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    House prices could fall "by up to 50%"

    @@@@SPAN style="FONT-WEIGHT: bold">How the housing corner stones of our economy could go into a rapid freefall@@@@/SPAN>

    @@@@SPAN style="FONT-STYLE: italic">Demand exceeds supply? While it is not so long ago that property prices were soaring, global experience suggests they could crash by up to 50 per cent.@@@@/SPAN>

    Offering no evidence except wishful thinking, estate agents and politicians assure us that we have nothing to worry about: the Irish housing market can look forward to a soft landing.

    If, however, we look at what has happened to other small economies where sudden prosperity and easy credit drove house prices to absurd levels, we should be very worried indeed.

    If the experiences of economies similar to ours are anything to go by, we may be looking at large and prolonged falls in real house prices of the order of 40-50 per cent and a collapse of house-building activity.

    Two housing booms are especially sobering for being so similar to ours: Finland in the 1980s and The Netherlands in the 1970s.

    Finland boomed after oil was discovered off the coast in the mid-1980s. With low interest rates and loans available for the asking, house prices soared. Then, as the Soviet Union collapsed, unemployment rose and house prices started to fall, creating problems first for builders, then for homeowners, and finally for banks.

    The Finnish banking system effectively disintegrated under the weight of bad housing loans and had to be rescued, at huge expense, by the state. Unemployment rose from 5 to nearly 20 per cent. The real price of houses fell by more than 40 per cent.

    A Finnish contributor to an online discussion board captures the spirit of the times.

    "In 1991, a friend of mine offered about $120,000 (€91,464) on a lovely house that had cost $240,000 to build just three years previous. With over 20 per cent unemployment, it was not surprising that the owner and his wife had both lost their jobs and were about $12,000 behind in their mortgage payments.

    "Obviously, the owner refused my friend's offer, but the bank manager called back in just a few hours with a counter-offer: he'd accept the $120,000 if my friend also paid the delinquent $12,000 in mortgage payments.

    "That's it, the other family was left without a house and still owed the bank about $70,000."

    The Netherlands shows how house prices can collapse even when banks are big enough to absorb large losses. In the 1970s, thanks to the discovery of natural gas, the Dutch economy was the wonder of Europe.

    Once again, low interest rates and relaxed lending criteria led to a housing boom. Then, in 1979, the international recession bit, interest rates rose and prices tumbled. By 1985, the real price of houses had fallen by 50 per cent.

    There is an iron law of house prices. The more house prices rise relative to income and rents, the more they subsequently fall. To see the iron law in operation look at figure 1. It shows that for every industrialised economy between 1970 and 2000, how a rise in house prices relative to income is followed by a proportional fall. Economic theory predicts that house prices should be very volatile and prone to "rational frenzies" - and that is what the data show.

    But how about Ireland? Surely our house-price rise is simply due to our rising income and the shortage of houses in places where people want to live?

    Neither reason is valid: while incomes have risen, house prices have risen faster. Since 2000, house prices have risen 30 per cent more than income.

    Similarly, were there any shortage of housing we would see rents rising as fast as house prices.

    In fact, compared with income, rents have actually fallen since 2000. The importance of what has happened to rents cannot be over-emphasised. If the housing boom were due to rising incomes and more people forming households, rents would also have risen. The fac

    #2
    Strangest first post yet.

    Interesting though, i think people have stopped thinking about any
    negative equity becuase the reality of a bad landing is actually too
    painful to focus on.
    It is useless to attempt to reason a man out of a thing he was never reasoned into.

    Every plan I have is the best plan in the room. Everybody get quiet and listen to it, and everybody will win

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      #3


      Originally posted by JoeyFantastic
      Strangest first post yet.

      Interesting though, i think people have stopped thinking about any
      negative equity becuase the reality of a bad landing is actually too
      painful to focus on.

