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News : Irish Last Updated: Dec 19th, 2007 - 13:17:15


Goodbody Stockbrokers says Irish house prices will fall 13% from peak; GDP growth in 2008 forecast to plunge to 2.5%
By Finfacts Team
Nov 9, 2007, 16:46

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Goodbody Stockbrokers says in its report Reconstructing Ireland, which was published today, that house prices will fall by 8% in 2008 after a 5% fall this year.

Goodbody economist Dermot O'Leary has also produced the lowest forecast yet for economic growth for 2008. He says gross domestic product will expand by just 2.5% next year after a 4.9% rate this year.

O'Leary says builders are responding more quickly than expected to the housing slowdown. As a result, he now expects just 50,000 homes to be completed next year, 10,000 lower than his previous forecast.

However, he says that growth can rebound to 3% in 2009 as the housing market stabilises and Government spending on the National Development plan helps the rest of the construction sector.

O'Leary's report also predicts that consumer spending growth will fall back to 3%% next year from 6.5% this year, mainly due to slower employment growth.

Housing a global issue- The report says that housing market cycles have played a pivotal role in the trajectory of many developed economies since the turn of the decade. Ireland’s high dependence on residential construction (13% of GNP) makes it more sensitive to a slowdown in the sector. For the long-term sustainability of the economy, a rebalancing away from construction is necessary.

However, this adjustment is taking place at a faster pace than initially envisaged, which will negatively impact on growth prospects in the short-term.

Quicker response from Irish builders...- Goodbody says that although housing construction has slowed dramatically in the US over the past eighteen months, the response in Ireland has been even faster. Housing starts in the US have fallen by 31% relative to the peak level in 2006, but Irish housing starts may well be down by c50% from their peak at the same stage of the slowdown. While, undoubtedly, there will be short-term issues around this correction, this is inherently a rational response, as builders respond to a changing environment, which according to the analysis has seen the supply of unsold existing houses increase to 12 months. This compares to 10 months currently in the US and a long-term average of 7.

...has a negative impact on 2008 GDP forecast...- Given these dynamics, Goodbody is reducing its completions forecast from 60,000 to 50,000 in 2008. The house price adjustment is ongoing. While it expects a further 8% price decline in 2008, after a 5% decline this year, based on the official house price index, it says that a significant proportion of these declines have already taken place on the ground, but have not yet been picked up in the data, given its inherent lags. The employment effects also have knock-on implications for consumption forecasts. The consequence of these changes is that Goodbody is revising its GDP growth forecasts for 2008 from 3.1% to 2.5%, down from an anticipated 4.9% this year. This is primarily led by the slowdown in domestic demand, which is expected to grow only modestly next year. Even though one key sector is set to see output decline by over 30% yoy, GDP growth overall is expected to be in line, or even slightly above, the euro-area average.

...but puts the economy on track to return towards trend in 2009- While the forecasts for 2008 imply the slowest growth in Ireland for some time, such has been the swift response by the construction industry, that Goodbody believes overall economic growth can rebound to 3% in 2009. This is based on the assumption that house completions stabilise around 50,000 units. Non-residential construction is underpinned by the Government’s commitment to the roll-out of the NDP. The Government will play an important role in the management of the slowdown of the Irish economy, and, in this regard, the upcoming Budget provides an opportunity to restore some confidence to the housing market.

...but drag will not linger into 2009

Given the speed at which housing output has contracted, the effects of the rebalancing of the economy are not expected to linger. The report says that the absence of a drag from this sector means that investment can return to growth once again. Goodbody says  however, that there will be lagged effects of the suspected higher unemployment rates and slower employment growth into 2009, consistent with previous episodes of slower consumption growth. Therefore, a rather conservative estimate of 2% growth in consumer expenditures is expected in that year. Slowing domestic demand will have the effect of curtailing growth in imports and while export growth is also expected to ease, net exports should make a further contribution to economic growth. All in all, Goodbody is anticipating that GDP will expand by 3% in 2009.

Stock of homes for sale stands at 12 months’ supply...

It has been suggested that the sharp decline in housing commencements has forestalled a run-up in the stock of unsold homes, a la the situation in the US. This is confusing cause with effect. The construction industry has responded to an increase in the housing stock and a slowdown in liquidity in the market by cutting future supply intentions. While no official data are available in Ireland, Goodbody estimates that the supply of second-hand units for sale may account to as much as 12 months’ supply. This compares to a current level of ten months in the US and a long-term average of seven months.

