National University of Ireland, Galway 1

Surviving the Housing Slump:

Prospects for the Irish Economy Alan Ahearne

NUI Galway

Presentation to the Fine Gael Parliamentary Party

12 September 2007

National University of Ireland, Galway 2

Rapid catch-up, though gap remains in services sector

GNP per capita Ireland relative to the United States

0

10

20

30

40

50

60

70

80

90

100

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

%

National University of Ireland, Galway 3

House prices dropping…

Nominal house prices (month-to-month % change)

Source: Permanent TSB/ESRI

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jan-

04 Mar

May Ju

lSep Nov

Jan-

05 Mar

May Ju

lSep Nov

Jan-

06 Mar

May Ju

lSep Nov

Jan-

07 Mar

May Ju

l

%

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…following a typical boom-bust pattern

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Measures suggest housing is overvalued by about 20

per cent Rental yield

Source: Own calculations based on CSO and Permanent TSB/ESRI data

0

1

2

3

4

5

6

7

8

9

10%

National University of Ireland, Galway 6

Completions still running at heady pace…

House completions (annual rate)

Source: Department of the Environment, Heritage and Local Government

0

20,000

40,000

60,000

80,000

100,000

120,000

2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2

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…adding to the stock of unsold houses

• Sellers will need to slash prices to shift houses.

• Global credit crisis not positive for housing market.

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Economy will be vulnerable during adjustment

• EMU membership reduces likelihood of an outright crisis…

• …but adjustment could last for a prolonged period.

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Residential investment set to plunge

Housing starts (annual rate, s.a.)

Source: Davy

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

National University of Ireland, Galway 10

Share of GDP (%, 2006)

Personal consumption 47

Government consumption 14

Investment: Residential Other construction Machinery & equipment

1466

Exports 81

Imports -69

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Contribution to GDP growth (%)

Source: Data for 2005 and 2006 from CSO. e: estimates for 2007 from ESRI QEC Summer 2007

2005 2006 2007ePersonal consumption 3.5 2.7 3.7Government consumption

0.6 0.7 0.8

Residential investment

1.8 0.6 -0.7

Other investment 1.3 0.2 1.6Net Exports -1.1 0.6 0.1Memo: GDP 5.9 5.7 4.9

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Personal consumption expected to moderate…

• Slower employment growth.

• Reduced inward migration.

• Deterioration in consumer sentiment.

• Post-SSIA payback.

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Expansionary budgetary policy can partly fill the gap

• Budgetary policy too loose over recent years.

• Now is not the time for a sharp tightening.

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Focus on restoring export-led growth…

• Greater attention to competitiveness required:

– Short-term: Wage growth.

– Medium-term: Services sector and innovation.

National University of Ireland, Galway 15

Competitiveness hurt by high inflation and sluggish

productivity

Real Exchange Rate and Gross Exports

-15

-10

-5

0

5

10

15

-40 -30 -20 -10 0 10 20 30 40

Export Growth

Ch

an

ge

in

Re

al

Ex

ch

an

ge

Ra

te %

Belgium

Germany

Greece

Spain

France

Ireland

Italy

Netherlands

Austria

Portugal

Finland

Cumulative change 1999-2006

Excess over euro area averageEurostat and DG ECFIN

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Global economic environment may turn sour

• US recession a significant risk.

• Dollar likely to drop further.

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Conclusions

• Housing slump will not be short-lived.

• Entering a period of heightened vulnerability.

• Growth slowdown will bring new challenges– Need to build “social bridges”