Monday 21 May 2018

Housing crisis: Ireland at risk of creating new property bubble - OECD

Price rises are now back in double-digit territory for the first time in two years. Stock image
Price rises are now back in double-digit territory for the first time in two years. Stock image
Colm Kelpie

Colm Kelpie

The sharp rise in Irish property prices and lending raises concerns that another bubble may be forming, a global economic think-tank has warned.

Just hours after the State's budgetary watchdog highlighted the risk of high public debt and the State's "minimal" adherence to strict EU spending rules, the Organisation for Economic Co-operation and Development (OECD) said the economy is "overheating".

Property prices are rising rapidly on the back of strong growth and a shortage of housing, while property-related loans are increasing fast, the think-tank said.

The Central Bank may have to step in with measures to restrict lending, it added.

"The economy is overheating somewhat," the Paris-based body said in its latest check-up of the economy.

Property prices are rising on the back of strong economic growth and a shortage of housing, it said, while property- related loans are increasing fast, contributing significantly to the recent recovery in total new lending.

Central Bank Governor Philip Lane Photo: Niall Carson/PA
Central Bank Governor Philip Lane Photo: Niall Carson/PA

Activity in the construction sector is gaining momentum, but supply is expected to fall short of demand for some time.

"The sharp rise in prices and lending raises concerns that another bubble may be forming, and the authorities should stand ready to tighten prudential regulations if needed."

Data released yesterday shows that property prices are continuing to surge fastest in the west of the country, with a rise of 17.8pc.

Charlie Weston: Brendan the Builder is busy, but he's not building houses, only office blocks and extensions

In Dublin, the overall market was up 8.2pc in the year to April, but house prices were only up 2.3pc in the Fingal area compared to 11.1pc in the city and 9pc in south Dublin.

Central Bank Governor Philip Lane has already rejected suggestions the economy is on the brink of another property bubble.

He has said the bank's mortgage lending rules will act as a drag on prices.

But the OECD warns that property prices could rise even more strongly than projected, which - while good for the recovery of the construction industry - could "sow the seeds of another bubble".

Domestic experts have warned of the potential for the economy to overheat, but have said this isn't happening yet.

The State's budgetary watchdog, the Fiscal Advisory Council, said this week that overheating could occur, however, if demand for new housing led to very strong construction-led growth.

"The risk of overheating occurring in coming years is significant," the watchdog said in its latest assessment of the economy, published yesterday.

The OECD also said that notwithstanding the economic recovery, the banking system is still damaged. Borrowing conditions remain tight for small and medium-sized businesses, and total new lending is outpaced by debt repayments.

Bad loans still account for 17pc of total outstanding loans, despite improvement in recent years, and a majority of them are property-related. The thinktank said that given the level of uncertainty facing the economy, the Government should set out strategies aimed at making the economy more resilient against shocks.

"The economic prospects are surrounded by more uncertainty than usual, including notably the final outcome of Brexit negotiations," the OECD assessment said.

"The high level of private indebtedness leaves Ireland sensitive to a rise in interest rates. Conversely, property prices might rise more strongly than projected, which would support construction activity in the near term, but might also sow the seeds of another bubble. A rise in protectionism would be particularly detrimental to the Irish economy, given its high degree of openness."

A spokesperson for incoming Taoiseach Leo Varadkar last night described the Fiscal Advisory Council and OECD reports as "valuable".

"It's important to note the Department of Finance view that price rises in the property market are due principally to high demand and limited supply, rather than the availability of credit. As house building and supply ramps up, price increases should moderate," he said.

"Separately, the Help-to-Buy Scheme is being reviewed, and the Central Bank is playing an important role in overseeing the mortgage market."

On the issue of debt, the spokesman said the Fiscal Council's view "will be taken into account as part of the need to balance prudent control of finances, with the need to resolve Ireland's significant infrastructure deficit".

"The deficit in itself could prove to be a major barrier to further growth and debt reduction if it's not resolved," he said.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business