New research shows a 'soft landing' for the property market is taking place, writes Marc Coleman
Before I begin in earnest, there is an announcement about next week's Property. Given emotional responses to recent trends, I have pleaded with the property editor that a free comfort pack be given out with next week's edition. Kind soul that she is, next week's readers will be given a cellophane bag containing a small teddy bear, a CD of soothing whale music and several Prozac tablets.
According to the latest consumer sentiment indicator, a good number of you will need it. According to the survey, produced jointly by Irish Intercontinental Bank (IIB) and the Economic and Social Research Institute (ESRI), one in six of you expect house prices to fall in 2007, four times as many as expected prices to fall in the same survey conducted this time last year.
My views on the present Irish property market are best expressed by the following quote from German philosopher Friedrich Nietzsche: "What doesn't kill you makes you stronger". It probably has something to do with an upbringing in a small Calvinist town that I admire virtues of stoic defiance in the face of adversity. Those virtues are real: for much of the last two decades the German property market was not a roller coaster ride, but it was no disaster either and somehow the Germans pulled through and their market is now recovering. For that reason, we have no excuse for some of the blubbering that is going on at the moment.
In real terms, German house prices peaked in 1995 on a wave of post-unification euphoria and as the global economy was on a post-recession upswing. In that year the German economy also reached a peak in terms of the contribution being made to employment and economic output by the construction sector.
From a peak of about 14 per cent of Gross Domestic Product (GDP) in 1995, the sector now accounts for about 9 per cent. By contrast, Ireland's share of GDP is estimated at between 17 and 24 per cent.
That number might suggest that house prices and the economy have further to fall here than they did in Germany. But, if the forces acting to push prices down in Ireland are stronger, the countervailing pressures are also stronger. On the one hand, the price overshoot is greater than occurred in Germany whereas the increase in housing supply is also greater.
On the other hand, Germany did not experience, speaking in relative terms, the kind of mass emigration that sustained and continues to sustain demand here. Neither did Germany have a National Development Plan to cushion the blow. With an economy strangled by high taxation, Germany's public finances were - and remain - in a perilous position with weak revenue growth and strong pressures on the public purse.
When many other countries' property markets were booming - Ireland, France and Spain to mention a few - Germany's entered a period of gentle price stagnation. In nominal terms, German house prices have fallen by a bit more than 5 per cent since 1995. Now at last, the corner has been turned and prices are starting, modestly, to increase.
Despite the nervous one-in-six it identifies, the average results of the IIB/ESRI consumer survey indicator suggests that a similarly moderate - and considerably less painful - correction is in store for our market. On average, house prices are expected to rise by 3.5 per cent this year, about 4 percentage points less than nominal GDP. A repeat of this in 2008 will wipe out most of the modest overvaluation in the average house price.
It will also begin the needed change in our mentality towards property from the present mad passion to a more mature one based on steadiness and stoicism. Mad passions are dangerous: they can reverse very quickly and, when they do, the fears that drive them become self-fulfilling. As Nietzsche himself said: "If you gaze long into an abyss, the abyss will gaze back into you".
Marc Coleman is Economics Editor of The Irish Times ... - mcoleman@irish-times.ie
