CENTRAL BANK governor John Hurley has said house prices are returning to realistic levels, dismissing the findings of an International Monetary Fund (IMF) report that indicated Irish property may still be 30 per cent overvalued, writes Jamie Smythin Brdo, Slovenia
The Irish economy is also delivering "a solid performance" despite the bank's downward revision of its 2008 forecasts for gross national product growth to 1.9 per cent on Friday, Mr Hurley told The Irish Timesas he attended an EU meeting at the weekend. "Growth of that level in the context of what is happening internationally and the adjustment to the Irish property market, which is a good thing, is a very credible performance, a solid performance on growth," he said.
"We expect to see some increase in unemployment but we will still be below the EU average. And we have a debt to gross domestic product ratio which is the second-lowest in the EU, the lowest after Luxembourg."
Mr Hurley, who will attend a European Central Bank monetary policy meeting on Thursday, which decides euro zone interest rates, said the financial market turmoil is affecting economic growth.
"This is going to take some time before this works through. We have seen the developments in the US, developments in relation to the subprime market continue. There is clearly an effect on growth in the EU and some impact on growth worldwide.
"What is good is that it has had only a moderate effect on European growth to date, although the risks are clearly to the downside," he said at the informal meeting in Brdo, Slovenia, of EU finance ministers and central bank governors, which discussed the ongoing market crisis.
Asked to respond to a new study by the IMF, which showed Irish property prices were up to 30 per cent higher than the financial fundamentals justified, Mr Hurley said that recent price falls, when coupled with inflation, had reduced them to realistic levels.
"You may recall that, in the middle of 2006, I said that the Irish property prices were not at that time being supported by fundamentals," he said. "If you look at what has happened in the last year you see a reduction of 8 or 9 per cent. With inflation, that's 14 per cent. I think a very, very good part of that gap has been closed . . . Stable prices or low nominal prices will complete that over the next year . . . I believe there are good fundamentals in the housing market and the rental market is a good monitor of that."
Mr Hurley said the Irish banking system was robust and its "shock absorption capacity" had not been unduly affected by turmoil in international markets. "The capitalisation of the Irish banks and the profitability of the Irish banks is strong, the loan book is strong and the liquidity arrangements are good," he said.
Mr Hurley dismissed the concerns of some commentators who have pointed out that Irish banks are charged the highest rate in the euro zone for so-called credit default swaps, which is a type of insurance that banks take out to guarantee they can repay money borrowed from other financial institutions.
"The default swap situation has been affected generally around the world and, second, the market for default swaps is not a very liquid one - there are far more buyers than sellers in relation to credit default swaps, so all of that would have to be taken into account," said Mr Hurley.
He added that he believed Irish financial institutions were robust.