Bertie Ahern has accused economists of talking down the economy and of being merchants of doom. But house prices are falling, and signs for the economy don’t look good. The Socialist examines some of the key issues facing the economy in the South.
There are conflicting views on what is happening with the housing market. Some economists are arguing that the sharp drop in the number of houses being built will eventually stop the decline in house prices and create a new property boom even as early as the new year.
This is very doubtful. The housing boom ended mainly because houses became too expensive. In the last ten years house prices rose on average by 350%. It was inevitable at a certain point that house prices would rise beyond the reach of most working class people, and the end of the boom was in sight when the banks started giving out 100% mortgages over 35 to 40 year repayment periods. Rising interest rates also added to people’s difficulties as they have increased mortgage repayments by up to €6,000 per year for some owners of an averaged priced house.
So far house prices are down 3% this year and in Dublin by over 4%. There is a massive amount of unoccupied properties, upwards of 300,000. Property speculators have backed off from the market for fear of being left with apartments and houses that they can’t sell and that are falling in value.
Some economists have even predicted that in a worse case scenario, the fall in house prices may continue for the next six or seven years.
The housing boom has played a major part in the boom over the last number of years. Increasing house prices have allowed home-owners to take out new loans and this has fuelled consumer spending. Employment has risen dramatically in the construction industry, attracting immigrant workers who in turn have become new consumers. It has also created up to 60,000 new jobs in the finance sector and many thousands of other jobs in the sectors supplying the construction industry. But job losses are now inevitable in all of these areas as house building declines.
The loss of 1,800 jobs in construction in August may seem small but that doesn’t give the real picture. House starts in August were down a massive 58% on the same time last year. A certain delay is inevitable but it’s only a matter of time before the impact on jobs is felt.
The drop in house construction is serious and is taking place very quickly. Two in every three of the 280,000 jobs in construction are in house building. Davy Stockbrokers expect house building to be down by about 20% this year and 40% next year on the 2006 level. Construction unemployment and its impact are likely to be significant with some talking of up to 30,000 job losses or even as high as 100,000 when you include all of the areas linked to the construction industry. The capital projects in the National Development Plan and an increase in the DIY market will not provide enough employment for all of these construction workers as some claim.
According to the CSO, 78% of all job lost so far in construction have been migrant workers. The decline in construction could also lead to a fall in immigration and even some migrant workers moving to other countries to find work. This will also impact on the economy as the ESRI estimate that migrant workers add 2.5 – 3% to GNP. To put it more simply, less migrants means less consumers which in turn means less jobs.
Already there have been warnings that tax revenues for this year will be significantly less than in 2006. Brian Cowen had a €2.5 billion surplus in taxes to play around with in his budget last December, now it is being predicted he may have a €1 billion deficit. 17% of tax revenues comes from construction, a decline in this industry will directly impact on government spending which may fall by 6% in this years budget. Serious cuts in government spending could be on the cards in the next few years.
The European Central Bank postponed its planned interest rate rise for September not because of the problems facing homeowners in Ireland but because of the fear of a recession in the US. The latest information indicates that the property crisis there is worsening and is a catalyst in bringing down the overall economy. Rather than being temporary, the problems in property market here are likely to continue and in turn can be deepened by unemployment, as the economy shifts from high growth to instability and lower growth. However when the US goes into recession, more than anything else this will provoke an economic crisis here as well.
