Although the housing situation in the US is still at an extremely fragile stage, there are some signs that the market is in recovery. The National Homebuilders Association index has indicated increasing steps towards stability in the last few months. However, are the events of the US sub prime situation going to repeat itself on the Irish market? What now for Irish Property in the face of recent uncertainty? Simon Barry, Economist with Ulster Bank, explains in part 2 of our US housing Special.

There are certainly some parallels between the Irish and US markets, where in a similar vein to the US, one of the primary reasons our property market boomed was the effects of low interest rates. However, these were raised by the Central Bank from 2% back to 4% soon after, so the effect of cheap mortgages was, in effect, more limited than in the States, says Barry.

However, this is where the similarities end as sub prime lending is a niche rather than a mainstream mortgage product here, with lending conducted with mostly ‘prime’ borrowers and it is estimated less than €1 billion of sub-prime loans currently exist in Ireland.

The subsequent slowdown took place here for a number of reasons which were for the most part, wholly unrelated to sub prime lending. These included a drop in affordability due to rising interest rates, the uncertainty over stamp duty reforms and house prices growing at a rate of 15% year on year, a rate which was clearly untenable over the long term.

In an environment where rates are low house prices will run robustly, so it was natural that when rates jump, the market will dampen somewhat, Barry says.

It was thus the combination of these forces that affected the property slowdown and exerted downward pressure, with prices falling 6% in 2007. However, let’s take this in context, he argues.

“In the 10 years to 2006 prices escalated by a whopping 290%, so a 6% fall is somewhat insignificant and it had to normalise at some point”, he says.

“A correction in the housing market was thus inevitable and also desirable to bring the market back to a sustainable rate of growth and in line with the economic cycle. Indeed, it also appears further inroads will have to be made both here and in the US to correct their respective markets further”.

Weaker construction output will always place a drag on the Irish economy; the forecasted 45,000 completions for this year is half the 2006 figure and the general rule of thumb is every 10,000 less completions knocks 1% off economy growth.

However, the same rule of thumb does not apply to the US economy. “What many fail to realise is outside of housing, the American economy is holding up quite well, despite the fact their housing market has been in recession for a full two years”, he says.

Their economy isn’t as dependant on construction figures as here in Ireland, and GDP minus residential construction in the US, indicates growth of 3.5% for Q4 of 2007, which is higher than any other growth rate in the past 10 years.

Their economy has a strong services sector, which employs 84% of workers. GDP including the housing correction was 2.5%, which suggests a more stable economy than widely believed.

However, there is no direct implications for the Irish property market from US weakness as of yet, Barry contends, since the weakness in the housing market hasn’t yet spilled over to the rest of the US economy. If growth continues to weaken and spill over does happen, the ECB will inevitable drop its rates, according to Barry.

Recent events however, on the US stock markets have reverberated onto the Irish economy, with further jobs losses in American-owned financial companies expected if uncertainty continues.