Wednesday, January 14, 2009

The Irish Dr. Doom... or Just an Exaggerating Economist?

Professor Roubini has nothing on Professor Morgan Kelly from the University College Dublin. Back in February 2007, Prof. Kelly predicted:

The expected fall in average real house prices is in the range 40 to 60 per cent, over a period of around 8 years. Such a fall would return the ratio of house prices to rents to its level at the start of the decade.
By January 2008, Professor Kelly felt this 50% decline was overly optimistic:
Writing in this newspaper a year ago, I suggested that, in the light of past property booms abroad, Irish house prices were at risk of falls of around 50 per cent in real terms. At the time I imagined, again based on what had happened elsewhere, that selling prices would stabilise at their peak values for a year or two, and then fall slowly by a few per cent a year for up to a decade.

My forecast has turned out to be wildly optimistic.
And now? According to the Irish Times (bold mine):
Ireland will see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.

In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.

An 80% decline in nominal terms would be extreme (it would bring home values back to levels seen in 1993), but Professor Kelly's 80% decline in real terms means home prices will drop to a level not seen since.... well I can't find data going back that far, if it even exists.


  1. I think you have real and nominal falls confused. The real fall is inflation adjusted. Nominal fall doesn't include adjustment for inflation. So an example of a 50% nominal fall is to fall from 100K to 50K. An example of a 50% real fall over a period of time with 20% inflation is a fall from 100K to 60K.

  2. Disinflation is leading to deflation in Ireland at the moment. Although camps are split on where inflation is heading mid to long term, if deflation was to get a hold then a real fall would be "more" than a nominal fall.

    In any event, Kelly's predictions are based on empirical studies of app 40 previous crashes around the world. Given the worsening global situation (Ireland was always already facing disaster) he is revising his predictions to the downside. He is used to being derided; he is also used to being right.

  3. Anonymous-

    "An example of a 50% real fall over a period of time with 20% inflation is a fall from 100K to 60K."

    I understand how to compare going forward (as you detail above), but comparing the fall to historical "real" prices is done in the manner I describe, no?

  4. maybe he also expects a very high inflation, so if inflation is 10%, real prices arent that low...

    And don´t forget, after an overshooting comes an undershooting.

  5. I have great respect for Mr Kelly. He is educated and knows what he is talking about. He will not get any thanks from some people in this country, because it sounds to much like honesty. I just wish everyone in this country was as honest. Thank you Mr Kelly. When are we actualy going to see reductions in house prices because all I see is the same old auctioneers with the same property, year after year and they have not changed their prices in any way. They are still hundreds of thousands over priced. The Government and the banks are trying to get poor first time buyers to enter the property market at the minute with this new advertising campaign, offering all sorts of nonsence to lure them like lambs to the slaughter, to tie themselves down to a monster of a mortgage for a house that is roughly €200,000 to €300,000 overvalued. I hope they see through what is happening and waight for another ten years before they decide to buy, poor things.