Will luck of the Irish rub off?

Rock-Bottom interest rates, sizzling house prices, and a plethora of pundits predicting a crash. Sounds familiar, but this is not Britain in 2004: it's Ireland, circa 1998.

The Celtic Tiger, as Ireland's rampant economy became known in the late 1990s, roared its way into the eurozone with double-digit GDP growth, and house-price inflation running at an annual rate of well above 20 per cent. With eurozone interest rates set low to prop up other - and much slower-growing - members of the single currency, many experts fretted that the Irish housing market boom would soon turn to bust.

What happened next could give some hope to nervous homeowners in the UK. Ireland managed to pull off a 'soft landing', something Bank of England governor Mervyn King would dearly like to achieve in the UK. But many economists believe such a landing here is as likely as finding a leprechaun at the bottom of the garden.

By the end of 2001, Irish house price growth had fallen to a gentle 2 per cent a year, without slipping into reverse. Since then, prices have smoothly recovered, with growth this year back at around 10 per cent.

'We did have a period of double-digit increases in house prices, on the back of a boom in the economy overall,' says Michael Crowley, an economist at Bank of Ireland. 'There were all kinds of theories saying, "it's all going to come crashing down to earth," but it didn't happen.'

With the UK's housing market already on the turn, and all the major indicators pointing down, the debate about whether the market is headed for a hard or a soft landing is becoming fierce. The Bank of England admitted for the first time last week that prices 'may fall modestly for a period', although the Governor played down the similarities with the last housing market boom, which resulted in the painful crash and the repossessions of the early 1990s.

So the case of Ireland, where a crash was once seen as inevitable, is interesting. Before homeowners in Gravesend take too much comfort from their cousins in Galway, though, it's worth pointing out a couple of differences.

First, the Irish slowdown was nudged into action by the decline in global demand that followed the dotcom crash. Ireland, a small, open economy with close trading links to the US and a proliferation of hi-tech firms, was hit hard by the downturn. Suddenly, the European Central Bank's interest rates, which were slashed from 4.75 per cent at the end of 2000, to 3.25 per cent by the end of 2001, looked more appropriate. Instead of pumping extra air into an already unsustainable bubble, they helped to cushion the effects of the downturn, and create the fabled soft landing.

'It may well have turned into a crash, except that a global downturn intervened, and the Irish economy slowed down significantly,' Crowley says.

Second, the housebuilding industry in Ireland responded in impressive fashion to the surge in property prices through the late 1990s. A third of the country's total housing stock - 420,000 homes - has been built since 1992. This year, Ireland is expected to build close to 80,000 houses, for a population of 4 million people. That compares to just under 183,000 completions last year in the UK, which has a population of 60 million (and where house prices were rising much faster). The Bank of Ireland has described this building boom as a 'golden age of construction'.

'We have had a supply response: house builders crowded in and began to increase the supply,' says Crowley.

Ed Stansfield, property economist at Capital Economics, which has long pre dicted a 20 per cent drop in UK house prices, says there are a number of one-off factors which make the Irish experience special: in particular, the fact that their boom partly resulted from strong inward migration as a result of the extraordinary transformation in the economy throughout the 1990s.

'We would argue very strongly that Ireland's a different situation. They've had rapid population growth; there's a lot of different circumstances,' he says.

In the UK, it is much more difficult to find one-off reasons for the consistent surge in house prices since the mid-1990s: so the luck of the Irish may be out of the reach of Mervyn King.

At the outset, hard landings and soft landings are difficult to tell apart. King was keen to emphasise last week that he thinks a gentle descent back to earth is still the most likely scenario - but many experts think he may not be so lucky.

'We can't even see the runway yet,' says Danny Gabay, of Fathom Consulting. 'We've had two months of flat or falling house prices following seven years of rising prices, so I think there's a long way to go before we can declare victory.'