AUSTIN HUGHES: SUPER-ECONOMIST
Apr 14th, 2010 by Conor McCabe
Austin Hughes is still being asked for his analysis by the Irish Times.
Here are some gems from a debate Austin Hughes got into with Morgan Kelly on 8 October 2007. It was one of those ‘Head 2 Head’ opinion pieces the Times loves so well, and it was entitled “Are We Heading For a Property Crash?”
Austin said no, we were not heading for a property crash.
This is why.
This is his evidence.
Enjoy
We live in a world where every reversal seems to threaten a major calamity. But not every shower beings with it a flood. Not every cough threatens a fatal ailment. Not every sporting defeat spells catastrophe for the nation. In spite of headlines and hysterics, life usually goes on. Although this is a testing time for the housing market, the risks of a collapse shouldn’t be exaggerated.
The main reason why a house collapse is unlikely is that the key driver of the current slowdown - a sequence of interest rate increases every two or three months since December 2005 - now appears to be at an end. Although the European Central Bank may continue to threaten further increases, falling US interest rates, record highs for the Euro against a faltering dollar and weaker business sentiment in continental Europe combine forcefully to argue that the next substantive ECB policy change is more likely to be downwards rather than upwards. Before long, interest rate changes should support rather than soften Irish house prices.
Another reason why Irish house prices should not collapse is a surprisingly sharp and speedy response by builders to softer sales. A substantial drop in housing starts means that the bulk of the current correction in the housing market is likely to occur through weaker activity levels rather than markedly lower prices. If house building falls to around 65,000 units next year [2008], it will keep Irish house prices roughly 10 per cent higher than would have been the case if building remained at last year’s levels.It is sometimes suggested that, even if building is curtailed, the market still faces a problem of too much supply. Without doubt, there are mismatches in terms of locations and/or type of accommodation that make for excess supply in some areas. In the near term, this will keep prices soft. However, double-digit rent increases suggest that underlying demand for accommodation remains strong and supply is not excessive. Indeed, compared to most European countries, Ireland’s housing stock is low relative to our population.
While alarmist noises are often made about the number of “empty” houses, last month’s IMF report on Ireland shows the proportion of unoccupied dwellings here is slightly below the EU average. A surge in spending power that made ownership of holiday homes and accommodation for children at college almost commonplace is one element in this rise in so-called “empty” homes.
The scale of house price increases Ireland has seen may make some readers nervous. However, the Irish economy has undergone a transformation that is extreme in many ways. If it seems crazy now that new house prices are now 50 times higher than they were in 1970, it is even more astonishing that the money value of activity in the Irish economy is more than 70 times greater.
Increased prosperity has naturally translated into more expensive property. A surge in population in the past decade associated with a virtual doubling of employment, a halving of borrowing costs and dramatic gains in after-tax incomes have contributed forcefully to higher house prices. The unique transformation experienced by the Irish economy also means that many simple cross-country comparisons of house price changes can be dangerously misleading.
The slowdown is sharper than I expected. Softer house prices owe a great deal to higher interest rates. However, the fiasco surrounding stamp duties and some doom-laden predictions have also had a significant impact. As a result, these is a strong case for confidence-enhancing measures in the upcoming budget, not to avoid a normal correction in the market, but to prevent unnecessarily nervous conditions persisting through early 2008.
On average, Irish house prices are now around 2 per cent below the levels of a year ago. It is sometimes suggested that a definition of a downturn is when someone else loses their job, whereas a depression is when you lose yours. In the case of the Irish housing market, the personal experience of some would-be sellers may now be approaching what they would describe as a “collapse” , but across the market as a whole, the softening is more limited.
The broad slowdown we have seen is, in general, a healthy correction, and in the next few months, softer prices could well persist. However, with better news on borrowing costs, a sensible budget, lower levels of building and a resilient Irish economy, I would be confident that a house price collapse will be avoided. Indeed, a modestly improving trend in house prices in a more stable market should become evident during 2008. (Irish Times, 8 October 2007, p.14)
Oh no, the economy’s fucked.
I’ve just been reading the CSO’s retail survey, and while the volume of sales is up in certain sectors, the actual value of those sales is down. People are buying cheap stuff, and more of it, but nowhere near enough to add any growth to the economy. There is less and less money circulating in this economy, and that trend is continuing.
I’m mighty suspicious of the following:
“Furthermore, two-thirds of businesses interviewed have reduced pay levels in recent years, with an average pay cut of 13 per cent imposed on staff.”
Interviewed - eh? Hmmmm.
I’d say it was a nice find the above, but it’s not really. It’s a hurl the fucking mouse, pardon my french, at the wall sort of a find. And the keyboard after it.
These guys got it wrong, constantly got it wrong, and their opinion still matters.
So much for meritocracy.
Is there a private company in the country that though in profit is not, at the very least using the recession to imposing a pay freeze? They’d be mad not too. But we also know that they are cutting pay in lower wage positions while rewarding management with ‘incentive’ based bonuses.
Conor, while I understand your concern over verification and the ‘testing of analysis’, many of our economists have transcended such obsessions and have embraced the true post-modernist spirit. House prices going up or down? Hey, it’s all relative. Relative to what? Relative to our self-constructed and self-vindicated relativeness. Normal tests don’t operate in this la la land. Better to treat such predictions not as analysis but rather as a strange semiotics. The ‘communication’ involved does not signify content, but rather the communicator - as long as they are being asked to write commentaries, they are by definition ‘experts’.
Joking aside (and please keep up this series of ‘what did you say in the past and why should we care what you say now’), your point re: retail sales is well-taken. While its hard to read from gross figures (you have to go into the sub-sector detail), we can see that for long periods up to December last year, using the excl.mortor sales indicators, value was being cut to protect volume (though both were going down). In December and January volume was sluggish but value went up - which suggests that retailers took advantage of people’s desire to buy things at this time of year (not necessarily a bad thing - as I said, value was being cut at a faster rate than volume for considerable periods). However, in February we returned to value cuts to protect volume. This is a far cry from the ‘turn the corner’ brigade. While annual decline is lessening, that’s all its doing - but from some commentary, you’d think there were real gains. But, hey, value, volume - it’s all relative dude.
It’s true. In terms of circulation the economy is still shrinking. The latest figures show that, yet all the talk is of increased volume. It’s a bit like saying that although our bus ran out of fuel 50 miles before we got home because we couldn’t afford to buy more petrol, at least we had more passengers paying less sitting in the bus than before. So we’re failing to get people where they want to go, but at least we’re failing with less money and more people than before.
I suppose the CSO would see as a victory the sinking of the Titanic if more people had actually stayed on the ship. Yeah, sure the boat sank, but look at the volume of victims.