Download Surviving the Housing Slump - National University of Ireland, Galway

Surviving the Housing Slump:
Prospects for the Irish Economy
Alan Ahearne
NUI Galway
Presentation to the Fine Gael Parliamentary Party
12 September 2007
National University of Ireland, Galway
1
Rapid catch-up, though gap
remains in services sector
GNP per capita
Ireland relative to the United States
%
100
90
80
70
60
50
40
30
20
10
19
6
19 0
62
19
64
19
6
19 6
68
19
70
19
7
19 2
74
19
76
19
7
19 8
80
19
82
19
84
19
8
19 6
88
19
90
19
9
19 2
94
19
96
19
9
20 8
00
20
02
20
0
20 4
06
0
National University of Ireland, Galway
2
House prices dropping…
Nominal house prices (month-to-month % change)
%
2.0
1.5
1.0
0.5
Ju
l
ay
M
ar
M
-0
7
Ja
n
N
ov
Se
p
Ju
l
ay
M
ar
M
-0
6
Ja
n
N
ov
Se
p
Ju
l
ay
M
ar
M
-0
5
Ja
n
N
ov
Se
p
Ju
l
ay
M
ar
M
Ja
n
-0
4
0.0
-0.5
-1.0
Source: Permanent TSB/ESRI
National University of Ireland, Galway
3
…following a typical boom-bust
pattern
National University of Ireland, Galway
4
Measures suggest housing is
overvalued by about 20 per cent
Rental yield
%
10
9
8
7
6
5
4
3
2
1
19
80
Q
19 1
81
Q
19 3
83
Q
19 1
84
Q
19 3
86
Q
19 1
87
Q
19 3
89
Q
19 1
90
Q
19 3
92
Q
19 1
93
Q
19 3
95
Q
19 1
96
Q
19 3
98
Q
19 1
99
Q
20 3
01
Q
20 1
02
Q
20 3
04
Q
20 1
05
Q
20 3
07
Q
1
0
Source: Own calculations based on CSO and Permanent TSB/ESRI data
National University of Ireland, Galway
5
Completions still running at heady
pace…
120,000
House completions (annual rate)
100,000
80,000
60,000
40,000
20,000
0
2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2
Source: Department of the Environment, Heritage and Local Government
National University of Ireland, Galway
6
…adding to the stock of unsold
houses
• Sellers will need to slash prices to shift houses.
• Global credit crisis not positive for housing
market.
National University of Ireland, Galway
7
Economy will be vulnerable during
adjustment
• EMU membership reduces likelihood of an
outright crisis…
• …but adjustment could last for a prolonged
period.
National University of Ireland, Galway
8
Residential investment set to
plunge
Housing starts (annual rate, s.a.)
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Source: Davy
National University of Ireland, Galway
9
Share of GDP
(%, 2006)
Personal consumption
47
Government consumption
14
Investment:
Residential
Other construction
Machinery & equipment
14
6
6
Exports
81
Imports
-69
National University of Ireland, Galway
10
Contribution to GDP growth (%)
2005
2006
2007e
Personal consumption
3.5
2.7
3.7
Government consumption
0.6
0.7
0.8
Residential investment
1.8
0.6
-0.7
Other investment
1.3
0.2
1.6
Net Exports
-1.1
0.6
0.1
Memo: GDP
5.9
5.7
4.9
Source: Data for 2005 and 2006 from CSO. e: estimates for 2007 from ESRI QEC Summer 2007
National University of Ireland, Galway
11
Personal consumption expected
to moderate…
• Slower employment growth.
• Reduced inward migration.
• Deterioration in consumer sentiment.
• Post-SSIA payback.
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12
Expansionary budgetary policy
can partly fill the gap
• Budgetary policy too loose over recent years.
• Now is not the time for a sharp tightening.
National University of Ireland, Galway
13
Focus on restoring export-led
growth…
• Greater attention to competitiveness required:
– Short-term: Wage growth.
– Medium-term: Services sector and innovation.
National University of Ireland, Galway
14
Competitiveness hurt by high
inflation and sluggish productivity
Real Exchange Rate and Gross Exports
Cumulative change 1999-2006
Change in Real Exchange Rate %
15
Belgium
Germany
10
Greece
Spain
5
France
Ireland
0
-40
-30
-20
-10
0
10
20
30
40
Italy
Netherlands
-5
Austria
Portugal
-10
Finland
-15
Eurostat and DG ECFIN
Export Growth
Excess over euro area average
National University of Ireland, Galway
15
Global economic environment
may turn sour
• US recession a significant risk.
• Dollar likely to drop further.
National University of Ireland, Galway
16
Conclusions
• Housing slump will not be short-lived.
• Entering a period of heightened vulnerability.
• Growth slowdown will bring new challenges
– Need to build “social bridges”
National University of Ireland, Galway
17