Ireland: House construction nose-dives

In 2006 approx 93,000 new houses were built. In 2007 this dropped to 78,000. The prognosis for 2008 is bleak with forecasts generally in the range of 40,000 to 45,000 house completions. The estimate for 2009 is even bleaker with suggestions that figures could drop to 37,000. In 2007, 20,000 construction workers were laid off
Clearly the bubble has burst.

There are a number of reasons for the slow down:

(1) The 2% rise in EU interest rates is a contributory factor.

(2) Uncertainty on the Stamp Duty issue contributed to the instability.

(3) Excessive house price inflation has priced houses out of the reach of many in the middle class.

(4) The Government tax takes is too high.

(5) The 5% general inflation rate has weakened purchasing power.

(6) Up to 200,000 houses remain unsold.

A major reduction in EU interest rates will not be sufficient to return the house building sector to health. Further reductions in VAT and Stamp Duty are required. The 200,000 overhang in unsold houses must be substantially cleared. A further substantial reduction in house prices is required. General inflation must fall substantially.

The implications for Government finances are quite severe. There was an Exchequer surplus of €2.3 billion in 2006. A deficit of €4.9 billion is projected for this year.
Tax receipts for January and February are 684 million lower than for the corresponding period in 2007 . VAT receipts for January and February are 7.3% lower than anticipated whilst Stamp Duty receipts are down 44% on the first two months of 2007. The unemployment hate has risen to 5.2%. A rocky road lies ahead for the economy.

Ireland-Construction Downturn

There is increasing evidence of a downturn in the building industry. House prices are overvalued by about 20% . Some optimists forecast that the moderate fall in house prices would have run its course by early 2008. It is more likely that the correction underway will continue for some time. The spectre of negative equity looms for some.
There are several reasons for the decline in house building:

• The 2% rise in interest rates has impacted strongly on repayments.
• Many builders were over optimistic in their assumptions in relation to future demand. They are now left with unsold houses.
• There has been an unsustainable rise in house price inflation.
• The Government takes 30%-40% of the cost of a new house in tax.
• The Stamp Duty issue has not been resolved.
• Unemployment has begun to rise.

There is a tendency to scapegoat economists -like David McWilliams- who have forecast choppy waters ahead. Some have gone so far as to blame them for the fall in house prices. This is of course nonsensical.

There are indications that on average builders have up to 10 new houses unsold in some parts of Ireland. In 2008 a more conservative approach will be adopted. Forecasts for 2008 vary widely.It is likely that new house starts will drop from 90,000 to 60,000 in 2008. There is a danger that it could drop to 50,000 as builders must first off load large numbers of unsold houses.

The growth rate for the economy will drop to 3.5%-This is the benign scenario. Government cutbacks rising oil prices and a housing crisis could drag the rate down to 1% or less.