The Irish are ahead of us on this one. After years of ridiculous greedy speculation, house prices have finally begun to fall over there. Furthermore, as prices fall, it will take down the Irish economy with it. As hard as it is to believe, the Irish economy is moe vulnerable to a housing slowdown than the UK economy. Their construction sector employed more people, as a percent of the workforce, than the UK sector.
Furthermore, the Irish have a somewhat unique problem - the empty holiday home. During the house price run-up, people speculated on holiday homes, and now the vast majority of them are empty and unwanted. Wait three years, and desperate housing speculators will be giving them away.
Here is an article from this week's economist, which gives a flavour of what is to come.
Ailing Celtic tiger?
Ireland's property market is already showing signs of a correction. Estate agents report prices down in some areas by around 10% this year, and shares in companies with property market exposure have also experienced falls. But is a contraction a welcome correction in a bloated market? Or could the property market spiral downwards, harming the broader economy via a weakened construction sector, lower household spending and rising unemployment? These are serious risks, though the data so far points to a soft landing.
In the decade up to 2006 residential property prices in Ireland rose more rapidly than in any other developed-world economy. Strong demand partly explains this: incomes, employment and population all grew robustly. The increase in the supply of new housing was just as phenomenal—the number of annual housing completions in 2006 was almost five times that in the early 1990s, which compares with static output in the euro area and the UK. Considering both these dynamics, prices in recent years have almost certainly overshot, as suggested by a range of indicators. For example, the house price/average income ratio is the second-highest in the OECD. Also, as household indebtedness has grown more rapidly than in any other OECD country over the past decade, to approach 100% of national income, and as most mortgage debt remains subject to variable interest rates, sensitivity to changes in rates is greater than in any other OECD country. And rental yields are at historical lows. Despite this, large numbers of investors continued to enter the market in 2006 in anticipation of further price increases.
With a cooling of the market already underway, Ireland may be about to experience a period of sharply falling property prices. With the cost of mortgage servicing rising, many borrowers are beginning to be squeezed. The many investors who have bought to let are particularly vulnerable. Those who have borrowed to finance property purchases are experiencing a widening in the gap between rents and mortgage repayments. For many investors, the logic of holding property is now based entirely on the assumption of future capital gain. If this assumption changes, there is likely to be a rush to offload properties. This is the most likely trigger for a correction in the Irish property market and an almost certain, sharper than forecast slowdown in the wider economy