national university of ireland, galway1 surviving the housing slump: prospects for the irish economy...
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National University of Ireland, Galway 1
Surviving the Housing Slump:
Prospects for the Irish Economy Alan Ahearne
NUI Galway
Presentation to the Fine Gael Parliamentary Party
12 September 2007
National University of Ireland, Galway 2
Rapid catch-up, though gap remains in services sector
GNP per capita Ireland relative to the United States
0
10
20
30
40
50
60
70
80
90
100
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
%
National University of Ireland, Galway 3
House prices dropping…
Nominal house prices (month-to-month % change)
Source: Permanent TSB/ESRI
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Jan-
04 Mar
May Ju
lSep Nov
Jan-
05 Mar
May Ju
lSep Nov
Jan-
06 Mar
May Ju
lSep Nov
Jan-
07 Mar
May Ju
l
%
National University of Ireland, Galway 4
…following a typical boom-bust pattern
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Measures suggest housing is overvalued by about 20
per cent Rental yield
Source: Own calculations based on CSO and Permanent TSB/ESRI data
0
1
2
3
4
5
6
7
8
9
10%
National University of Ireland, Galway 6
Completions still running at heady pace…
House completions (annual rate)
Source: Department of the Environment, Heritage and Local Government
0
20,000
40,000
60,000
80,000
100,000
120,000
2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2
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…adding to the stock of unsold houses
• Sellers will need to slash prices to shift houses.
• Global credit crisis not positive for housing market.
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Economy will be vulnerable during adjustment
• EMU membership reduces likelihood of an outright crisis…
• …but adjustment could last for a prolonged period.
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Residential investment set to plunge
Housing starts (annual rate, s.a.)
Source: Davy
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07
National University of Ireland, Galway 10
Share of GDP (%, 2006)
Personal consumption 47
Government consumption 14
Investment: Residential Other construction Machinery & equipment
1466
Exports 81
Imports -69
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Contribution to GDP growth (%)
Source: Data for 2005 and 2006 from CSO. e: estimates for 2007 from ESRI QEC Summer 2007
2005 2006 2007ePersonal consumption 3.5 2.7 3.7Government consumption
0.6 0.7 0.8
Residential investment
1.8 0.6 -0.7
Other investment 1.3 0.2 1.6Net Exports -1.1 0.6 0.1Memo: GDP 5.9 5.7 4.9
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Personal consumption expected to moderate…
• Slower employment growth.
• Reduced inward migration.
• Deterioration in consumer sentiment.
• Post-SSIA payback.
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Expansionary budgetary policy can partly fill the gap
• Budgetary policy too loose over recent years.
• Now is not the time for a sharp tightening.
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Focus on restoring export-led growth…
• Greater attention to competitiveness required:
– Short-term: Wage growth.
– Medium-term: Services sector and innovation.
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Competitiveness hurt by high inflation and sluggish
productivity
Real Exchange Rate and Gross Exports
-15
-10
-5
0
5
10
15
-40 -30 -20 -10 0 10 20 30 40
Export Growth
Ch
an
ge
in
Re
al
Ex
ch
an
ge
Ra
te %
Belgium
Germany
Greece
Spain
France
Ireland
Italy
Netherlands
Austria
Portugal
Finland
Cumulative change 1999-2006
Excess over euro area averageEurostat and DG ECFIN
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Global economic environment may turn sour
• US recession a significant risk.
• Dollar likely to drop further.
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Conclusions
• Housing slump will not be short-lived.
• Entering a period of heightened vulnerability.
• Growth slowdown will bring new challenges– Need to build “social bridges”