'Wild West' lending in the US won't affect market fundamentals here, says Marc Coleman
"We're in the midst of a classic boom-bust credit cycle in housing . . . and the bust is just beginning." These words belong to Andy Laperriere, MD at International Strategy & Investment Group in Washington, just one of the thousands of analysts with something to say about the US property market. From reasonably stable growth in the late 1990s, US house prices climbed a steep hill in the current decade. The extent of that climb is much greater than the growth in any underlying variable that might explain it: there has been no significant acceleration in the rate of population growth or building costs. Sure bond yields have fallen, contributing somewhat to the rising prices, but this far from explains the almost doubling of prices between 2000 and 2006.
Last week stock markets took a beating as the role of non-fundamental factors behind recent price peaks was brought home by a scare about one of those factors - sub-prime lending. Directed at speculators and financially desperate owner-occupiers, this practice has resulted in situations like the one reported last week in this paper. A lady earning just under $20,000 was given a "no money down" mortgage for $896,000 (and, no, I didn't accidentally put an extra digit after that last number). If credit like that was available to buyers on such low incomes, the credit made available to medium or high income buyers doesn't bear thinking about.
Most accept that the US economy is now over-reliant on consumption based on borrowings from housing equity and even Alan Greenspan recently said a recession could happen in the US this year. The connection between housing markets and the economy is such that such predictions could be self-fulfilling. Worries about the economy prompt wholesale mortgage lenders to worry about repayment ability. They consequently withdraw credit.
In addition to driving up interest rates and making repayments more difficult (thus accentuating the extent of default), this lowers the amount of money chasing the housing stock and lowers prices. Lower prices, in their turn, increase the chances of negative equity, making home owners less likely to borrow to fund consumption. And that creates the worries about the economy that we started the circle with a few sentences ago.
In some parts of the US, Florida for example, properties prices have fallen by as much as 50 per cent - could we experience anything of the kind in Ireland? A survey by daft.ie shows that since October last, prices in Galway have fallen by 10 per cent while, anecdotally, I have heard of apartments being sold in outlying areas of Dublin for about 20 per cent less than the asking price. But no news is good news: Galway has been subject to an exceptional increase in supply, as has the apartment belt around the outskirts of Dublin. But taking the market as a whole, there are several reasons why overall price trends here will be mild compared to the US.
For many home owners, other parts of the US are just as good substitutes for the place they already live. For most Americans, San Diego is almost as good as Florida and Seattle almost as good as Boston. In this country, by contrast, the raw anger generated over the issue of civil service decentralisation shows you just how attached people in Ireland are to the idea of living in familiar neighbourhoods.
Even more reassuring is the superior financial position of most Irish home owners. Compared to a zero savings rate in the US, the Irish save around 14 per cent of their income, one of the highest savings rates in Europe. Our interest rate cycle is also less volatile than in the US. Compared to a rise in US rates of over 4 percentage points in the space of four years, euro zone rates have climbed by 1.75 per cent. Finally, nothing in the Irish mortgage lending scene in recent years comes anywhere near the wild west abandon of sub prime lending. There are important concerns about the Irish housing market, but what's happening in the US housing market is not one of them.
Marc Coleman is Economics Editor of The Irish Times
