Economist who predicted 2008 crash sounds alarm for Irish property market

As the financial storm clouds gather again, economists wonder if Ireland is prepared for a downturn, the new factors that could trigger a shock and wonder how long another recession could last .

Ann Pettifor Director of Policy Research In Macroeconomics (Prime) and author who predicted the 2008 financial crash in her 2006 book “The Coming First World Debt Crisis”

“The idea that house prices are determined by supply and demand is a childish view of how the market works. Asset prices in Ireland are very high because there is a wall of money looking for ‘a safe place to land – and the property is considered a sure thing.

“That’s what’s driving prices up in Ireland, not supply and demand. You could cover all your land in concrete and prices will continue to rise, as long as mainly foreign capital is free to invest in finished Irish assets.

“Liquidity will dry up at some point, and that will have an impact on property prices. How? Think about his impact on the United States in 2007. In the film The big court, the pole dancer suddenly couldn’t pay her mortgage, because in real terms her salary was falling. So it was people like her who brought down the whole financial system.

“That’s the point. People take out mortgages, they think everything is fine. But their mortgage rates go up.

“In Ireland incomes are very high for people working in finance and technology. But not for others who borrow to buy homes. There comes a time when energy and food inflation consumes more of their income and leaves less for the mortgage. It’s going to happen at some point, when, I’m not sure at all, but it will be the time to worry.

Dermot O’Leary Chief Economist, Goodbody’s

“In many ways, the coming economic downturn is one of the most predictable in recent history. We know there are multiple international factors — energy, interest rates, war and high inflation. This is very different from the 2008 crisis, as it involved a credit crunch in the banking system.

“Ireland doesn’t have the same problems as in 2007, it’s not building enough houses and the banks are well capitalized and funded. But we are more exposed to FDI, especially in tech and pharma.

“Tax revenues are highly dependent on a small number of companies in these sectors. This leaves Ireland in a relatively vulnerable position, if there are cuts in technology or if profitability declines.

“At the moment, the risk of a recession is very high, but it is impossible to know how long it will last, because it is intrinsically linked to the war in Ukraine and, by extension, to energy prices.

“But I don’t think it’s comparable to 2008, because credit flows and big government spending cuts won’t be part of it. If there’s a really big housing demand shock, prices could fall. However, with very large supply shortages, the declines are very unlikely to be significant or prolonged.

Jim Power Independent economist

“The lessons I learned after the crash of 2008 are: pay less attention to what the Central Bank says about the banking system; do my own research on bank balance sheets; and devote more time to economic history.

“In hindsight, the mess the banking system was in was pretty obvious, but at the time I was working in financial services and my objectivity was not as it should have been. Now that I’m independent, it’s easier to be skeptical.

“I also learned that the future cannot be predicted with certainty, and those of us who try are fools.

“Do I think there will be a repeat of the 2008 crash? After more than a decade of cheap money and artificial liquidity thanks to QE, asset prices look very inflated overall, especially stock markets and real estate.

“We are facing rising interest rates, a toxic global geopolitical environment, severe inflation, a central banking system that uses interest rates to solve an inflation problem primarily driven by pressures from supply rather than excess demand, and the global economic outlook looks highly dangerous.

“I don’t think the type of global banking crash we saw in 2008 is imminent, but rarely have I felt so uncertain and nervous about the future in my professional life.

“As to whether there will be a soft landing in housing, once bitten, twice shy – and I refuse to use the term ‘soft landing’ again.

“Irish residential property prices and rents are at obscene levels. Policy makers are either unwilling or unable to solve the problem. Meanwhile, home prices continue to rise.

“According to the CSO, the National House Price Index is now equal to its highest level at the peak of the housing boom in April 2007 and house prices in Dublin are 8.1% below their February 2007 peak.

“Logically, based on rising interest rates and the global outlook, house price inflation should moderate over the next few months – and likely decline over the next couple of years – but the logic is rarely evident in the housing market.

“If prices continue to rise, it will put the market in a very dangerous position, which could ultimately lead to a more abrupt correction. Personally, I would welcome a 30% correction, but I don’t see it happening. “

Konstantin Gurdgiev Associate Professor of Finance, University of Northern Colorado

“The good news is that banks today are more resilient to shocks, have stronger capital buffers and have higher quality loan portfolios.

“The bad news is that no crisis arises from the same causes as the previous one. The next one is probably already preparing outside our field of vision.

“From this perspective, we currently face the growing likelihood that the next global crisis will materialize in 2023-2024.

“The underlying causes have been in place for a number of years: our reliance on debt financing to generate growth has increased many times since the banking collapse of 2008. Banks have been mended since then, and the next crisis is unlikely to destroy them, but banks are also much less important to the real economy today.

“What matters to Western economies has not been fixed. Our businesses depend more than ever on cheap credit. Our labor productivity growth has fallen off the cliff. Our unemployment levels are kept superficially low and employment-to-population ratios are below pre-2008 levels, 13 years after the crisis.

“In Ireland, at least 17,000 pre-2008 borrowers are still in default and many more are in long-term agreements which conceal the fact that their original loans cannot be repaid.

“Households face higher energy costs and skyrocketing inflation. As a society, we spend a huge proportion of our income on health, education and housing — the basic necessities. To think that our modern economy is somehow a symbol of crude health is delusional.

“Today, a more likely trigger for the crisis will be a mistake in monetary policy. As central banks – from the Fed to the ECB – try to control inflation, they are raising interest rates and reducing mass These actions are likely to trigger a recession, as demand for credit dries up and investment collapses.

“But the catalyst for the crisis may also come from financial assets that have seen unprecedented inflation over the past 13 years. A sustained stock market selloff over time will also squeeze future investment and increase unemployment.

“Unfortunately, just like in 2007-2008, we don’t know the moment of the crisis. It’s also virtually impossible to say how much of an impact it will have.

“Apart from the banking sector and relatively more resilient households, the rest of the economy is more indebted in 2022 than it was in 2007. Public debt is at or near historic highs. Monetary policies are still far too accommodative and corporate balance sheets are more leveraged than at the start of 2008. And new debt is less and less capable of generating new growth.

“It may not indicate that the next crisis will be more disruptive than 2008, but it doesn’t look encouraging either. One truth is certain: consensus economics and analysts employed by the establishment will not be the only ones to spot an accumulation of risk in the real economy.

Penny D. Jackson