National University of Ireland, Galway1 Surviving the Housing Slump: Prospects for the Irish Economy Alan Ahearne NUI Galway Presentation to the Fine Gael Parliamentary Party 12 September 2007

National University of Ireland, Galway2 Rapid catch-up, though gap remains in services sector

National University of Ireland, Galway3 House prices dropping… Nominal house prices (month-to-month % change) Source: Permanent TSB/ESRI

National University of Ireland, Galway4 …following a typical boom-bust pattern

National University of Ireland, Galway5 Measures suggest housing is overvalued by about 20 per cent Rental yield Source: Own calculations based on CSO and Permanent TSB/ESRI data

National University of Ireland, Galway6 Completions still running at heady pace… House completions (annual rate) Source: Department of the Environment, Heritage and Local Government

National University of Ireland, Galway7 …adding to the stock of unsold houses Sellers will need to slash prices to shift houses. Global credit crisis not positive for housing market.

National University of Ireland, Galway8 Economy will be vulnerable during adjustment EMU membership reduces likelihood of an outright crisis… …but adjustment could last for a prolonged period.

National University of Ireland, Galway9 Residential investment set to plunge Housing starts (annual rate, s.a.) Source: Davy

National University of Ireland, Galway10 Share of GDP (%, 2006) Personal consumption47 Government consumption14 Investment: Residential Other construction Machinery & equipment 14 6 Exports81 Imports-69

National University of Ireland, Galway11 Contribution to GDP growth (%) Source: Data for 2005 and 2006 from CSO. e: estimates for 2007 from ESRI QEC Summer e Personal consumption Government consumption Residential investment Other investment Net Exports Memo: GDP

National University of Ireland, Galway12 Personal consumption expected to moderate… Slower employment growth. Reduced inward migration. Deterioration in consumer sentiment. Post-SSIA payback.

National University of Ireland, Galway13 Expansionary budgetary policy can partly fill the gap Budgetary policy too loose over recent years. Now is not the time for a sharp tightening.

National University of Ireland, Galway14 Focus on restoring export-led growth… Greater attention to competitiveness required: –Short-term: Wage growth. –Medium-term: Services sector and innovation.

National University of Ireland, Galway15 Competitiveness hurt by high inflation and sluggish productivity

National University of Ireland, Galway16 Global economic environment may turn sour US recession a significant risk. Dollar likely to drop further.

National University of Ireland, Galway17 Conclusions Housing slump will not be short-lived. Entering a period of heightened vulnerability. Growth slowdown will bring new challenges –Need to build “social bridges”