Nothing exciting - or dangerous - is in prospect for the market over the next two or three years, says Marc Coleman
"The good thing about the Irish skyline," remarked the German economist, "is that if your economy ever crashes very badly, there are no tall buildings for people to jump out of." On that cheerful note, I ended a 10-minute conversation between myself and the economist on the parallels between Germany's economy in the 1990s and Ireland's economy today. The economist was pointing to the fact that about one-quarter of Ireland's economy now depends on the construction sector, of which house building is a central part.
The OECD made this point about Germany's economy in the 1990s. "The weakness of Germany's economic performance is mainly reflected in weak employment generation. Indeed, the total hours worked per inhabitant have actually declined, causing real GDP growth per capita to weaken by some three-quarters of a percentage point per year over the past decade," noted Rossa White, research economist with Davy stockbrokers. Rossa pointed out the link between German unemployment and the high numbers involved in the construction sector during the early 1990s. Once the construction employment boom stopped, it was hard for other parts of the economy to compensate for the job losses coming from it.
But German construction employment maxed out at around 9 per cent of the labour force at the height of the reunification-driven boom. In Ireland today, almost 14 per cent of the labour force is employed in the sector. This week Davys stockbrokers has come out with a report on the construction sector and the news is, for stockbrokers, moderately good. Generally, stockbrokers shouldn't have a good word to say about property markets. These people want you to invest in shares. In Ireland, however, the stock market is heavily influenced by the property market.
Stocks like AIB, Bank of Ireland and Grafton have all, in different ways, benefited from the construction boom. Even so, whatever stockbrokers say about property markets tends to be on the pessimistic side. Which makes Davys latest prognosis reasonably comforting. On a month-on-month basis, house prices will not rise this year, they predict. And although Davys don't predict any month-on-month growth, they don't predict any decline either. Taking some carryover from last year, this means that, compared to last year, prices will still average around 4 per cent higher this year.
Actually, this is perfect for the economy: by keeping house prices growing by about 4 points lower than the rate of nominal GDP, the modest overvaluation in the market will disappear over a period of two or three years. And this outcome assumes that stamp duty will not be reformed.
Whatever their political complexion, all parties now know that, if house prices do wobble in the coming two years, they at least have a remedy to give it a needed lift. Nothing exciting is in prospect for the market over the next two or three years, but nothing dangerous is in prospect either. By downwardly revising their estimate for housing completions in 2007 - from 87,000 to 82,000 - Davys has copperfastened the view that last year's output (88,200) was now a cyclical peak. It will take a decade or more for completions to return to this level and this is where a problem arises: how to deal with any drag in employment that results from this?
Construction booms are a bit like bad hangovers: the pain doesn't stop because you were drinking so hard the night before, it happens because you stopped drinking too suddenly at about 3am. But the Government has something lined up in case anything goes wrong: the new National Development Plan commits well over €50 billion to capital investment spending over the next six years. Hair of the dog, you might say.
• Marc Coleman is Economics Editor of The Irish Times
