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Market on knife-edge between 'hard' and 'soft' landings Back  
As analysts predict further interest rate increases, of up to four in the next 18 months on the most pessimistic assumption, readers of FINANCE polled in a special 20 year anniversary poll are divided in their views as to whether Irish house prices are headed for a 'crash', with as many as 35 per cent predicting that it is, compared with a further 50 per cent who are predicting a 'soft landing'.
The picture emerging of Irish residential property prospects in mid summer 2007 is of a market already in mid correction, with quoted prices from auctioneers already showing declines of as much as 20-25 per cent on a year-to year basis in some cases, recorded prices already declining by 0.75 per cent a month (according to lagging price indicators, such as the Irish Permanent-ESRI Index), and divided opinion amongst analysts and finance sector professionals as to whether the market will decline sharply, or will fall more gradually, in a soft landing that may however be protracted, according to some forecasts.

The key indicator, as always, is interest rates, and a panel of Ireland's top economists polled in FINANCE's annual Residential Property Survey emerge as relatively benign in their expectations, predicting, on average, just two more quarter point rate rises to bring the ECB rate up from its current level of 4 per cent, to 4.5 per cent by the middle of 2008. This compares with as many as four, predicted by our panel's top pessimist, Eoin Fahy of KBC Asset Management.

Ireland's leading lending institutions have also moved to tighten their lending criteria, with several of the leading Irish banks reporting to investors at the European Securitisation Conference in Barcelona last month that they have moved up their stress testing lending criteria to 'ECB plus 3 per cent', compared with a level of 'ECB plus 2 per cent' previously.

These assurances are designed to assure investors in Irish securitised loan portfolios that Irish banks are sound, and do not have over-exposure to risky property lending, putting them in the same bracket as lenders in other European property hot spots, such as Spain. The Irish Financial Regulator has also been encouraging the banks to move to a 3 per cent stress test level. These trends indicate that the market is currently seeing a reduction in credit supply, equivalent to a further 1 per cent interest rate increase, which is matching the autonomous (expectations driven) decline in demand that the market is reporting (see article in this issue by Marian Finnegan, economist, of Sherry Fitzgerald). This increase, however, will represent a further 12.5 per cent increase in interest outlays from a borrowing sector which has already seen seven rate rises since the beginning of the current interest rate upswing, starting in 2005.

Evidence from the Irish response to this is that, in the early stages of interest rate upswings little impact is had on activity levels, as mortgage credit continued to surge. However, latest mortgage credit data show that house loans are running 25 per cent lower than they were a year earlier, E1.5 billion a month, compared with E2 billion a month in June last year.

These trends lie behind the high percentage of respondents to the FINANCE poll, who predict a crash of some kind.

The magnitude of this is not set out, but the economists polled in our annual property survey predict overall price declines of 5 per cent at most, although there is a common agreement that fundamental factors, such as the demographic profile, and the continued number of immigrants coming into Ireland will underpin the decline in the market, and lead to a recovery, although major doubt exists as to whether that will be seen by the second half of 2008 or not.

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