Slowdown Starts to Bite

A Neighbor of mine put his house on the market towards the end of last year. It's a prestigious beachfront property on the coast in north Co. Dublin, close to yacht clubs, golf clubs, good schools and the Dart commuter train into the city.

A few years ago, if you put a property like this on the market you would be overrun with buyers waving checkbooks and offering millions. Now, it's very different. My friend's house is still languishing on the market, and to make matters worse another house further along the beach is now also up for sale and there's no sign of a buyer there either.

In desperation, my friend knocked about one-sixth off the asking price of his house earlier this year. But so far it has not tempted anyone.

With all the confusion there had been here about changes in property sales tax (or stamp duty) now out of the way after the election, it had been expected that buyers who had been holding back would be returning strongly to the market, especially for the kind of trophy home being sold by my friend.

But it has not happened. The property market at all levels here is not just flat now, it is definitely slipping, with prices now falling for the third month in a row.

This is serious for the construction industry here, of course, although most people accept that a cooling off in the overheated Irish property market was inevitable. A return to a steady annual price increase of a few percentage points, more or less in line with inflation, had been anticipated. A soft landing rather than a sudden price crash was what people had been expecting.

That soft landing is now starting to give some sellers like my friend a touch of vertigo. They're standing at the edge of a cliff and there's no sign of the bottom below.

It's not something that can be explained by uncertainty over stamp duty or anything else. It's a lack of confidence in the market and it seems to be affecting all levels.

The property market here, like everywhere else, is a useful signpost to economic confidence in general. In Ireland it's a particularly sensitive indicator, given our national obsession with owning our own homes and investing our savings in bricks and mortar rather than stocks and shares.

Once we are confident that the property outlook is good, we will buy anything with a roof on it. But if we feel that the economy is going off and prices could fall, we won't buy a beautiful house on a beach even if the price has been cut to a bargain level.

So last week's figures showing that house prices had fallen for the third month in a row are the best evidence so far of what is going on here, better than the opinions of a row of economists and experts.

Like it or not, the slowdown here is starting to bite. The number of people out of work here surged by 3,600 last month, bringing the total to 163,400, which at 4.6% is the highest figure in four years. The fall off in the housing market is directly to blame for much of this since the number of new houses being built has slowed dramatically.

But it's not just construction jobs that are being lost. Our failure to stay competitive in the international market is now costing us jobs every month in manufacturing.

And the situation is getting worse with inflation hitting 5% in recent months. Ireland's competitiveness is taking a hammering.

The more optimistic economists here are still saying that the jump in the jobless total is down to the building industry and that the rest of the economy is still doing well. In some sectors there is even a shortage of workers, they claim.

But most people just don't believe this. It seems to be just a few exceptions that are proving the rule, as far as they are concerned. The feeling out there at the moment is not good.

Mind you, some people here are finding it hard to accept the evidence before their own eyes. We have become so used to the ongoing boom, albeit at a less frenetic pace, that it's hard to believe the good times may at last be coming to an end.

There is simply no doubt that the Irish economy is going to be much weaker in the years ahead. And much of that is due to declining confidence, most visible in the property market and in lower personal spending.

Instead of spending their SSIA (special savings accounts) money that had a government bonus attached and had matured after five years in perfect time to get Taoiseach (Prime Minister) Bertie Ahern back into office, many people here used the windfall to lower their mortgages or pay off other debt. What they did not do was go on a consumer spending spree, because they are concerned about the rainy days that may lie ahead.

The property market has been extraordinary, with an incredible 90,000 homes finished last year and office blocks and roads being built all over the place. House prices had been rising at an average 12% a year.

Now as things start to change one of the gloomiest economists here has analyzed property booms and busts in different countries over the past 40 years and compared what he found to the Irish situation. He says that a persistent Irish property slide could knock up to 60% off the real (after inflation) price of houses here over the next 10 years.

There is no reason to assume that this must happen, but it's not impossible either as the economy continues to slow down. Economic growth is down from 6.4% recorded in the year to March this year to what is likely to be less than 4% in the year ahead.

And it's not just the effect on individual workers that will hurt. Less activity will mean that the huge flood of tax revenues enjoyed by the government over the past three years, making it possible to spend so much on services and welfare of various kinds will start to calm down to more normal levels.

The Department of Finance is still saying that this year's budget will be on target, but there is unlikely to be the annual overshoot in taxes we have come to expect, a bonanza that meant the government was always awash with money.

Even so, it's not all doom and gloom. Foreign investment was still growing last year and exports are still doing well. And even if certain sectors of manufacturing are being squeezed out by lower wages and costs elsewhere in the world, our services and financial sectors are doing well.

What is facing the government here now is a test of economic management. The budget next December is not going to be a pleasant experience.

Public spending, including wages for state workers of all kinds, will have to match the new reality. So the huge increases in public sector pay cannot continue into the future.

The rate of increase in welfare payments will also have to be moderated. Fortunately for the government, there is a kind of expectation among the public that bad news is on the way.

So there is an acceptance that belts will have to be tightened just a notch to preserve our prosperity into the future.

And with a bit of luck my friend will find a buyer for his house, even if it means knocking a bit more off the price. From now on, it's a buyers' market.