Is Ireland heading for recession?

jetski

“Property asking prices down 10%.”

It’s a headline to strike fear into the heart of any overstretched homeowner. And it’s precisely the headline that readers of the Irish Times - Ireland’s biggest broadsheet - woke up to last Monday. Asking prices across Dublin have slumped in the past six months, particularly in the wealthier suburbs of the city, amid a glut of property coming onto the market.

It’s certainly a shock for those who thought prices could only ever go up. But as economist Dermot O’Leary of Dublin’s Goodbody Stockbrokers said: “It had to happen at some stage.” Even the IMF and the OECD reckoned the Irish property market was overvalued by at least 25%.

And how bad can it be? After all, unless you bought in the past two years, you would probably be cushioned from the impact - wouldn’t you?

Unfortunately for Ireland, the cracks in its property market run way deeper into the economy than most would have hoped.

Ireland long ago stopped being the much-lauded Celtic tiger economy. Now “it’s a Bob the Builder economy”, says Morgan Kelly, professor of economics at University College Dublin.

In 1998, Ireland had a rapidly growing economy (even then), with interest rates at around 6% and rising. In 1999, as a member of the eurozone, it switched to a single interest rate controlled by the European Central Bank. Now, the main economy in the eurozone is Germany, and it was the polar opposite of Ireland at the time. So Ireland ended up with a sharply reduced interest rate, more suited to struggling Berlin, than racing Dublin.

Hence the house price boom, which has seen prices shoot up by more than 200% in the past five years alone, fuelling an equally superlative construction boom.

In 2005, the building sector accounted for nearly a quarter of gross national product. It also employs 13% of the Irish workforce - that’s more than one in eight of the working population.

So if the construction sector goes down, the Irish economy goes with it. And right now building work is stalling. Very rapidly.

The trouble is, just as Ireland’s consumers are stuffed full of debt and vulnerable to any waver in interest rates, Germany is recovering. And now the ECB is raising rates - which suits the consumer in Berlin, but is an utter nightmare for Dublin’s amateur property moguls.

As more properties come onto the market, prices fall. There are now 250,000 vacant housing units on the market, about 15% of Irish housing stock, compared to 100,000 units five years ago. So builders are responding the only way they can - they’ve stopped building. The 12-month running total for housing starts has fallen from a peak of 96,000 in September last year to 83,000 now.

And they’ll fall much further. UK construction group Wolseley, which owns Brooks, Ireland’s largest timber distributor, reckons starts will fall by 30% this year to between 70,000 and 65,000. And less building means less builders, which means longer dole queues.

“We’re looking at a horrible employment shock,” says Kelly, with “very unpleasant consequences.”

He forecasts unemployment reaching 12%-13% within the next year to 18 months, as builders continue to cut back on construction. He points to Arizona in the US, where housing starts have more than halved, dropping from a high of 8,000 units a month last May, to just 3,000 by November.

“Irish people are very casual about this. There’s an assumption that construction workers are all Eastern Europeans and that they’ll get back on the plane to Krakow,” when things go awry, he says. “But foreign workers only make up 12% of the building workforce.”

Kelly reckons prices could fall by 50%. “In a typical property crash, prices fall by 70% of what they’ve gained. That would imply a rental yield of 8%, which is still very low” by historical standards. “A 10% rental yield would imply bigger falls.”

And, as a small open economy especially vulnerable to external developments, everything from a weakening dollar to higher interest rates – both of which seems very likely indeed - could act as a trigger for a drop, says Dr. Alan Ahearne, an economist at the National University of Galway.

“If we get a 25% drop in house prices over two to three years and a big contraction in [construction] at the same time… there’s no doubt that that would put the Irish economy into recession. And if our export sector is hit at the same time by a falling dollar then you’re getting a perfect storm of negative shocks, and then there could be quite serious trouble.”

So it sounds like bad news for Ireland – and investors on this side of the Irish Sea shouldn’t get too comfortable either. Interest rates look set to rise in the UK too, and building inflationary forces mean that indebted homeowners can’t rely on the Bank of England bailing them out with rate cuts. Ireland’s woes may well be heading this way.

http://www.moneyweek.com/articles/money-morning/is-ireland-heading-for-recession.aspx

gurramok

Old article from Oct 2007 but it sums like fine points of while Ireland Inc is in trouble and will be for a while yet.

Retail sales have been down month on month since before xmas, thats the consumer spending which accounts for majority of our economy gone downhill.

Why buy a home when a recession is looming with job insecurity?

punchestown

But sure the fundamentals are sound and were Irish so itll be alright!