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11 November 2004 Edition

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What to do if house prices crash

BY ROISIN DE ROSA

Is the bubble of the Celtic Tiger about to burst?

The original spur to the amazing economic growth experienced over the past decade was the influx of Foreign Direct Investment by multinationals, particularly in the IT and chemical industries. But an oft forgotten feature of this extraordinary growth rate was the massive domestic investment, helped by EU funding, in the construction sector, with multi-million euro road infrastructural development and investment in private housing.

The construction sector alone contributes 19% of all government revenue.

Increasingly, though, rumours are mounting among international commentaries on the Irish economy that house prices will have to correct. A fall of at least 20% is anticipated. The dreaded event of negative equity, where the mortgage is for a greater sum than what can be realised through the sale of the house, looms on the horizon.

Set within the indisputable logic of the underlying trend for foreign footloose capital to emigrate to cheaper climes, where workers can readily be got for $100 a month or less, the prospect of negative equity is not easily dismissed.

Negative Equity

If employment starts to contract, and people lose their jobs, they can no longer meet their mortgage payments. Ultimately, they are forced to sell — but without realising the original capital borrowed. They are left without a house and with a debt.

The government's announced intent to sell off its public housing stock is not only repudiating any obligation to address the housing crisis of 48,000 families in need of housing, but it is a policy deliberately intended to remove the safety net against such an eventuality of negative equity.

And house prices are funny things. A fall in the rate of increase in house prices can itself lead to a reversal of the trend for prices to increase at all. House prices, a bit like stock market prices, always have that element of the self-fulfiling prophecy about them. Commentators have the power to 'talk down' the prices, and if prices are expected to fall, then now is the time to sell — and that creates a glut of houses on the market, leading to a fall in prices.

Can we rely on the Dublin Government to take the necessary measures to stave off such a crisis?

Under increasing centralisation of finance and monetary policy in the EU, there are not many weapons at the disposal of government. In joining the Euro, the government has ceded monetary control to Frankfurt. The government no longer has power to independently control the rate of interest through the Central Bank. The rate of interest is set in Frankfurt and by no means determined by the needs of one of the EU's smallest member states.

Government help?

Banking and financial institutions are increasingly independent of government in a world where liberalisation is the catchcry. Will the government have the interest, not to mention the power, to regulate the behaviour of these financial institutions, such as building societies, mortgage companies, banks and other lending institutions, that have wilfully encouraged the growth of personal debt to total, in the 26 Counties, an unimaginable €87 billion?

Will a Dublin Government have the commitment, in the eventuality of negative equity, to say to mortgage companies — "Lump it. You've had your profit on debt provision: now take your losses — carry the inability of people to meet their payments?" Very unlikely. Profit, after all, in our economy is sacrosanct.

Answers are there

But there is an alternative to stave off such a crisis. It is through government investment in local enterprise to develop our own natural resources. Home based companies have been starved of investment under the Celtic Tiger.

Government, blinded by excitement at recent ESRI projections of growth, sticks to its head-in-the-sand philosophy of increasing liberalisation and competition. For the moment, they are ignoring the need for long-term investment in our indigenous economic development, which can provide a stimulus needed to stave off, or at least mitigate, the effects of collapse of the housing and construction sector.

There are many examples of failure to direct investment into channels to spur domestic economic growth that are not subject to the whims and greed of internationally mobile capital. That sort of investment could be used to build a local economy that meets local needs and provides the jobs, which spur small Celtic Tiger pups to set off a cumulative multiplier effect.

Funding policies to promote social economy not only raises the tax take — a virtuous circle — but encourages and empowers local communities to address their own needs.

Instead, successive government policies have meant that impoverished communities have been carried into the dependency economy and the creation of one of the most unequal societies in the so-called Developed World.

The Good Friday Agreement made provision for this in the Common Chapter, which called for joint economic planning, North and South, in sectors of the economy that could be argued to be among the weakest. Governments have not lived up to their commitments — joint economic planning between the two administrations has not been progressed, partly because neither administration is into long term economic planning in the first place. They are happy to leave such things to what they like to call 'the discipline' of the marketplace.

No policy except cuts

Political parties are eager to claim Sinn Féin — which is committed to equality and implementation of human rights to education, health, welfare, and so on — as the 'big spend' party that Harney likes to claim "will ruin the economy".

Under the McCreevy/ Harney partnership, we had the closure of CE schemes; FÁS Social Economy projects were cut off; there was no targeted growth, no take-up of the Common Chapter introduced under the GFA for joint economic planning; there was no development plan for homegrown indigenous companies, or tax allowances; there was the closure of Forfás, the one statutory body dedicated to strategic economic planning for the indigenous industrial development; and there were cutbacks in Teagasc research and development work in agriculture. The list goes on.

This is the economic policy which is no policy, except the refusal to have one: the refusal to recognise conditions and pro-actively plan to reverse their worst effects, still less to exploit the opportunities to development our own indigenous economic potential across the island.


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