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House prices to fall up to 40 per cent in this ‘savage’ correction: FINANCE economists poll Back  
The ‘savage’ house price correction now fully underway in the Irish market will see prices falling by 20 to 40 per cent, peak to trough, before bottoming out, according to a panel of the leading Irish economists polled in Finance this month.
While the survey predicts falls of 20-40 per cent in house prices in the correction, the panel furthermore, feels, unanimously, that house prices will continue to decline for the rest of 2008, although at a slower pace than over the past twelve months. Most do not see a return to price growth in houses until 2010 at the earliest.

The average estimate puts the correction to date at approximately 17.5 per cent in the €2m+ range, although, as some of the respondents point out, asking prices are down by more. By the end of 2008, the fall is predicted to be in excess of 23 per cent, and in 2009, a further slight fall in the €2m+ nationwide range is predicted while the $2m+ Dublin range will begin to grow. The following year is seen as the year for the market to bottom out by most, although not all, of the panel.
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The most bearish forecasters, Jim Power of Friends First, and Dermot O’Leary of Goodbody stockbrokers, predict declines approaching 42 per cent and 32 per cent respectively at the top end, in the course of the Irish house price correction. The correction is expected to last another eighteen months at least, by most of the panel, with O’Leary expecting it to bottom out by the end of 2010 (a further 30 months).

Power, who estimates that prices at present are down 30 per cent in the €2m+ Dublin range from peak will be down a further 10 per cent by the end of this year and after a further fall of 2 per cent next year they will begin to turn. He predicts they will have fallen by 42 per cent from their peak. In the lower price ranges Power is less bearish but still predicts peak to trough falls in the €1m-€2m price ranges of 30 per cent (nationwide) and 35 per cent (Dublin) while in the sub-€1m range he forecasts falls of 26 per cent (Dublin) and 21 per cent (nationwide) before the market bottoms out.

In the survey, the respondents were asked to prove estimates of price declines from peak levels in the market (the precise date of that peak is left unspecified in the FINANCE survey, due to the confusion that is common surrounding Irish house price statistics, due to the lagging nature of data provided in the main house price indicators). (The permanent-tsb/ESRI index is based on mortgage approvals, which typically are recorded several months after prices are set in the market between vendors and buyers).

Power says; “The housing market is going through a savage correction and given how inordinately dependent the market had become on housing activity in recent years, the economic impact is proving very painful. Inappropriately low interest rates since 1999 created a seriously overheated housing market that is now cooling sharply.

Furthermore, he says: “The sharp reduction in new housing supply, with less than 35,000 new housing completions likely in 2009 and the young population are positive factors, but will be insufficient to turn the market around until 2010 at the earliest. The upper end of the market is most vulnerable”.

Accounting for a bearish twist to economists’ opinions in recent weeks has been the ECB’s hawkish stance on interest rates, which is also supplemented by the private sector tightening of the money supply, due to the need for banks worldwide to de-leverage as a result of the ongoing credit crisis (see separate stories in this issue).

Noel Griffin of Bank of Scotland who sees prices falling a further 5 per cent by the end of 2008 says, ‘Prices will continue to fall as the current environment is one of a loss of confidence, increasing unemployment, higher inflation, lower disposable income (due to a number of factors including higher commodity prices, higher oil prices, higher mortgage repayments etc).’
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Among the less pessimistic for house prices are Dan McLaughlin of Bank of Ireland and Alan McQuaid of Bloxham Stockbrokers, although both are predicting further price declines by this year.

Says McQuaid: house prices took a turn for the worse in 2007 and for the year as a whole were down almost 7.5% on 2006. However, there is a general feeling out there that house prices have fallen more than the official statistics suggest. Prices are likely to continue to drift lower in the early part of 2009 unless the Government takes some remedial action in the next Budget and/or the ECB takes an easier stance on interest rates. Overall, I do think that house prices will be back on a rising trend in the latter part of 2009 and in 2010, though the extent of the gains will be in low single digits. What happens to oil prices and consumer price inflation going forward will be critical.’

According to Dan McLaughlin, “there has been a relatively rapid supply response to weaker demand from house-buyers, but the prospect of establishing a balance in the market in 2008 has been dented by the recent surge in oil prices. This has pushed headline inflation to new cycle highs in Europe and prompted concern from the ECB, with the result that interest rates are now likely to rise near-term rather than fall, which looked likely earlier in the year. The spike in energy costs will dampen economic activity, however, and the ECB may well be cutting rates aggressively in 2009 given that growth in the euro area is already slowing. Sentiment in the Irish economy is poor and house prices may not stabilize until monetary policy is eased.

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