Economist Ann Pettifor, who predicted the crash of 2008, rings alarm bells for the Irish housing market

This Thursday marks the anniversary of the 2008 crash, when Lehman Brothers closed and global financial markets imploded. As financial storm clouds gather again, economists debate whether Ireland is prepared for a recession, the new factors that could trigger a shock and wonder how long a new recession could last.

Anna Pettifor
Director of the Policy Research In Macroeconomics (Prime) group and author who predicted the 2008 financial meltdown in her 2006 book “The Coming First World Debt Crisis”

“The idea that house prices are determined by supply and demand is a childish view of how the market works. The prices of assets in Ireland are very high, because there is a wall of money looking for a safe place. where to land – and the property is considered a safe asset.

“This is what is raising prices in Ireland, not supply and demand. You could cover all of your land in cement and prices will still rise, as long as mainly foreign capital is free to invest in limited Irish assets.

“Liquidity will run out at some point and this will have an impact on house prices. How? Think about how it influenced the United States in 2007. In the movie The great short, the pole dancer suddenly couldn’t pay the 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 take out mortgages, they think everything’s fine. But their mortgage rates are going up.

“Incomes in Ireland are very high for people in the financial and technology sector. But this is not true for others who borrow to buy homes. There comes a point where energy and food inflation absorbs more income and leaves less. for the mortgage. At some point it will happen, when I’m not sure at all, but it will be time to worry. “

Dermot O’Leary
Chief Economist, Goodbody’s

“In many ways, the impending economic downturn is one of the most anticipated in recent history. We know that there are multiple international factors: energy, interest rates, war and high inflation. It is very different from the 2008 crisis, as it resulted in a credit crunch in the banking system.

“Ireland does not have the same problems as in 2007, it is not building enough houses and the banks are well capitalized and financed. But we are more exposed to FDI, particularly in the technology and pharmaceutical sectors.

“Tax revenues are very dependent on a small number of companies in those sectors. This leaves Ireland in a relatively vulnerable position if there are cuts in technology 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, to energy prices.

“But I don’t think it’s comparable to 2008, as credit flows and large cuts in government spending will not be part of it. If there is a very large shock on housing demand, prices could fall. However, with a very large supply. shortages, the declines are highly unlikely to be significant or prolonged ”.

Jim Power
Autonomous economist

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

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

“I also learned that the future cannot be predicted with any degree of certainty, and those of us who try are fools.

“Do I think there will be a repeat of the 2008 incident? After more than a decade of cheap money and artificial liquidity through QE, asset prices across the board look very inflated, especially the stock and real estate markets.

“We are facing rising interest rates; a toxic global geopolitical environment; severe inflation; a central banking system that uses interest rates to address an inflation problem driven primarily by supply-side pressures rather than excessive demand. And the global economic outlook looks highly dangerous.

“I don’t feel the kind of global banking crisis we experienced in 2008 is imminent, but rarely in my professional life have I 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 use the term ‘soft landing’ again.

“Irish residential property prices and rents are at obscene levels. Politicians are unwilling or unable to address the problem. Meanwhile, house prices continue to rise.

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

“Logically, based on rising interest rates and global outlook, home price inflation is expected to moderate in the coming months – and likely to decline over the next couple of years – but the 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 sharper correction. Personally, I would welcome a 30% correction, but I don’t see that happening.”

Constantine Gurdgiev
Associate Professor of Finance, University of Northern Colorado

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

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

“From this point of view, we are currently facing the growing probability that the next global crisis will materialize in 2023-2024.

“The root causes have been going on for several years: Our reliance on debt financing to generate growth has increased many times since the 2008 bank crash. Banks have since been repaired and the next crisis is unlikely to bring them down. But banks are also much less important to the real economy today.

“What matters to Western economies has not been fixed. Our businesses are more dependent than ever on cheap credit. Our growth in labor productivity has fallen off the precipice. Our unemployment levels are kept superficially low and the employment / population ratio is falling below pre-2008 levels, 13 years after the crisis.

“In Ireland, at least 17,000 borrowers before 2008 are still in distress and many others have long-term arrangements that cover the fact that their original loans cannot be repaid.

“Families are facing higher energy costs and skyrocketing inflation. As a society, we are paying a huge share of our income for health, education and housing, basic necessities. To think that our modern economy is somehow a symbol of rude health is illusory.

“Today, a more likely trigger for the crisis will be a monetary policy mistake. While central banks, from the Fed to the ECB, are trying to control inflation, they are raising interest rates and reducing the money supply. These actions are likely to trigger a recession as credit demand runs out and investments plummet.

“But the catalyst for the crisis could also come from financial assets that have enjoyed unprecedented inflation over the past 13 years. A major sell-off in equity markets sustained over time will also squeeze future investment and increase unemployment.

“Unfortunately, just like in 2007-2008, we don’t know the timing of the crisis. It’s also virtually impossible to say how impactful it will be.

“Outside of the relatively more resilient banking and household sectors, the rest of the economy is more indebted in 2022 than in 2007. Government debt is at or near all-time highs. Monetary policies are still too accommodative and corporate balance sheets are in debt. to a greater extent than in early 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 that of 2008, but it doesn’t sound encouraging either. One truth is certain: the consensus economy and the analysts employed in the establishment will not be the ones who will detect an accumulation of risks in the real economy. “

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