Cross-posted from The European Tribune
Warning that house prices may fall by 80% – The Irish Times – Tue, Jan 13, 2009
IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.
In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.
“Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future,” he said.
Low levels of education among those employed in construction – where worker numbers peaked at about 280,000 – meant retraining would not be straightforward.
Recovery will be slow: “It has taken us 10 years to get into this situation – it will in all likelihood take us 10 years to get out of it.”
Warning that house prices may fall by 80% – The Irish Times – Tue, Jan 13, 2009
Mr Kelly said he had been hailed as being extremely prescient as a result of his warnings in relation to the property bubble, when in fact he and a handful of other “amateurs” were merely stating what was obvious.
Sparing no blushes, he said professional economists in the Central Bank and the Economic and Social Research Institute “need to look very closely at their analyses of the Irish economy and figure out what went wrong”.
Mr Kelly said Ireland’s “reputational capital” had been damaged by “chancers” such as ex-Anglo Irish Bank chairman Seán FitzPatrick, who had been abetted by “buffoons” such as former financial regulator Patrick Neary, Minister for Finance Brian Lenihan and the Taoiseach.
In discussing the €110 billion given in loans to developers, Mr Kelly said a typical regional housing collapse in the US saw banks sustain a 20 per cent loss on these loans, but the narrowness of the Irish market increased the risk of “substantially larger losses” for Irish banks.
“The guarantees of Anglo and [Irish] Nationwide liabilities have a strong chance of being called in over the next 21 months,” he said. Extending the Government guarantee to these two financial institutions was “extraordinarily unwise” and could produce losses that the State cannot afford to repay.
The global financial crisis may have been positive for the Irish economy as it “stopped us dragging ourselves even deeper into our hole,” he said. “If it had taken another year or two, we would have ended up in an Icelandic-shaped hole, which is not to say that we won’t end up in one.
Mr Kelly said the Government should abolish stamp duty on property, compile proper price and quantity statistics and restore competitiveness through a public sector pay cut of 10 per cent.”
The Irish economic crisis illustrates both the strength and the weakness of being a member of a larger currency block like the Euro. In the bad old (pre-Euro) days, the current crisis would probably have been largely averted by interest rates rising much higher much earlier in the “asset bubble phase”, followed by a much earlier and more drastic reduction in interest rates once the bubble burst, combined with a dramatic devaluation of the Irish currency. That is arguably what we need now. to restore some semblance of competitiveness to our economy, and some resemblance to affordability in the efficiency and cost of provision of many of our public services.
But being a member of the Eurozone also gives us much greater stability in our trading relationships, and better prospects for funding our ballooning public sector deficits. Our Debt GNP ration is likely to go up from a very reasonable 25% in 2007 to something approaching 60% by 2010. Clearly an unsustainable rate of increase.
What should have happened, of course, is that Government fiscal policy should have taken over the role of regulating Ireland’s economic growth at a time when the Government no longer had the interest rate and devaluation mechanisms available pre-Euro. But instead of taking the tough counter-cyclical measures which would have been required to rein in Irish inflation and growth to sustainable levels, the Government instead provided populist tax reductions and wage increases which exacerbated the asset and consumer price inflation boom.
The figures all looked great so long as we could get away with ever increasing asset prices and moving the economy up to higher value added R&D, Pharma, ICT and financial services industries which were less sensitive to inflated costs of doing business here. The Irish economy was heading for a fall before ever the US sub-prime crisis appeared on the scene, but now the crisis is happening at the very worst time possible when neither the largely foreign own multinational sector, nor the more consumer orientated service sectors are in a position to shore up the personal, corporate, or state balance sheets.
Dell recently announced 2,000 job cuts in Limerick. Today Nortel announced it was filling for bankruptcy putting a further 1,500 Irish jobs at risk. Irish unemployment will double from 4 to 8% within the next year. There isn’t a bottom yet in sight, and no indication of why one should appear on the horizon, because the Government has no effective mechanisms for making the drastic adjustments required to stabilise the economy. The public sector deficit is likely to hit 8% next year, and there is no reason to suppose that it can be reduced beyond that as escalating interest rates (based on increased Sovereign default risks and a crowding out by “bail-out” borrowing by other states) makes the Irish public debt all but unsustainable. Peak to trough, Irish GDP could well fall by 10% in real terms, and the bulk of that readjustment will fall on those least able to bear it.
We have become used to Irish private sector professionals and public sector managers earning far more than their equivalents elsewhere within the EU. Irish Consultant doctors earn salaries in excess of €200K per annum for a 30 hour week and can earn a multiple of that from private practice in addition to their public income. They can force public patients off their waiting lists (through excessive waiting lists) and treat those same patients privately for enormously inflated private fees paid by rapidly going insolvent health insurance companies. Lawyers won’t get out of bed for less than €2000 per day briefing fees. Tribunals of enquiries have paid such lawyers hundreds on millions of Euros for work more properly done by the police or appropriate financial investigative agencies. Top bankers have treated their banks as their private fiefdoms for their own speculative off-balance sheet adventures. There is almost no concept of value for taxpayers money at higher levels of the civil service.
In effect, what we have in Ireland is a class society where both public and private sector leaders and top professionals have been able to charge more or less what they like and become millionaires as a matter of course for performing activities that would command a modest salary (by Irish standards) in other European countries. It is difficult to imagine a change in the Irish social, political and economic structure that would adequately address the imbalances this has created in the economy any time soon. And as always, it will be the poor, the sick, and the unemployed who will bear the brunt of the crisis.
