ANALYSIS:Growth in incomes and in house prices will be much more closely aligned between now and 2010 - and that's good for the market, writes Marian Finnegan.
THE LATEST ESRI review of the Irish economy sent out an upbeat message. While it recognises that there is a danger that Ireland could be transfixed by its current difficulties and, in doing so, miss the opportunity to prepare for a better future, the authors suggest that whatever the severity of the immediate economic difficulties, if properly managed, they will not do lasting damage to the economy.
The report also provides a much needed medium-term view of the Irish housing market, and one which is largely positive.
Despite the current slowdown in the housing market, the ESRI suggests that the demographic factors underpinning household formation will result in a relatively strong demand for housing in Ireland.
With stock levels reaching an equilibrium, the Review forecasts demand for almost 48,000 housing units a year between 2010-2020, falling to 45,000 beyond 2020. That is a very robust forecast by either historical or international standards.
The Review also suggests a very positive outlook for house price growth, albeit at a lower level than experienced in the last 10 years.
Between 2005 and 2010, house prices are expected to grow by an annual average of 3.2 per cent and by an average of 3 per cent over the rest of the growth period. This happens to largely coincide with the projected growth of income levels in the economy in the relevant period.
This lower growth in Irish house prices will be from a much higher price level than that in many other European countries.
In analysing future trends in the housing market it is noted that current and expected personal income is important in determining the demand for housing.
Between 1995 and 2000, average annual growth in house prices was much higher than growth in disposable personal income per head and, although the gap narrowed, this differential remained in place between 2000 and 2005.
As a result there was deterioration in the affordability of property over that period.
However, the forecasts in the medium-term review indicate that in the current period, 2005-2010, annual average growth rates in these two variables will remain much more closely aligned.
The recent decline in house prices, coupled with continued income growth, suggest an improvement in affordability.
Further moderate house price inflation will underwrite this improvement in affordability, all of which bodes well for future accessibility of the market place.
So what can we conclude from this report? First, it is heartening at a time of uncertainty to see research that, while heeding current events, looks to the future to give us a glimpse of what we can expect.
Indeed, this report could serve to remind us all that focusing on the percentages lost this year might result in paralysing us from taking the steps necessary to ensure that we reap rewards in the future.
The report is very timely, our own recent consumer-sentiment research suggests that there is now a cautious optimism in the consumer's attitude towards the future of the property market, a sentiment which is endorsed by the positive outlook in this report.
While we may never return to the glory years of the Celtic Tiger we can, I think, take comfort in the fact we can anticipate an evolution to a mature, resolute economy with a dynamic housing market which is more affordable and accessible to our population than it was at the height of the roaring Celtic Tiger years.
Marian Finnegan is chief economist with the Sherry FitzGerald Group