...but some regions are more affected than others

This national figure disguises some important regional differences. According to the data from Daft.ie, one in fifteen properties is currently on the market in both Cavan and Roscommon, for example. A majority of the regions at the top of the list in terms of properties currently for sale also came out as regions with a significant number of vacant premises in the Census. Correlating the two of these with housebuilding trends over the past number of years indicate that housing oversupply issues are concentrated in some regions around the country. Interestingly, Dublin, the key economic centre of the country comes in at the very bottom of the list in terms of houses for sale, vacant homes and house building per head of population.

House price adjustment ongoing

According to the official data from the permanent tsb/ESRI index, monthly house price readings began to turn negative in March of this year. Since that time, monthly house price readings have continued to be in negative territory and have thus dragged the annual reading to below zero for the first time since the index began. However, the house price adjustment has, thus far, been modest, according to the index at least. Goodbody believes that house price declines have been of a more marked nature in reality.

Three reasons can be cited for this discrepancy. Firstly, the data are reflective of prices at the mortgage payment stage of the house-buying process. This can be some 3-4 months after a sales price is agreed, and, in a slower market, this lag could get extended further. Therefore, there is a significant lag between market prices and the official house price data. Secondly, the type of properties in the ptsb database may be concentrated towards the lower price range in the market. While recognising the fact that the ptsb data takes account of the different characteristics of the house, the average price in the country is well below the estimates contained in the dataset from the Department of the Environment. Finally, price incentives, which have become common for new scheme developments, would not get reflected in the data.

All things considered Goodbody expects a 13% cumulative decline from the peak in house prices. While a further 8% price decline is forecast for 2008, after a 5% decline this year on the basis of the ptsb data, the report says that a proportion of these declines have already taken place on the ground, given the inherent lag in the index. Given the regional supply issues, these movements will not be uniform across the country.

Further, it has become clear that prices at the higher end of the market will be most affected. However, this adjustment will help rental yields and affordability return to more normal levels. Nevertheless, prices are only returning to levels reached at the end of 2005.

Cyclical peak for housing not exclusive to Ireland

Dermot O'Leary says that they have delved into the housing market trends of the UK and the US in this note. All of the three markets analysed exhibit signs of being at, or just past, their cyclical peaks. To be sure, construction output has already fallen substantially in the US and Ireland. Given the current low levels of UK output, Goodbody does not expect a housing slowdown to influence the wider UK economy in the same way. However, a housing slowdown can feed through to the economy through different channels. The increase in equity withdrawal in the UK and the US has undoubtedly played a part in boosting consumption growth over recent years. In Ireland, consumption growth has been underpinned by the twin dynamics of rising incomes and increasing employment levels. Although consumption will be impacted by the knock-on implications of a decline in housing-related jobs, the report says that any wealth effect in Ireland will be negligible, if any exists.

Another more comforting conclusion of the analysis of the three housing markets is that the quality of debt-holders is greater in Ireland, with sub-prime lending only accounting for a miniscule 2% of gross new lending, relative to a fifth in the US and 8-9% in the UK.

Government policy can dramatically affect outcome

Goodbody says that Government policy can dramatically impact confidence and activity levels in the property market. Faced with falling house prices, easing construction activity and most importantly, rock-bottom confidence levels, Minister for Finance Charlie McCreevy, in Budget 2002, decided to row back on previously announced changes introduced to reduce the amount of investor activity in the market. This intervention worked, and activity began to increase once more relatively quickly. While the situation is different this time around, and, indeed, a slowdown in the sector is desirable given the economy’s overdependence on housing, there is also an argument to believe that the slowdown should be managed to forestall any significant impact on employment levels.

On the basis of the analysis, rising unsold stock levels have forced builders into cutting back supply plans rapidly. This is not only a function of very high levels of supply in recent years, but also a function of a reduced level of liquidity. Therefore, any efforts to improve liquidity in the market must be encouraged. Goodbody say that it pointed out last year that the time for reform of stamp duty was when activity has slowed significantly. In this light, exceptionally weak transaction activity provides the  opportunity for the Government to reform the stamp duty regime. While the report says that stamp duty has been an issue which has caused the recent slowdown, it is the most potent tool at the disposal of the Government to kick-start the market.

Goodbody says that it does not believe the rates themselves are an issue, but do believe, at a minimum, that the regime could be changed to allow the different rates of tax to be levied in the incremental amount over and above the bands and not on the full amount of the purchase price as is currently the case.


© Copyright 2007 by Finfacts.com

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