      Especially when his location says Engl*nd

      Comment


        #4





        David McWilliams did his best a couple of months ago, but the Decklanders didn't want to listen.
        New infraction avoidance policy: a post may be described as imbecilic, but its author should never be described as an imbecile.

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          #5
          This also happened in various parts of teh USA in the 80's. Believe.
          Hello friends in Brussels. Baldy here

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            #6
            Haven't people realised we've invented a new, unbreakable economy?
            It is useless to attempt to reason a man out of a thing he was never reasoned into.

            Every plan I have is the best plan in the room. Everybody get quiet and listen to it, and everybody will win

            Comment


              #7


              I had a housemate in college in '98 from france who swore up & down the irish economy was going to crash and burn at any moment .... of course at the time the .com bubble was growing rapidly, and it did indeed burst, but did not cause the celtic tiger to die, but rather change direction and slow a little.


              Plato: \"One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.\"

              Comment


                #8


                Well, what can you say? It's all too true. We have been burying our heads in the sand too long and listening to politicians' and property agents' spin. We're not all right, we won't wake up and find out it has all been a bad dream. It was good while it lasted for the politicians and some land owners but it's not them unfortunately who will suffer. We need tougher laws on buying property like in France of Scotland, where gazumping and cheating by property agencies is harder.
                Bigamy is one wife too many. Monogamy is the same.

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                  #9
                  when basic family houses, badly built, in towns without proper roads and basic public transport start selling for €600,000, at the same time as the ECB are putting rates up, theres only one thing that can happen
                  If the lessons of history teach us anything it is that nobody learns the lessons that history teaches us.

                  Comment


                    #10


                    Originally posted by munsterforever
                    when basic family houses, badly built, in towns without proper roads and basic public transport start selling for €600,000, at the same time as the ECB are putting rates up, theres only one thing that can happen




                    The Developers' and Builders' Party gets relected with an increased majority?
                    New infraction avoidance policy: a post may be described as imbecilic, but its author should never be described as an imbecile.

                    Comment


                      #11
                      Originally posted by lahinch_lass


                      I had a housemate in college in '98 from france who swore up & down the irish economy was going to crash and burn at any moment .... of course at the time the .com bubble was growing rapidly, and it did indeed burst, but did not cause the celtic tiger to die, but rather change direction and slow a little.





                      maybe a fench person just didnt like the idea of little old ireland outstripping france economically! france has been in the doldrums economically for the last decade or so.


                      on the matter at hand it may be no harm if housing "slowed" a bit(not crashed) it would be a kick policy makers need to really get diversify the economy a bit more. more emphasis has been placed on this idea of a "knowledge economy" although its still in its infancy,but we have seen more employment in R and D over the last year or so


                      also realise that its not only housing that is involved in construction,ireland is undertaking massive infrastructural changes that will keep the industry ticking over for the next few years anyway.


                      of course vigilance is still needed
                      g\'wan bruff!!

                      ``The answer is not heavy- handed regulations that crush the entrepreneurial spirit and risk- taking of American capitalism. That\'s what\'s made our economy great.\"
                      -Barack Obama


                      \"The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics\"
                      -thomas sowell

                      Comment


                        #12
                        How about another nice big whip around for Bertie Bung, Old Dog? Maybe he can den get on his tinking cap and diversify de ah de de ah ting ah de economy, like Bruffian wants him to do.
                        Hello friends in Brussels. Baldy here

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                          #13
                          It's the only way my generation will be able to afford to buy property.
                          Shameless self promotion time ladies and gents!
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                            #14

                            Originally posted by Cathal
                            It's the only way my generation will be able to afford to buy property.
                            it wouldnt be so bad but the number of affordable homes going up, from what i can see, is negligible
                            If the lessons of history teach us anything it is that nobody learns the lessons that history teaches us.

                            Comment


                              #15


                              The one examplehe goes into detail on isa country suddenly landed with 20% unemployment. Of course house prices drop massively as unemployment soars. The question is do youthink unemployment is likely to soar?


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