[Article] IMF warns house prices may have risen too high

Victor

IMF warns house prices may have risen too high
From:ireland.com
Thursday, 7th August, 2003

There is a significant risk that house prices are overvalued, leaving the property market vulnerable if unemployment rises sharply, the International Monetary Fund (IMF) has warned.

The boom in credit could have helped to push house prices to unsustainable levels, it says, leaving purchasers exposed and posing risks for banks and building societies which have lent them money.

In its latest assessment of the Irish economy, the IMF forecasts a pick-up in growth next year, but warns that declining competitiveness could hinder the economy.

It calls for a moderation in wage growth, and says that basic pay increases below inflation may be needed in the second phase of the current national agreement, particularly for the public sector.

In a detailed study of the housing market, the IMF says that it is impossible to say for sure whether there is a price " bubble " as fundamental factors, such as a housing shortage and strong demand, are behind much of the price rises.

However, there is a risk that market "psychology" could have pushed prices to unsustainable levels. This led the IMF directors, in their assessment accompanying the study, to warn that "a sharp rise in unemployment could . . . pose risks to the housing market and the financial sector".

The IMF warning on house prices is the latest in a line of pessimistic predictions for the sector, although the Central Bank has said it expects the market to stabilise rather than experience sharp price falls.

The IMF also warns of risks to the financial sector from exposure to investor-owned housing and the commercial property market. Overall it feels these risks are "manageable", but warns that the Irish Finance Services Regulatory Authority (IFRSA), the new regulator, will need to be vigilant.

The Central Bank, which is linked with IFSRA, also warned in its recent annual report about the financial sector's exposure to the housing market. IFRSA is currently undertaking a review of lending policies in the mortgage market, with recent figures showing an annual rise of 24 per cent in credit growth clearly concerning the authorities.

The IMF, the international economic institution based in Washington, undertakes an annual visit and report on member economies each year, which is then considered by its executive board.

The board commended Ireland's "exemplary track record of sound economic policies" in recent years. It predicted that Gross National Product growth would be 1.5 per cent this year and 3 per cent next year as the Republic benefited from an expected international recovery.

However, it warned that there were risks to this outlook as the "global recovery could be more anaemic than expected", while a further rise in the euro's value could hit competitiveness. This emphasised the need to control costs and bring down inflation.

It says negotiations due next year on pay increases for the second half of the new national agreement must reflect economic conditions, and this may mean rises below inflation "especially in the public sector and publicly-owned enterprises". Meanwhile verifiable evidence of improved productivity was essential in return for benchmarking increases in the public sector.

In a short statement, the Minister for Finance, Mr McCreevy, welcomed the IMF's findings, and said he agreed "that the likelihood of slower growth in the period ahead requires us to get our prices and cost increases more in line with our EU partners in order to improve our competitive position".

Fine Gael's Mr Richard Bruton said the report was a "timely warning" to the Government of the dangers that lie ahead and the need to bring down inflation and improve public sector productivity. However, Mr Brendan Howlin, of the Labour Party, said the IMF report was "predictably conservative", and did not adequately consider the case for borrowing to fund investment.

The IMF report calls for tight control on current spending to free resources for capital investment. It said that the 2004 budget should be "neutral", implying tight spending control and no major tax changes. The report supported the tax reductions of recent years and said that if there was a need to raise more revenue, this should be done through broadening the tax base and introducing new user charges, rather than by increasing tax rates.

Borzoi

Ecomomists are like stopped clocks, even they tell the right time twice a day:D

Though reading through the article it looks like a blinding flash of the obvious, ie if unemployment rises house prices may soften

Victor

http://home.eircom.net/content/irelandcom/topstories/1193516?view=Eircomnet

Regulator to scrutinise bank lending as house prices soar
From:ireland.com
Friday, 15th August, 2003

The financial services regulator is deepening its investigation into bank-lending policies as house prices continue to rise at a record rate. Siobhán Creaton, Finance Correspondent, reports.

The monthly house price index compiled by the Economic and Social Research Institute and Permanent TSB, published yesterday,showed a 15.6 per cent increase in house prices nationally during the 12 months to the end of July. This compares with a 14.7 per cent rise in the 12 months to June .

The increase in the seven months to the end of July of 8.1 per cent was the highest in three years.

The Irish Financial Services Regulatory Authority confirmed yesterday that it had sent letters to all mortgage-lenders to query issues about lending policies uncovered during a preliminary investigation.

