In July 2008, just as the falls in property prices were beginning to be really felt, this column threw up a chart of what had happened to the property market in Japan. It suggested that we would follow the Japanese path. Up to then, many people felt that the market would stabilise or lose maybe 15pc or, at a stretch, 25pc. The column contended that we would follow Japan exactly and prices would fall by 75pc. It seemed a radical forecast at the time.
Most of the commentary was still in the ‘buy on dips’ mode. This inertia is not surprising, given the long boom. Weaning yourself off a boom is like weaning yourself off any addictive substance — it takes time to change behaviour.
Four years later, we can see that the Irish property market experience is a mirror image of the Japanese experience. But while it looks depressing, it may also suggest that we could see the bottom of price falls in the next year or 18 months.
Look at this new chart. It shows you house prices in Ireland and in Japan. The chart starts at 2005 for Ireland and 1988 for Japan — the year before both markets peaked.
It measures the years from the peak along the bottom axis. You are seeing what has happened since. The blue line is what happened in Japan and the red line tells you what is happening in Ireland.
As you can see, the two lines move in tandem. It also shows that prices in Japan fell for five years continuously and then started to move up again. We can also see that the depth of the price plunges was similar.
For Ireland and the Irish property market, it tells us that if we continue to mirror the Japanese experience, the property market should hit the bottom in year six, which would be the end of this year or some time in the early months of 2013. It also indicates that the prices of property will rise again as activity rises but it won’t reach 2006 levels. In Japan, prices have still not reached their 1989 peak.
So does this give reasons to be cheerful for the hundreds of thousands of people in negative equity? Is there light at the end of the tunnel? Or are there other factors in Ireland, which were not present in Japan, which will cause prices to keep falling or prevent the Irish property market from recovering even if prices plateau? For example, will prices bounce along the bottom for years?
The major similarity between Japan and Ireland is that both countries are suffering from an “anxiety” recession. When you have so much debt and prices are falling, each fall in price makes the debt burden bigger because it increases the negative equity. People are anxious.
This is why, in order to get the economy going again, there needs to be an injection of demand. In short, someone has to start buying stuff.
But who is that going to be?
It won’t be the Irish (or, in the case of Japan, the Japanese consumer), because they have too much debt and don’t want to borrow any more.
Will it be the foreign demand? For Japan in the 1990s, America — its largest market — was growing rapidly in the Clinton years. This increased the demand for Japanese exports significantly.
However, the Japanese government knew that this would not be sufficient to keep the economy from contracting more and more, so the Japanese government borrowed and spent as much as possible.
This policy had two effects. The first was that it drove the national debt of Japan through the roof. The second was that it minimised the fall in Japanese economic activity and in so doing helped the property market to stabilise.
This is not possible in Ireland. We will be cutting government expenditure for the next few years and we also know now that the world economy is grinding to a halt.
Well, the whole world economy isn’t stagnant but growth in the bits of the world economy that we export to — such as the US, the UK and the EU — are anaemic at best.
SO what are the prospects for the Irish property market? Will there be a recovery like in Japan, where prices did start rising reasonably rapidly six years after the peak?
It seems that this is unlikely, for the reasons explained, but what is likely, given the way people are feeling in the country, is that prices will overshoot even the Japanese bottom, because in times of extreme pessimism that is what markets do.
The quicker we get there, the better. The recent move that limits the amount that can be paid to landlords from housing social welfare recipients is a step in the right direction.
This, together with the announcement some time this year of a property tax, will hasten the massive downward move in house prices that was seen in the last few months of last year. In the final three months of the 2011, the average asking price fell by almost 8pc.
According to Ronan Lyons — one of the few worth reading on the property market — this “means that the fall in asking prices over the course of 2011 was 18pc, as large as any of the falls seen in 2008, 2009 or 2010”.
When the falls this year are out of the way, yields will have risen substantially and money will come back into the market at much lower prices and much higher yields than have been seen for many, many years.
Whether this activity pushes up prices remains to be seen, but this time next year, the property market might just show signs of activity at prices that have some relation to our straitened reality. This is not a forecast, just a hunch.