Housing bubble spectre raised

by Mackenzie McCarty09 Apr 2013

An analysis of the shattered Irish housing market published yesterday by unconventional economist, Leith van Onselen, has raised some serious concerns for our own.

As described by Australian Broker last week, Ireland’s house values have collapsed by 50% on average since 2007 and the nation’s home owners have collectively lost the equivalent of A$315bn.

Back in 2004, notes van Onselen, Ireland was the ‘toast of Europe’ and one of the world’s wealthiest countries, boasting GDP levels per capita around 20% above the European average.

“How things change…As is the case with most housing bubbles, Ireland’s was fuelled by a number of inter-related drivers: easy credit, speculation, and unresponsive supply.”

In 2007, the Ireland Central Bank’s Financial Stability Report showed lending restrictions on investor mortgages were relaxed in the mid-1990’s, enabling property investors to borrow at the same interest rate and on similar terms to owner-occupiers.

“This led to a surge of property investment...In fact, as at June 2007, investors accounted for around 27% of total mortgage lending – slightly below Australian investor’s share of 32% of total mortgage lending.”

The sharp rise in property prices prior to the GFC forced rental yields down as well.

“As such, recent investors were cash flow negative in 2007, since rental income nowhere near covered holding costs. So just as property investors in Australia rely predominantly on capital appreciation to make ends meet, investors in Ireland were doing the same.”

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  • by Wozza 9/04/2013 10:27:31 AM

    Another prophet of doom. We have already gone through an adjustment since 2007/8 and I believe the Australian economy is in much better shape than Ireland. Our banking system is regulated and lends responsibly so why would anyone compare the Irish system with ours?

  • by James 9/04/2013 11:18:51 AM

    Wozza. Why do you label this guy a "prophet of doom" for simply outlining some downside risks, namely that the mining boom could unwind in a nasty matter. Whether it does or it doesn't is beside the point. But burying your head in the sand and saying that a painful correction is not possible here is delusional.

    Plus, he never said that Australia would replicate Ireland. Rather that there are some simularities that are worth being aware of that, in the worst event, could come back to bite.

  • by NoTimeLikeTheFuture 9/04/2013 11:55:49 AM

    Many of Ireland's characteristics do exist in Australia.

    I believe the Australian market has been successfully propped up by:

    1. SMSF's entering the market
    2. Australia's 888 visa encouraging property investment from Asia, raising prices on new property with flow on to existing properties
    3. Elevated mining incomes and strong employment, with falling interest rates

    A bust would hurt a lot of people but an orderly correction makes sense..