The regulatory authority is concerned that banks and building societies are relaxing lending policies when the economy is slowing and job losses are increasing.

Its chief concern is that some borrowers may have over-extended themselves and could find they are unable to afford their mortgage repayments.

A spokesman for the authority said it expected the financial institutions to respond to its latest queries within a month.

The expanded inquiry follows warnings from economists and the International Monetary Fund that the risk of a collapse in house prices is increasing.

The house price index revealed that the rate of increase was 1.1 per cent in July, which was unchanged on the rise in June but is weaker than that recorded in earlier months.

At 1.1 per cent, the rate of house price growth slowed since April and May when the index recorded rises of 1.3 per cent and 1.7 per cent respectively.

However, the July figure is higher than for July 2002, which was 0.4 per cent. The average price paid for a house nationally was €222,628, compared with €192,591 in July 2002.

The rate of house price increases in Dublin was 16.5 per cent year-on-year, compared to 13.7 per cent throughout the rest of the Republic.

Mr Dermot O'Brien, economist with NCB stockbrokers, said it looked like the overall rate of increase in house prices for 2003 would be in high double digits.

"We don't believe that this is sustainable and are expecting some correction in the market with price increases moving back to more realistic levels." Mr O'Brien suggested that any correction would result in a 2 to 3 per cent reduction in the rate of price increases rather than a substantial collapse in house prices.

Earlier this month, the IMF warned that there was a significant risk that Irish house prices were overvalued, leaving the property market vulnerable if unemployment rises sharply.

It stated that it was impossible to say for sure whether there was a price "bubble" as fundamental factors, such as a housing shortage and strong demand, were behind much of the price rises. It identified a risk that market "psychology" could have pushed prices to unsustainable levels.

Permanent TSB's head of marketing, Mr Niall O'Grady, said the latest index showed signs for optimism, particularly the slowdown in price rises in Dublin.

"The most important thing to emerge in this month's report is the considerable easing in the rate of growth of Dublin prices. If this continues it should feed into a lower rate of growth for prices nationally over the coming months," he said.

In Dublin, house prices rose by 0.6 of a percentage point in July, while outside of the capital, the rate of growth in house prices was double, at 1.2 per cent. In June, Dublin house prices rose by 2.5 per cent, while price increases outside the city were around 0.5 of a percentage point.

The average price paid for a house in Dublin last month was €294,189, while elsewhere the average price was €192,520.

The price paid for houses by second-time buyers increased by 1 per cent, while first-time buyers faced a 0.8 of a percentage point rise. This compared with a 1.3 per cent appreciation for second-time buyers in the same month last year and a 1 per cent rise for first-time buyers.

The average price paid by a first-time buyer was €195,843, while second-time buyers paid an average of €249,509. The price of new houses increased by 1.4 per cent, while second-hand house prices rose by 1.4 per cent.

Victor

http://www.rte.ie/news/2003/1002/housing.html

Central Bank calls for probe into site costs
October 2, 2003 (16:46)

The Central Bank has called for an investigation into the cost of building land on foot of evidence that up to two-thirds of the rise in house prices in Dublin over the past number of years was attributable to site costs.

In its latest quarterly ecomonic commentary, the bank said it is particularly concerned about house prices and pointed out that up to 50% of the cost of houses in Ireland is now attributable to land and site costs.

Speaking at the publication of the Central Bank's Autumn economic commentary, the Bank's Assistant Director General, Dr Michael Casey, said it would be useful for an economist to look into land and site costs in the housing market and see what the factors are that account for high prices.

Dr Casey said it was possible that it may be due to delays in the planning process or to the hoarding of developing land by certain property developers, or to other factors.

He pointed out that historically low interest rates meant it was particularly cheap for developers to fund the cost of hoarding land. He said that in such circumstances it was economically rational for developers to to hold on to building land at the moment.

However, Dr Casey said that in the rest of Europe, it was more usual for land and site costs to represent about 20% of house prices and the fact that this proportion is now as high as 50% in Ireland is worth a further investigation.

The report says high house prices have the potential to add to wage pressures, as even relatively well-paid workers are finding it difficult to enter the housing market.

It also warned against borrowers taking on too much debt to purchase houses, and said the Financial Regulatory Authority is actively pursuing this issue with lending institutions.

The bank said it would be necessary for people to accept a culture of stability in which prices in the economy and wages rise by no more than 2%.

