Is This The End Or The Beginning ?

[THE SAGE]

Just read that Guardian article thoroughly:

Inflation in Ireland is running at 5%!!!!!!!!!!!!!!

They have NEGATIVE real interest rates of over -3%!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

                 

No WONDER there is a bubble in Irish house prices!

<{POST_SNAPBACK}>

Good call zz

I knew Irish prices were even higher than ours but I hadn't

thought of the havoc negative interest rates would create.

What do you think will be the outcome of this situation and what steps

should be taken to address it?

[zzg113]

What do you think will be the outcome of this situation

I think we have to look at the fundamentals of the situation in Ireland. Ireland as a country currently has a population almost one QUARTER the size of the population of London, on a land area FIVE times the size!

Population of Ireland as of July 2004: 4 million. http://www.cia.gov/cia/publications/factbook/geos/ei.html

Land area: 70,000 sq km.

Population of London: 14 million http://en.wikipedia.org/wiki/London#Population

Land Area: 16,043 sq km.

The justification for high house prices just isn't there. If it looks like a bubble, smells like a bubble, and acts like a bubble, then it it probably is a bubble, and Ireland exhibits all the signs. I defer to the definition of a bubble as defined by Joseph Stiglitz, the Nobel prize-winning economist:

In discussing a possible bubble, the authors subscribe to a standard economic definition as stated by Nobelist Joseph Stiglitz: a bubble exists if prices are high today because investors believe future selling prices will be higher, even though fundamental factors do not justify the prices.

As to what the outcome will be, it all hinges on A ) whether Ireland withdraw from the European single currency and B ) if not, how they will tackle their raging inflation problem (without the tool of being able to set interest rates, this will be like trying to put out a fire with one hand tied behind your back).

IMO they should withdraw from the euro but it is politically impossible, because of the huge grants they receive from the EU and the likely high interest rates that would be necessary following the re-establishment of a sovereign currency. In that case the only tool with which the Irish government can fight inflation is fiscal policy (ie tax increases). By taxing investment property and promising to spend it on transport infrastructure they can be seen both to be helping FTB's and resolving a problem (ie poor transport network) which is growing increasingly critical. This should take some heat out of the Irish housing market and weed out some of the more marginal players.

[THE SAGE]

I think we have to look at the fundamentals of the situation in Ireland. Ireland as a  country currently has a population almost one QUARTER the size of the population of London, on a land area FIVE times the size!

Population of Ireland as of July 2004: 4 million. http://www.cia.gov/cia/publications/factbook/geos/ei.html

Land area: 70,000 sq km.

Population of London: 14 million http://en.wikipedia.org/wiki/London#Population

Land Area: 16,043 sq km.

The justification for high house prices just isn't there. If it looks like a bubble, smells like a bubble, and acts like a bubble, then it it probably is a bubble, and Ireland exhibits all the signs. I defer to the definition of a bubble as defined by Joseph Stiglitz, the Nobel prize-winning economist:

As to what the outcome will be, it all hinges on A ) whether Ireland withdraw from the European single currency and B ) if not, how they will tackle their raging inflation problem (without the tool of being able to set interest rates, this will be like trying to put out a fire with one hand tied behind your back).

IMO they should withdraw from the euro but it is politically impossible, because of the huge grants they receive from the EU and the likely high interest rates that would be necessary following the re-establishment of a sovereign currency. In that case the only tool with which the Irish government can fight inflation  is fiscal policy (ie tax increases). By taxing investment property and promising to spend it on transport infrastructure they can be seen both to be helping FTB's and resolving a problem (ie poor transport network) which is growing increasingly critical. This should take some heat out of the Irish housing market and weed out some of the more marginal players.

<{POST_SNAPBACK}>

Thanks zz that's food for thought.

My sister lives in Eire with her husband and bought in 1998 and

even then prices were high compared to UK at that time.

I think withdrawal from single currency would be a disaster for exactly the reasons you state so without interest rates as a tool they will have no option

but to use tax raising measures to fight inflation.