An analysis of the shattered Irish housing market published Tuesday by unconventional economist Leith van Onselen has raised serious concerns for Australia.
Ireland’s house values have collapsed by 50%, on average, since 2007 and the island nation’s home owners have collectively lost the equivalent of A$315bn.
Van Onselen notes that in 2004, Ireland was the ‘toast of Europe’, a country with a GDP per capita roughly 20% above the European average.
“How things change… As is the case with most housing bubbles, Ireland’s was fuelled by a number of inter-related drivers: easy credit, speculation, and unresponsive supply.”
In 2007, the Ireland Central Bank’s Financial Stability Report showed lending restrictions on investor mortgages were relaxed in the mid-1990’s, enabling property investors to borrow at the same interest rate and on similar terms to owner-occupiers.
“This led to a surge of property investment... In fact, as at June 2007, investors accounted for around 27% of total mortgage lending – slightly below Australian investor’s share of 32% of total mortgage lending.”
The sharp rise in property prices prior to the GFC forced rental yields down as well.
“As such, recent investors were cash flow negative in 2007, since rental income nowhere near covered holding costs. So just as property investors in Australia rely predominantly on capital appreciation to make ends meet, investors in Ireland were doing the same.”
The Irish planning system also contributed to the bubble, he argues, by creating a system of supply that was unresponsive to market demand. Governments granted planning permits ‘too late’, resulting in the building of large numbers of standardised, small, poor-quality homes in satellite locations far from city centres – something van Onselen believes is currently happing in certain parts of Australia, including Melbourne.
There are, of course, significant differences between the Irish and Australian economies and van Onselen believes that an Australian housing bubble, while certainly possible, wouldn’t likely be as dramatic as the Irish one.
“There are some pretty big differences. Ireland’s exchange rate and monetary policy is set by the ECB, while Australia has control over its own economy.”
Ireland also doesn’t have Australia’s mining sector, but van Onselen warns that, if we were to experience a mining bust, ‘that could be our catalyst’.
“There certainly are a lot of similarities, but I don’t think we’d have nearly as big a bust as Ireland; we’ll have a similar, less drastic fate.
“The risk for Australia is it basically hinges on the mining boom. If we had a big, big drop-off in mining, we could have a pretty big drastic adjustment. But it’s hard to say what the price adjustment would be if that happened. I couldn’t see Australia being anywhere near 50% [reduction in home values] but 20% could be possible.”
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