Economics: The housing market "is an area of particular concern" for the Irish Central Bank especially in relation to house prices which are still rising at a double digit annual rate, writes Dan McLaughlin.

The Bank returned to this theme in its recent "Quarterly Bulletin" although in cold print its musings on the subject hardly constitute a "warning of house price collapse" as some headlines screamed - the text notes that there "may be overvaluation present" and that a continued rise in house prices "could be followed by quite a disruptive adjustment as prices revert to their fundamental values".

The evident caveats are understandable in that determining what constitutes "fundamental value" for any asset - be it property or equities - is hardly clear-cut and disagreements on the issue are what ultimately makes a market.

Yet the voices warning of a sharp fall in Irish house prices have grown in number and volume of late, with many drawing comparisons between property prices today and stock market values in the late 1990's, with the corollary that a "bubble" exists in housing, which must burst at some stage, propelling prices to much lower levels.

The housing market has some unique features, however, which makes it difficult for nominal prices to fall for a sustained period. To illustrate the point I have re-examined the experience of the UK housing market in the early 1990's which is often put forward as an example of a "housing crash" and therefore a glimpse of what could happen in Ireland.

In 1988, the average UK house cost £49,355 having risen by 36 per cent over the previous two years. The Bank of England began to raise interest rates mid-year and within 15 months the base rate rose from 7.5 per cent to 15 pe rcent, where it remained for another year. By late 1992, rates were again down at 7.5 per cent and falling, because the economy went into recession from mid-1990, which resulted in unemployment rising from 5 per cent to 10 per cent over the following two years. So the housing market was hit by a severe interest rate shock followed by a substantial unemployment shock, but even so it is difficult to see the evidence of a crash from the trend in house prices at the time.

The average house price in 1990 was £59,785 (9 per cent higher than the previous year) and prices rose again in 1991, by 4.5 per cent to £62,455. Prices did fall in 1992, by around 2 per cent to £61,366, but had resumed their upward trend the following year with an average house costing £62,333.

The decline in 1992 was larger in London, it has to be said, but the fall there was only 10 per cent using annual averages, which begs the question as to why that episode looms so large as a traumatic period.

The answer is that transactions did fall sharply, for over 500,000 a quarter in 1988 to 280,000 a quarter in 1992, and repossessions rose, although this had more to do with loan to value ratios in excess of 100 per cent and rising unemployment than house price falls.

The example illustrates a few general points about housing and why it differs from equity markets.

In the first place, the latter turnover three or four times a year while annual housing turnover usually amounts to around 5 per cent of the market.

Incidentally, this also explains why surveys of house prices sometimes give different results - unlike shares, a specific house is only likely to change hands once a decade so house price indices are measuring different houses each time.

Secondly, it is possible to "short" the equity market, (i.e. borrow stock and sell it with a view to buying it back at a cheaper price) which is impossible in housing.

Third, panic or forced selling is likely to be limited in housing, as homeowners are more likely to delay moving house in a weak market.

Fourth, although some home owners are tempted to cash in on a boom by selling, as one might with a good performing stock, the majority stay put as it is, after all, their home.

Fifth, Irish housing supply has proven to be much more responsive to demand and price than most other European countries - just as supply can rise sharply in a boom, developers may postpone building houses if they fear a period of weak demand.

The conclusion is that house prices are "sticky" downward in nominal terms, as illustrated by the fact that prices in Ireland have only fallen one year in the last 30 and that by 1.5 per cent (in 1987).

House prices have fallen more often in "real terms" (i.e. they rise at a slower pace than consumer prices) but I doubt if that would cause much concern.