IMF warns that house boom may bust

The Irish housing market could be heading for a "bust", according to the findings of a new study by the influential Washington-based International Monetary Fund (IMF).

In its World Economic Outlook, issued yesterday, the IMF argues that the larger a housing boom, the larger a subsequent bust is likely to be.

Where growth in house prices exceeds a boom, as in the case of states such as the Republic, the Netherlands and the UK, the market has a 40 per cent chance of collapsing into bust, according to the analysis.

The housing study was published as the IMF cut its forecasts for global GDP growth in 2003 from 3.7 per cent to 3.2 per cent, citing a slow economic recovery, fallout from the "bursting of the equity market bubble" and geopolitical uncertainties.

Yesterday's growth prediction is based on an unwinding of current tensions and is subject to a number of additional downside risks, including currency movements and global variations in monetary policies.

The fund has more than halved its 2003 forecast for growth in the euro zone, cutting it to just 1.1 per cent. It cites the German economy, which is increasingly showing signs of strain in the financial sector, as a particular cause for concern.

For the Republic, which the IMF says will see "relatively strong growth", the authority has forecast GDP growth of 3.3 per cent for this year, and 4.5 per cent for 2004.

The Central Bank recently predicted GDP growth of 3.25 per cent for 2003, while the Department of Finance expects GDP growth of 3.5 per cent this year, followed by 4.1 per cent in 2004.

In a press conference marking the launch of the Outlook, IMF economists said its "peak to peak" statistical measure showed Irish house prices to have risen by 102 per cent since their previous peak. This compares to 78 per cent in the Netherlands and almost 70 per cent in Britain.

To qualify as a bust according to the IMF's definition, house prices must fall by more than 14 per cent, compared with 37 per cent for equities.

The fund has found that 20 house price busts occurred between 1970 and the third quarter of 2002 in a sample of 14 countries. Over the same period, 25 crashes in equity prices were recorded. Housing price busts led, on average, to a decline in prices of about 30 per cent.

The IMF expresses particular concern about the pace of growth in house prices at a time of bust in the stock markets. The possibility of a housing bust should, the IMF warns, inform monetary policy.

It argues that the European Central Bank (ECB) should consider further cuts in interest rates in the euro area if, as expected, inflation falls

Growth in the euro zone this year will be driven largely by personal spending, the analysis predicts, forecasting little uplift in investment.

The US will lead the continuing global recovery with GDP growth of 2.2 per cent, according to the analysis.