Economist who predicted 2008 crash sounds alarm bells for Irish property market

As financial storm clouds gather again, economists talk about whether Ireland is prepared for a downturn, the new factors that could trigger a shock, and ask how long a new recession could last.

Ann Pettifor Director of the Policy Research In Macroeconomics (Prime) group and author who predicted the 2008 financial crash in her 2006 book ‘The Coming First World Debt Crisis’

"The idea that house prices are determined by supply and demand is an infantile view of how the market works. Asset prices in Ireland are very high, because there is a wall of money looking for somewhere safe to land — and property is regarded as a safe asset.

“That’s what is hiking prices in Ireland — not supply and demand. You could cover all your land in concrete and prices will still rise, so long as mainly foreign capital is free to invest in finite Irish assets.

“Liquidity will at some point dry up, and that will have an impact on house prices. How? Think of how it impacted the US in 2007. In the movie The Big Short, the pole dancer suddenly couldn’t pay her mortgage, because in real terms her wages were falling. So it was people like her who brought down the whole financial system.

"That’s the point. People are taking out mortgages, they think everything is fine. But their mortgage rates are rising.

"Incomes in Ireland are very high for people in finance and tech. But that is not true for others who are borrowing to buy houses. There comes a point when energy and food inflation eats up more of their income and leaves less for the mortgage. That’s going to happen at some point — when, I’m not at all sure. But that’ll be the moment to worry.”

Dermot O’Leary Chief economist, Goodbody’s

“In many ways, the coming economic downturn is one of the most predicted in recent history. We know there are multiple international factors — energy, interest rates, war and high inflation. It’s very different to the crisis in 2008, as that involved a credit crunch in the banking system.

“Ireland doesn’t have same problems it had in 2007, it isn’t building enough houses, and banks are well capitalised and funded. But we are more exposed to FDI, particularly in tech and pharma.

"Tax revenues are very dependent on a small number of firms in those sectors. That leaves Ireland in a relatively vulnerable position, if there are cutbacks in tech, or if profitability declines.

“Right now, the risk of a recession is very high — but it is impossible to know how long it will last, as it is intrinsically linked to the war in Ukraine and, by extension, energy prices.

"But I don’t believe it is comparable to 2008, as credit flows and big government spending cuts will not be part of it. If there is a very large shock to property demand, then prices could fall. However, with very large supply shortages, it is highly unlikely that declines will be significant or prolonged.”

Jim Power Self-employed economist

“The lessons I‘ve learned after the 2008 crash are: pay less attention to what the Central Bank says about the banking system; do my own research into bank balance sheets; and devote more time to economic history.

“In hindsight, the mess the banking system was in was pretty obvious, but at the time I was working in financial services and my objectivity was not as it should have been. Now I’m self-employed it is easier to be sceptical.

"I’ve also learned that the future cannot be forecast with any degree of certainty, and those of us who try are fools.

“Do I think there will be a repeat of the 2008 crash? After more than a decade of cheap money and artificial liquidity through QE, asset prices across the board look very bloated, particularly equity markets and property.

"We are facing rising interest rates; a toxic global geo-political environment; serious inflation; a central banking system that is using interest rates to address an inflation problem primarily driven by supply side pressures rather than excessive demand. And the global economic outlook looks highly dangerous.

“I don’t sense the sort of global banking crash we experienced in 2008 is imminent — but I have rarely in my professional life felt so uncertain and nervous about the future.

"As for whether there will be a soft landing in housing, once bitten, twice shy — and I refuse to ever again use the term ‘soft landing’.

“Irish residential property prices and rents are at obscene levels. Policymakers are either unwilling to or incapable of addressing the problem. Meanwhile, house prices continue to rise.

"According to the CSO, the national house price index is now equal to its highest level at the peak of the property boom in April 2007 and Dublin house prices are 8.1pc lower than their February 2007 peak.

“Logically, based on rising interest rates and the global outlook, house price inflation should moderate over the coming months — and probably decline over the next couple of years — but logic is rarely evident in the housing market.

"If prices continue to rise, it will move the market into a very dangerous situation, which could ultimately result in a more sharp correction. Personally, I would welcome a 30pc correction, but I don’t see it happening.”

Constantin Gurdgiev Associate professor of finance, University of Northern Colorado

“The good news is that today’s banks are more resilient to shocks, carry more robust capital buffers and have higher quality loans books.

“The bad news is that no crisis arises from the same causes as the previous one. The next one is most likely already brewing outside our field of vision.

“From this perspective, we are currently facing the rising likelihood of the next global crisis materialising in 2023-2024.

“The underlying causes have been in place for a number of years: our dependence on debt financing for generating growth has risen many times since the 2008 banking collapse. Banks have been repaired since then, and the next crisis is unlikely to take them down. But the banks are also much less important to the real economy today.

“What matters for western economies has not been repaired. Our companies are more dependent than ever on cheap credit. Our labour productivity growth has fallen off the cliff. Our unemployment levels are being kept superficially low and employment-to-population ratios are running below pre-2008 levels, 13 years after the crisis.

"In Ireland, at least 17,000 pre-2008 borrowers are still non-performing and many more are in long-term arrangements that cover up the fact their original loans cannot be repaid.

“Households are facing higher energy costs and sky-high inflation. As a society, we are paying a huge proportion of our income on health, education and shelter — the basic necessities. To think our modern economy is somehow a symbol of rude health is delusional.

“Today, a more likely trigger for the crisis will be a monetary policy error. As central banks – from the Fed to the ECB – are trying to control inflation, they are raising interest rates and cutting back on money supply. These actions are likely to trigger a recession, as demand for credit dries up and investment collapses.

"But the catalyst for the crisis may also be coming from the financial assets that enjoyed unprecedented inflation over the last 13 years. A major sell-off in the equity markets sustained over time will also compress future investment and push up unemployment.

“Unfortunately, just as in 2007-2008, we do not know the timing of the crisis. It is also virtually impossible to tell how impactful it will be.

"Outside the relatively more resilient banking and household sector, the rest of the economy is more leveraged in 2022 than it was in 2007. Government debt is at or near all-time highs. Monetary policies are still far too accommodative, and corporate balance sheets are leveraged more than at the start of 2008. And new debt is less and less capable of generating new growth.

“This may not indicate that the next crisis will be more disruptive than the 2008 one, but it does not sound encouraging either. One truth is certain: consensus economics and establishment-employed analysts are not going to be the ones to spot a build-up of risks in the real economy.”