Fear that the housing market will collapse is spreading among consumers, who are now holding off on spending their Special Savings Incentive Accounts (SSIAs) amid concerns about the economic outlook, a new report suggests.
One in six consumers expect house prices to fall in 2007, according to the IIB Bank / Economic & Social Research Institute (ESRI) consumer sentiment survey published yesterday. This is four times as many as the number who expected prices to fall this time last year.
The "get rich quick" exuberance in the property market has evaporated, IIB's chief economist, Austin Hughes, said. Consumers expect house prices to increase by 3.5 per cent this year, which would probably be below the rate of general inflation.
SSIA spending plans have become more cautious, with only 4 per cent of SSIA holders saying they will spend some or all of their money on buying an Irish property, down from 8 per cent in the same survey last year.
The number of SSIA holders who intend to make "a major consumer purchase" has also dropped, the survey found, while the number who say they will use the money to pay off existing debts has only slightly increased, which Mr Hughes said proved that consumers had not gone on a credit-fuelled spending spree last year in the anticipation that their SSIAs were soon to mature.
More than 50 per cent of the 1.1 million SSIAs are due to mature at the end of April, the last month for them to do so, but one-quarter of SSIA holders are still undecided about what they will do with their matured funds.
"People have re-assessed their outlook for the economy as a whole. In a champagne economy, you get champagne spending. In a rainy day economy, people are more cautious," said Mr Hughes.
Around 8,000 borrowers are facing "a painful squeeze" as a result of rising interest rates, while a further 40,000-50,000 are being forced to make adjustments to their spending, he said.
The survey of more than 1,000 people, conducted in January, showed consumers are gloomier than economists about the forecast for interest rates, ESRI economist David Duffy said. Around one-third of consumers expect the European Central Bank (ECB) to increase rates by more than 1 per cent this year. Analysts and consumers underestimated the extent of the increases in 2006.
Most analysts expect the ECB to only make one further quarter point rate hike in 2007. The ECB has indicated this will take place in June, but softening economic sentiment in the US could prompt it to leave its base rate at its current level of 3.75 per cent.
