The collapse of the global speculative bubble

The global economy is entering the second and probably terminal deflationary phase that follows the bursting of any financial bubble. As with all financial bubbles, the final resting place is always somewhere below the initial starting point. This point will vary from country to country, depending on when the bubble started, and how steep the upward speculative curve.

A reasonable indicator can be found by examining house prices, especially when measured as a multiple of average wages. In Ireland's case, the first significant bubble phase was between 1975 and 1981, when average house prices rose by over 300 percent (from around £12000 to £42,000). The second bubble phase ran from 1987 to 1991, during which house prices rose from £49,000 to £67,000, and the third (and most reckless phase) ran from 1994 to 2007, when prices rose from £71,000 to £332,000.

Currently (Q4 2010) the average price is around £185,000, representing a fall of about 45 percent from the bubble peak.

Where will average house prices end up? Estimates vary. Global financial bubble analyst Nicole Foss, who has recently completed a speaker-tour of Europe (including four venues in Ireland) spoke of an ultimate fall in prices of 70-90 percent from peak bubble price. We would expect to see average house prices fall to about £150,000 by the end of 2011, and under £125,000 by the end of 2012. The cost of building a new house (typically a significantly higher figure) is largely irrelevant as Ireland has a surplus housing stock sufficient to meet demand for at least another decade.

Additionally, the days of 100 or 110 percent mortgages are over and mortgage providers are now almost pathologically against leading money. Job security is but a distant memory and Ireland is facing into the spectre of bankruptcy and sovereign debt default.