Economics: Property prices in Ireland and the UK may be cooling, but that probably bodes well for the future

On Wednesday an Air France Airbus with 297 passengers and 12 crew crash-landed at Toronto airport. No one was killed, but it might have been a close run thing with one commentator using the phrase "Air France, Air Chance" to comment on the state of safety at the airline.

The most dangerous and nerve-racking part of any flight is usually the landing. So it is with housing markets. Latest housing statistics from the ESRI and Permanent TSB show average house prices have grown by 2.5 per cent in the year to July.

The housing market has also cooled in the UK, where the Bank of England has engineered a safe landing. Indeed the market may have cooled too much for the Bank's liking. Concerned by the impact of house price weakness on consumption, it yesterday cut interest rates by 25 basis points. But the overall impression coming from the UK is of a housing market being steered into a safe berth by steady policy.

The UK market closely resembles our own in several ways. The first, mainly cultural, difference relates to the importance attached to home ownership. An Englishman's home is his castle and as far as attachment to land, bricks and mortar is concerned, the ghost of Bull McCabe still haunts the Irish psyche.

Continentals prefer to live in apartments, at least during the early years of their life. And stronger tenancy rights means that it is - believe it or not - possible to live, marry, reproduce, retire and die without ever having owned property. Neither does the state of non-property ownership confer a social status somewhere between leprosy and criminality. For those who do purchase a property, the greater preponderance of apartments combines with good spatial planning and transport facilities to present this a quite affordable option. For these reasons house purchase is not the obsession in most continental countries that it is here.

These differences might be regarded as "structural" and are worthy of some analysis. The uphill struggle faced by younger housing entrants has implications for demographics and for our economy. Delayed house purchase is a likely contributor to increasingly later ages for marriage, while housing costs contribute to upward wage pressure.

And there are unavoidable quality of life issues. Long commutes erode leisure time while forced migration to outlying areas disrupt important family and community relationships that have social value, even if these cannot be calculated on a balance sheet. But in return for a promise to return to these issues in depth later, permit me to focus for now on the more immediate issue of stability.

The stability of housing is a particular issue in Ireland. This relates to two other differences between the housing market here and in most of the euro zone. The first is that our housing market is a bigger driver of growth in consumption, and the economy in general. The second relates to our preference for variable rate mortgages.

We share these attributes with the UK but have an obvious difference in that the Bank of England can exploit these characteristics by using monetary policy decisions as a lever for stability in the economy as a whole. By contrast the state of our housing market holds about the same priority in driving the monetary policy of the European Central Bank, which sets our interest rates, as the level of rainfall in Brazil.

Compared with the UK, there is less that policy-makers here can do to stabilise the housing market. But there are mistakes that, provided a spirit of prudence and foresight prevails, can be avoided by the private sector. The recent speculation about 120 per cent mortgages has drawn attention to the significant role played in credit expansion in our economy. The Central Bank has warned us about strong growth in personal lending. The Government has said that present levels of debt are appropriate for a young population investing in its future. Both are right. Present levels of debt are just about right. But the rates of growth in lending - well over 20 per cent - are not. The recent introduction of 100 per cent mortgages by First Active has put pressure on other banks to follow suit. They may do so without severe consequences. The critical issue is that we break through the 100 per cent boundary at a critical time in our housing market and economy.

Another open question relates to the impact that SSIAs will have on the housing market. Although individually small relative to property prices, the average account when released into the economy may generate enough leverage to give prices another upward push next year. This would happen just as the ECB is likely to be increasing interest rates.

Recent data from the Central Statistics Office suggest that the housing market is beginning to dominate growth here. And recent Exchequer returns from the Department of Finance suggest that housing and construction activity is a major factor driving the growth in government tax revenues. The macroeconomic and fiscal - not to mention the political - implications of instability in the housing market would be unpleasant.

For this reason, the recent moderation of Irish house price growth - in spite of continued low interest rates - should be welcomed by all. Last year the IMF estimated Irish house prices were overvalued by 20 per cent, while the ECB included Ireland in a list of countries it felt were susceptible to falls in house prices, including Spain, the United Kingdom and the Netherlands.

The Irish property market is probably overvalued, but only slightly so. And to the extent that this is true, the needed correction is not a price fall, but simply a moderation of growth to single digit figures. That is precisely what is happening. Those advocating 120 per cent mortgages say that we are all adult enough to take our own risks. Perhaps. But in an interconnected economy we suffer from the mistakes of others, as well as from our own.

As with plane crashes, housing market crashes can occur at the very final stages of landing. A smooth landing appears to be in prospect for our own housing market. But don't unfasten your seat belt just yet.