Wednesday, 24 April 2013

Housing problems - lessons from Ireland (1)

Today's OCR review from the RBNZ repeated the Bank's concerns about frothy housing markets in some part of the country. You may well wonder whether the Bank's worries are justified. After all, New Zealand hasn't had the huge booms and busts that have occurred in recent years in residential property markets overseas, and maybe you're of the view that they can't happen here, or that, if they did, it wouldn't be the end of the world.

Just by way of a consciousness-raiser, here's what happened in another small island economy, Ireland.

Irish house prices, 2005-12
The graph, from Ireland's statistics agency the CSO, shows that prices peaked in late 2007 (and an earlier, unofficial, house price series showed that prices had roughly trebled in the decade leading to the peak) - and then halved over the next five years. When a serious house price boom  turns into a serious house price bust, you're not talking the 5% or 10% or 15% price fall that people could arguably live with. Rather, you're staring at something that can potentially be a serious disaster for personal and national finances.

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