Reliance on housing could spell recession, north and south

The housing market in Northern Ireland is clearly extremely bouyant at the moment. Yet as Maria Farrell argues on Crooked Timber, housing markets can grow equity and to a degree private wealth, it cannot drive the economy in the longer term. She reckons that a narrow focus on keeping the housing market in play could make the Fianna Fail/PD government vulnerable in the upcoming election:

The whole country has lost sight of lost sight of the fact that house building and buying are not the keys to economic and financial success, but merely indicators of it. Our economy is distorted, and so are our politics. The establishment generation (those forty and fifty-somethings) have done very well and have the most to lose. Much of our political debate in the last few months has focused on whether and how to reduce stamp duty on house purchases, i.e. how to keep the property boom going by ensuring stamp duty reductions don’t form a simple transfer from buyers to sellers. The real question is; are we fighting an election on spending promises when there won’t be much money left to spend in a year or two? One commentator said recently that this is an election to lose. He may be right.

But as Ciaran (a self confessed Eyore on the issue of economic recessions) points out, this is not simply a matter for the south. Some of Northern Ireland’s boom is a result of a peace dividend in growing equity, but a fair chunk of it comes from investment from the Republic, moving ever northwards because of the competition for land in the Greater Dublin area:

The issue matters very much for Belfast partly because the latest Agreement is being bankrolled from Dublin but more because Belfast and Newry’s housing markets were driven by surplus equity from the south throughout last year. About a 3rd of demand came up the M1 I read somewhere (sorry: I’ve forgotten the source). Hence the doubling of property prices.

My guess is that that ain’t going to continue: there is very little in the way of surplus equity in the south and NI doesn’t have immigration and other drivers for property in the way that Dublin does. Nevertheless, one thing is certain. All those people who think that property is a sure-fired short term bet for profits are in for a difficult period.

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  • Aaron McDaid

    “house building and buying are not the keys to economic and financial success, but merely indicators of it”

    The reverse follows too. If house prices go down a lot, it’ll just mean house prices go down a lot. Some individuals gamblers might not do so well, but that’s their own fault. The economy will be fundamentally fine. It’s funny how people forget that the ideal economy is where all prices are low (relative to earnings).

  • That point doesn’t quite apply to Ireland Aaron. In an economy that’s driven by the construction industry, and the construction industry is itself driven by specific expected returns from properties. Once there’s a reduction in prices then there’ll be an impact on employment, tax receipts etc.

    Moreover, construction is one of the primary industries employing Ireland’s immigrants. If it suffers a slowdown, your sensible potential immigrant will go to Germany or elsewhere instead. And a fall-off in immigrant numbers as footloose Poles head home will itself feed back into demand for housing, especially in the rental sector, further depressing the market.

    As Mick pointed out, I’m the paragon of cheery optimism.

  • IJP


    It’s potentially worse than that, because you would likely have immigrants left in Ireland seeking employment from a decreasing employment pool – when people talk of “them coming over here and taking all their jobs” they know it’s not true, yet…

    However, actually I think the problem applies much more in the North than in the Republic. The North has nothing else beyond high house prices and construction. The Republic now has, broadly, the culture of entrepreneurship, attracting investment, recognizing the value of the private sector etc etc. If one industry (construction) goes, the Republic can probably replace it. Can the North?

  • Aaron McDaid

    You can’t say it’s an economy driven by construction. – i.e. you can’t have an economy where everyone is building houses and offices for everyone else with nobody wanting to occupy any of them. The construction industry is driven by demand from the rest of the economy, e.g. non-construction industries needing office space for example.

    The rest of the economy will do just fine, they’ll just have decided the don’t want to spend as much money on construction as before. Many of those construction workers who can’t find a new job will move to another country. So we’re left with some people, immigrants perhaps, who’ll take a job elsewhere in the economy. But an economically productive adult actually creates more jobs than he/she takes, simply by buying stuff him/herself. It’d make more sense to deport our own kids and pensioners than it would to deport these immigrants.

  • I don’t really think I’m overstating the case here Aaron. Admittedly, as the 2005 Forfas annual report (pdf) said, construction is only one of the drivers for the economy (along with consumer and government spending). But, as a Goodbody Stockbroker report (again, pdf) points out, construction represents 23% of Irish economic output. The EU average is 12%.

    So I think my claim stands.

    Where my (not entirely expert) reading differs from that of Goodbody’s, is on prospects for the industry. Goodbody predicted (in October last anyway) that the sector would see growth elsewhere as growth derived from house building falls. I think that both consumer confidence is enmeshed with the housing bubble in a dangerous way. Second, I think that the construction industry is also exposed because the builders very often own the houses that either they won’t be able to sell or that they will only sell at a much lower margin than was predicted when they invested in the project.

    I hope I’m wrong on this, but I think that skating on high speed doesn’t mean you’re not on thin ice…

  • If one industry (construction) goes, the Republic can probably replace it.

    IJP, that’s most likely true. Moreover, construction isn’t like mining in the North of England. So, I’m not suggesting the Republic will return to the situation we were in during the 80s. But if a major component in growth falters, things will not be at all rosy for a while.

    Oh, and it strikes me while I’m typing: I wonder? Is it more difficult for countries like Ireland to recover from recessions because lots of consumption heads on the boat to England the second there’s a recession? I wonder.

  • Aaron McDaid

    I suppose 23% is indeed a very big number. I had thought it would only be something like 10%. A contraction in building could well lead to a lot of unemployed people.

    I still the rest of my argument stands up, essentially that construction cannot be seen as a driver for the economy. Construction is driven by the economy, not the other way around. Ireland’s ability to make stuff we and the world wants to buy won’t be affected by a house price crash. At worst, those that gambled on house prices will be less inclined or able to buy tat like big cars and shoes. So all in all, I really won’t mind 🙂

  • Aaron, I agree that in normal circumstances construction would be driven by the economy and not the other way around. I also agree to the extent that construction in Ireland is – as it is in the UK – in large part driven by the public purse.

    But the problem with a speculative bubble, which is certainly what the Irish property market is, is that normal rules don’t hold. We know the property market is a bubble because rents don’t pay for mortgages. The only reason people are investing in property (apart from quaint reasons like ‘to live in them’) is because they expect a return on their investment when they sell. Same goes for builders. As such, you can easily get a situation where, while in terms of perceptions construction is based on expectations about future economic behaviour, it is actually driving current economic behaviour.