View the article online at http://citywire.co.uk/money/article/a598225
Ireland headed for massive mortgage defaults, economist warns
Falling housing prices and growing unemployment are a recipe for disaster says Irish economist David McWilliams.
Ireland is on track for the biggest mortgage default rates since the Great Depression of the 1930s in the United States, according to Irish economist David McWilliams.
The country was the first eurozone state to enter a recession in September 2008 after it was hit by the financial crisis. Prior to the downturn the economy boomed as the 'Celtic Tiger', although this led to rapid credit expansion and a property bubble.
House prices in the country have fallen 55% since the height of the country’s property boom in 2007, though many people are locked into mortgages.
McWilliams commented: ‘What will happen in Ireland is the following: Ireland will suffer mass mortgage default, the type of which we’ve never seen since 1933 in the United States.
‘If you look at the balance sheet of the average Irish person who got involved in the property market, on one side of the balance sheet they have an asset, called a house which is falling still in value and on the other side they have the debt that they took out to buy that house which is fixed. So if your asset prices are falling and your debt is fixed, your income has to be rising very rapidly for you pay off that debt but that’s not happening in Ireland as incomes are falling.’
Currently 10.2% of borrowers are in arrears, a figure which is expected to increase as unemployment is also on the rise, with 14.5% of the work force out of work.
The comments came at a talk at the Irish Cultural Centre (ICC) in London on Wednesday night. McWilliams along with Morgan Kelly, a professor at University College Dublin, is credited with predicting the rise of the property bubble as early as 2003.
He added that Irish central bankers and politicians are still playing catch up with the reality of the crisis.
‘The balance sheet is broken so let’s cut to the chase. The banks are still in a zombie state, where they open their doors every day but the fact is they are a safety box for Irish deposits. The big fear is a bank run where the Irish middle classes will take all their money out, so if we don’t want these things to happen the central bank has to begin to negotiate on the basis of the reality, not the world as we would like it.
‘Over the last four years every single time a politician says we’re turning the corner or its getting better, the gross domestic product (GDP) figures come out and they’re worse every single time. There have been 14 downwards revisions of GDP figures in five years for each quarter.’
He added that the new wave of emigration has also added to the country’s woes, as 76,300 people left the country last year.
McWilliams continued: ‘When you have a dilemma like this you need either mass debt forgiveness, which is where you control the issue, or mass debt default where you don’t control the issue, but either way people will not pay.
‘Unless we realise what’s happening the economy will seize up more and more, more people will emigrate, the tax base will decrease and the budget deficit will increase, we will miss targets and constantly be on the back foot.’
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