4.  Domestic Organisations

This chapter is based on analysis of all the relevant publications from the Central Bank and Financial Regulator, as well as the ESRI (Economic and Social Research Institute) from the period. It argues that both organisations completely missed the possible extent of a residential construction collapse because they assumed that in a worst-case scenario housing output would fall to what they estimated to be its underlying demand level (representing an output fall of between 35 and 48%). This level would still have been a multiple of the pre-boom level or of the per capita levels seen in other countries. There was no evidence given to suggest that this is what happens after a construction boom ends, and the OECD’s study examined in the previous chapter suggests that residential construction investment tends to revert towards its pre-boom levels once the peak has passed. When residential construction output fell by over 90% the analysts in these organisations were thus caught completely off-guard. It rendered their worst-case predictions for financial stability, the fiscal position and employment totally inadequate. The failure to anticipate the extent of the construction collapse should therefore be considered decisive. Like the IMF, with whom it conducted stress tests in 2006, the Central Bank did consider the implications of major House price falls for the Irish banking system. Again, however, it paid minimal attention to the enormous exposure to a small number of key developers. Analysts therefore mistakenly concluded that the banks would withstand a market collapse.