Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

Is the housing crash over?

Journalists are going to have a field day with the latest residential property data from the CSO. Prices in Dublin seem to have risen slightly. Overall, house prices in Dublin are 55% lower than at their peak in early 2007. See the graph below.

CSO.ie

From the report:

In the year to May, residential property prices at a national level, fell by 15.3%. This compares with an annual rate of decline of 16.4% in April and a decline of 12.2% recorded in the twelve months to May 2011.

Residential property prices grew by 0.2% in the month of May. This compares with a decline of 1.1% recorded in April and a decline of 1.2% recorded in May of last year.

It’s important to have more data before before every auctioneer/journalist/commentator in the country starts calling the bottom of the housing market. We’re only talking about a few months of semi-positive growth. I don’t want to take away from the data, but interpreting these data points as proof the worst is over is premature, given the scale of the year on year change (about a 15% drop).

Richard Tol and the ESRI

It has been a strange few days for Richard Tol and the ESRI. A working paper co-written by Richard and released by the ESRI was later withdrawn, because there were “serious concerns about the methodologies used in the paper“.

Brian Lucey has a useful summary of all of the back and forth on his blog, including some rebuttals of Tol’s paper.

This episode is unfortunate for everybody, but in a lot of the coverage it is clear the ‘working paper’ status of the document is not well understood. Working papers exist to facilitate discussion and dissemination of ideas. Just about every working paper series carries a disclaimer to the effect that any paper within the series has not been peer reviewed and so the conclusions are not to be taken as read. In fact a disclaimer is at the bottom of the first page of the working paper.

Really what the author is saying to their colleagues in the scientific community when they publish a working paper is “here, have a look, tell me what you think.” The working paper status of the document is overlooked in several pieces I’ve read, with many calling it an ‘ESRI Report’, as if Tol et al’s working paper was like the Quarterly Reports which do, in fact, speak for the ESRI.

In my opinion, the correct thing to do now is to organize a half day talk around these issues with contributions invited from interested participants. Rather than stifling the debate around what is obviously an important topic, explore the idea properly and with the minimum of drama.

The possible shape of a second bailout for Ireland

..is discussed in the Irish Times today by my UL colleague Donal Donovan. From the piece:

The prospects for Ireland being able to access sufficient market funding by late 2013 do not appear favourable. The lending environment for sovereigns in much of the euro zone has worsened steadily and, barring miracles in Greece and Spain, is unlikely to improve sharply soon. Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.

Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.

Despite encouraging words from European Central Bank president Mario Draghi, it is hard to be confident that the estimated €40 billion needed to cover the budget deficit and repay maturing debt obligations in 2014-2015 can be obtained at affordable market terms.

Spain: Problem Solved.

Ahem.

Spain, Ireland, and austerity.

Spain’s banks are getting a series of loans. Hooray. The rather vague Eurogroup statement on Spain is here. It’s being reported that Spain will require up to 100 billion euro for its banks, which will be added to its national debt. The money will come in tranches, first from the EFSF, and then later from the ESM. There aren’t specific austerity measures attached to this series of loans. People in Ireland are sure to lose their minds over the fact that there won’t be specific conditionality attached to these loans, and the IMF will be ‘observers’ rather than actually part of a Troika of funders. The talk generally is likely to be something like ‘why couldn’t we get such a deal’, and apparently Minister Noonan will be bringing this up with his colleagues at a later date.

It should be noted however that Spain is already enduring a fair bit of austerity, has already signed up to the Fiscal Treaty, and so will have to produce a `programme’ of sorts under its own steam. Spain’s economy is also in pretty rough shape. I made the chart below from FRED to show household debt as a percentage of GDP (left hand axis) and unemployment in Spain (right hand axis), two variables we should be interested in. Clearly with an unemployment rate heading for 25%, a very indebted household sector, and a set of bunched bank balance sheets, the Spaniards have their work cut out for them even without a further programme of adjustment.

A few things to consider:

1. Will treating Spanish banks separately (in some sense) to the sovereign prevent its bond yields from spiking?

2. What will the effect on the EFSF and ESM balance sheets from a large scale Spanish ‘withdrawal’?

3. Will everyone now immediately target Italy (or Belgium) as the next domino to fall?