Lesson from Ireland: Property prices 'could take decades to recover'

The Irish Independent ran an interesting article in which the new Irish central bank deputy governor warns that property prices could take decades to recover from the crash.  A crash in prices that is still continuing.

HOUSE prices could take decades to recover from the property crash even if the economy starts growing, the new deputy governor of the Central Bank of Ireland [Stefan Gerlach] warned last night. 

Experience of booms and property crashes in other countries suggests the economic recovery here will be slow and house prices will recover even more slowly, he said....

Ireland had experienced a classic housing boom. House prices here rose faster and higher than in most booms but the bubble and burst is in line with the pattern seen around the world, he said. 

It means experience elsewhere could help forecast the likely trend here over the coming years. 

That evidence points to a sustained housing slump, because credit-fuelled booms are typically worse than other booms and the combination of a housing crash with a financial crisis is especially damaging....

A study comparing crashes in the likes of Scandinavia with in Korea and Japan revealed the wider economy recovered much faster than house prices, where they recovered at all. 

"While gross domestic product (GDP) in this sample of countries typically recovered to peak levels within six years, the recovery in house prices was much delayed," Mr Gerlach said.
"In the Nordic countries, the recovery took between 10 and 22 years, house prices have not yet recovered to pre-crisis levels in Korea and continue to decline in Japan. 

What is fascinating about this study is it shows that countries that pursue the Swedish model for handling a bank solvency led financial crisis see house prices recover to pre-crisis levels.

Under the Swedish model, banks are required to recognize the losses on the excesses in the financial system.  As a result, real estate prices decline initially to a market clearing level and then increase with growth in the economy.

Countries that pursue the Japanese model for handling a bank solvency led financial crisis don't see house prices recover to pre-crisis levels.  In fact, in Japan they continue to decline.

"Overall these graphs suggest that economic activity in Ireland will recover only gradually, and that it may take a long time before house prices return to their level in 2007," he said.