in it’s capacity to survive a fairly severe hit last year would counsel against being too pessimistic. If the property market weakens again, it seems as though supply can adjust as readily as demand.
Unless the Irish economy becomes mired in a deep and lasting recession, I think there is sufficient support to ensure that weakness in house prices will be reasonably contained. For this reason, and also because it is hard to imagine interest rates not being supportive of the market, I wouldn’t be inclined to incorporate double digit declines into a medium term forecast of house prices.
It should be emphasised that these forecasts are for ‘average’ changes in house prices. If, as we expect, the market as a whole sees less extreme conditions than in the past few years, particular segments could experience divergent trends. Location differences mean one property could face a bullish scenario and another a bearish scenario over the forecast period.
Our forecast sees 2003 as a relatively risky year for several reasons. First of all there is the possibility that the global economy suffers a relapse. Second, there is always a risk of a new Government intervening in the market. Third, the emerging trend in rents may signal that in certain areas, prospective supply now exceeds demand.
Eunan King: The central assumption is that the market gets to an over supply position as builders and investors assume the current buoyant market will continue into the 2003 and 2004. Since more than 50,000 houses per annum are now being built the risks are increasing that a speculative over supply could be generated. This would result in an overhang in the rental market and falling rents could be the early signal.
Dan McLaughlin: Bearish scenario would see prices fall by an average annual rate of just over 3 per cent p/a period. Such a scenario would be based on a much slower Irish growth environment due to a combination of ;
• Prolonged problems in the US economy due to unsolved economic imbalances
• Oil prices averaging $35 per barrel due to supply problems
• Higher ECB interest rates averaging 6 per cent, due to fears about oil induced inflation
• Continued retrenchment in the US IT industry feeding through in a negative way to Ireland’s FDI
• Sharp erosion of domestic competitiveness due to excessive wage inflation, a sharp increase in taxes due to a total failure to bring Government spending under control, and a failure to address the infrastructure deficit
GDP growth to average 1 per cent p/a, and unemployment to rise to 8 per cent p/a on average.
Alan McQuaid: This primarily comes down to the assumption on interest rates. It is not inconceivable that the European Central Bank will raise rates quite aggressively over the next eighteen months or so, especially if inflation in Euroland gets out of control (mainly as a result of higher oil prices and exorbitant wage deals). Another slump in the world’s stock markets and its detrimental effect on the global economy and in turn the Irish economy is also a key issue that should not be taken lightly, especially given Ireland’s huge dependence on the ‘high-technology’ industry, something that was brought home to us in a big way last year. Another global shock (similar to September 11, and/or worsening of the political situation in the Middle East) would also have a negative impact and send house prices lower. Although anything is possible, I think all things being equal the US economy is on the road to sustained recovery, which is good news for the world as a whole. Unless there is a major downturn in the global economy, I think Irish house prices will record positive growth even under the ‘bearish’ scenario, although the level of growth in the years 2004-2006 will be fairly low at around 2.0 per cent.
Jenny Pollock: The bearish scenario assumes that the rebound in the US proves short-lived with growth there stagnating in the later part of the year. If corporate earnings, from US high-tech companies in particular, fail to recover this could lead to a renewed spat of high profile factory closures in Ireland. This would severely dent the rebuilding confidence in the Irish housing market.
There are also risks that the Irish economy fails to recover as strongly as expected due to, in particular, the continuing rapid growth in current government spending and rising inflationary pressures. The high level of wage increases in Ireland compared to other EU countries is leading to a marked erosion in the competitive position of the Irish economy. A continuation of this trend could result in much slower growth by the Irish economy in the years ahead than otherwise would be the case. Meanwhile, increases in disposable incomes may not match expectations if the incoming government adopts more restrictive budgetary policies.
Jim Power: Bearish scenario would see prices fall by an average annual rate of just over 3 per cent p/a period. Such a scenario would be based on a much slower Irish growth environment due to a combination of:
• Prolonged problems in the US economy due to unsolved economic imbalances
• Oil prices averaging $35 per barrel due to supply problems
• Higher ECB interest rates averaging 6 per cent, due to fears about oil induced inflation
• Continued retrenchment in the US IT industry feeding through in a negative way to Ireland’s FDI
• Sharp erosion of domestic competitiveness due to excessive wage inflation, a sharp increase in taxes due to a total failure to bring Government spending under control, and a failure to address the infrastructure deficit
GDP growth to average 1 per cent p/a, and unemployment to rise to 8 per cent p/a on average. |
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| Article appeared in the May 2002 issue.
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