October 2006

The Ever Changing Face of the Property Market by Philip Farrell

It’s October, 2006 and there seems to be an air of uncertainty regarding the property market seeping into our thoughts. What is afoot? Are people crying wolf! Is it just hype?

There are a number of approaches to the ever sensitive topic:-

Firstly, the pessimist, he will tell you the bubble is about to burst, the time is nigh, the Celtic Tiger is over.

Secondly, the optimist will tell you this is just a hangover from the traditional August/September holiday season. He will say the Ryder Cup proved a distraction.

Finally, the realist – the one most likely to hit the nail in the head will say for the last 10 years our nation has seen unprecendented growth. The economy is thriving, unemployment is down from a figure of nearly 20%, 15 years ago to 4% of our working population. Interest rates for the last 5 years have been hovering around the 3% mark. Inflation has remained down around the 2 – 3% mark. The Government has improved the infrastructure throughout the country. It has been all ultra positive for a long time, something never previously heard of in our country.

However, it couldn’t last. Property value increases of 20% - 25% year on year could not be sustained. An interesting statistic is that property prices in general have doubled every 10 years in Ireland and the UK. for the last 50 years. If we are to follow this line of thinking we must assume it’s time for things to quieten down.

So what is happening - is the bubble bursting, are there darker days ahead. In my opinion – certainly not. What is happening in the marketplace is positive long term. It was needed. All that it is - is a correction in the marketplace. If we had continued the way we were going, the bubble would have burst, the situation would have been untenable. Put simply, property prices could not have continued to rise at rates they were progressing at.

The market now would seem to be stabilising and we may not see significant property increases in the short to medium term, i.e., over the next year. This is a good thing. We will all benefit from this in the long term.

So why now in October, 2006 is there uncertainty , what has caused the slowdown, there would seem to be 2 new factors at work – 1 internal and 1 external. Firstly, as mentioned above, it was due. The old adage “swings and roundabouts” comes to mind – the market had to change. One of the likely catalysts was always going to be the interest rates situation – something which we have very little control over. Both France and Germany the main dominant economies in the EU seem to be coming out of recessionary times. The ECB have taken measures to keep the ship afloat so to speak. There have been 5 interest rate increases since last December totalling 1.25%. A further one-quarter per cent increase in expected before Christmas. On an average €300,000 mortgage
over 25 years, this means an increase of approx. €250 per month. This means your average punter will have €250 less to spend every month. Basically interest rates have increased approximately 50% in the last year. Incomes would only have benefited to the tune of c 10% in the same period. People are starting to feel the pinch and inevitably it will take a while for people to adjust to this.

To the doom & gloom merchants , the ones who said I told you so! I say lets look at the positives!

To the people whose glass is always half full! I say “steady on” – or we will all suffer!

To the realists! I say you are correct in your prognosis – let’s steady the ship – let market forces dictate. It’s in all our interests going forward.

Philip Farrell is former Chairman of the Real Estate Alliance Group and currently on Board of Directors.

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