It predicts economic growth next year will be around 2.75%, and warned that Ireland may not benefit from an improvement in the international economic environment.

Victor

http://home.eircom.net/content/irelandcom/breaking/1599115?view=Eircomnet

Central Bank reiterates concerns on rising house prices
From:ireland.com
Thursday, 2nd October, 2003

The Central Bank has reiterated its concerns about rising house prices and said Irish consumers would have to accept "a culture of stability" to reduce the risk of a financial crisis.

In its Autumn bulletin, the bank also warned that inflation, especially in the services sector, was eroding competitiveness.

Historically low interest rates coupled with an inflation higher than the euro zone average is increasing house prices, the Central Bank said. In this context the bank advises borrowers not to overstretch themselves for fear of being caught out when interest rates inevitably rise.

The bank said that the new financial services regulator IFSRA is meeting with the main lenders as a follow-up to inspections carried out earlier this year to assess the prudence of lending procedures. IFSRA will consider measures if it decides a tightening of lending practices is necessary.

The Central Bank also cut its key growth forecast for the Irish economy in 2004 but said its predicted level, if achieved, would still represent a reasonably good performance by international standards.

Gross national product (GNP), considered the best gauge of the Irish economy, could reach 2.75 per cent, a reduction from its forecast in the summer of 3.5 per cent, the bank said. It said goss domestic product growth was likely to reach around 3.25 per cent, down from a forecast per cent.

According to the bank, GNP growth this year could still reach 1.5 per cent - unchanged from its previous bulletin - but that gross domestic product growth was likely to be lower than the previously forecast level of 1.75 per cent.

The central bank warned that Ireland's competitiveness - eroded by an inflation rate that remained stubbornly higher than the eurozone average - could hinder the country's capacity to benefit from an eventual upturn in the world economy.

It also noted that consumer demand remained subdued and that investment inflows into the technology sector were unlikely to resume at the scale which underpinned the boom of the late 1990s.

"It's reasonably prudent to assume that the recovery next year won't be as strong as previously expected," Mr Austin Hughes, chief economist at Dublin-based IIB, said.

"The trend is improving but the recovery will not feel significantly different from the downturn this year," he said.

The central bank said although there was evidence of incipient recovery in the US economy, the indicators for the euro zone remained "much more mixed".

"The response of the euro area to any increase in external demand may also take some time to become well established and will depend, at least in part, on exchange rate developments," it said.

Weighted GDP growth in Ireland's trading partners was expected to pick up to around 2 per cent in 2004 from 1.25 per cent this year, it said.

Victor

http://www.thepost.ie/web/DocumentView/did-134465376-pageUrl--2FThe-Newspaper-2FSundays-Paper-2FNews.asp

Probe into mortgage lenders to be widened
28/09/03 00:00
By Michael Murray, Markets Editor

The Central Bank of Ireland has extended its mortgage lending probe, The Sunday Business Post has learned.

A crackdown on the mortgage lending practices of some financial institutions is in prospect, making it much harder for their borrowers to secure property funding.

The Central Bank has targeted issues in "virtually every lender's portfolio" that must be addressed, according to a well-placed source. The bank is examining the mortgage portfolios of all banks and building societies. Informed sources said the scope and extent of the work meant it may not be completed until late this year.

It is expected that the mortgage investigation will result in lenders being required to report more comprehensively on their mortgage lending activities.

The Central Bank is also determined to stamp out certain practices of which it does not approve. These are understood to include the practice of including excessive proportions of bonus payments when calculating a borrower's total income. Bonus payments are not part of a person's permanent income.

The Central Bank is also understood to be keen to eliminate the inclusion of 100 per cent of casual letting income for the purposes of calculating a borrower's debt service capacity.

The bank is stepping up its scrutiny of property lending as the market continues to perform strongly.

According to recently published data based on nationwide research, the average house costs €224,340. Where a homebuyer has a 25-year mortgage and the mortgage ac-counts for 90 per cent of the purchase price, the monthly mortgage repayment is €998.50, based on an interest rate of 3.4 per cent.

The Central Bank is concerned about the high level of mortgage lending growth, which was 24.2 per cent year on year in July 2003. It was in the mid-20s percentile range last year.

"Borrowers should be careful about the amount they borrow and stretching themselves to the pin of their collar to buy their first homes, given rising unemployment and worsening economic conditions," its spokesman said.