Expert says house prices set to fall by about 5% this year

House prices will fall by about 5 per cent this calendar year, IIB Bank chief economist Austin Hughes predicted yesterday, writes Colm Keena, Public Affairs Correspondent.

He said the current underlying trend was for a fall of 10-11 per cent, but he expected the trend to ease out later this year.

Delivering his housing market outlook for 2008 to the media yesterday, Mr Hughes said it was his view that the European Central Bank (ECB) would be forced into reducing interest rates as a response to deteriorating economic conditions in the euro zone.

He predicted that a half a per cent cut would occur around the middle of the year "but it is impossible to be more definite because we don't know the extent of the financial problem."

The rate cut could occur sooner, he said.

While the ECB did not want to cut rates, it would be forced to. He pointed to a graph that tracked interest rates and economic growth and said it indicated that the bank did respond to economic growth rates.

Mr Hughes said it was his view that a number of factors could coincide later this year to improve sentiment in the housing market. These would include a rate cut, an improvement in the underlying trend in the fall off in house prices, and a reduction in supply.

He said he expected there would be about 40,000 completions this year, with builders reducing output in response to the drop off in sales.

He said he expected the drop off in completions to "bite during 2008".

If a turnaround did not occur in 2008, then it was possible that completions in 2009 would be only 20,000 to 30,000. This was against an estimated market requirement of about 60,000 new units each year.

Mr Hughes said the slowdown in the housing market had been sharper than he had predicted last year. Job losses would be in the region of 25,000-30,000, he said.

A survey carried out for IIB Bank by the ESRI in the first two weeks of January, involving a sample of some 1,400 people, found that, on average, people believed property prices would fall by 5 per cent this year, and would remain flat for the period to 2012.

Mr Hughes said historically downturns in the US economy were followed quickly by downturns in European economic activity, while there was usually a longer lag between upturns in the US economy and a European response.

He said that in recent times, downturns in the US had lasted an average of eight months.

"While we think confidence in the Irish housing market is unlikely to improve rapidly, a clear turn in the interest rate cycle, a further small easing in house prices in coming months, an improving trend in affordability, a sharp reduction in supply and signs of resilience in the Irish economy suggest that after a challenging start to the year, 2008 could end with the Irish housing market on a steadier footing."