Monday 27 January 2020

Soaring rents and legal costs a 'warning signal' for the economy, says watchdog

Picture posed. Thinkstock
Picture posed. Thinkstock

Colm Kelpie

The dramatic increase in residential rents is a cause of major concern and will potentially have significant adverse consequences for the entire economy, the State's competitiveness watchdog has warned.

Soaring rents and rising house prices will inevitably fuel calls for higher wages, increase the cost of living and ultimately damage competitiveness, the National Competitiveness Council said. Office rents are also rising rapidly thanks to low supply, it added, saying that the availability and cost of property is once again threatening sustained cost competitiveness.

The watchdog warned that the State must not allow the property sector to undermine the economic recovery, and threaten its sustainability.

The report also highlights the high costs associated with a range of business services including postal and courier, legal services and market research.

Legal costs were 8pc higher in the third quarter of last year, compared with 2012. Legal costs were repeatedly raised by the Troika during the bailout years.

Services associated with the construction sector, the report pointed out, including architecture and engineering, have also been significant drivers of the service price increases over the past 12 months.

The NCC said these prices rises should serve as a "warning signal" that cost pressures are emerging in a myriad of sectors.

Professor Peter Clinch, NCC chairman, said the Brexit-induced weakening of sterling and the higher price of oil shows just how vulnerable Irish firms are to international shocks.

"There is a role for both the public and private sectors alike to manage proactively the controllable portion of their respective cost bases, drive efficiency and continue to take action to address unnecessarily high costs," Prof Clinch said.

"Such actions will ensure that improvements in relative cost competitiveness are more sustainable, leaving Ireland better positioned to cope with external shocks."

The NCC reports to the Taoiseach and the Government through the Jobs Minister on key competitiveness issues facing the economy.

NCC members include the heads of the IDA and Enterprise Ireland, the head of Ibec, Dairygold, as well as trade union Impact and academics.

The report also pointed out that the supply and demand for credit has improved significantly since the height of the crisis. But the cost remains high. Ireland had the fourth highest SME interest rates on bank overdrafts and credit lines in the euro area in 2016 In January, the interest rate in Ireland on loans of up to and including €1m was almost double the euro area average rate for new business.

The NCC also noted that according to the World Bank, in international terms Ireland remains an expensive location in which to enforce a business contract and is the sixth most expensive in the OECD. It also takes significant time (650 days) to enforce a contract in Ireland (compared with an OECD average of 551 days

"Ireland remains an expensive location in which to do business, with a price profile which can be described as "high cost, rising slowly". Irish consumer prices remain over 22pc above the European Union average," the report stated.

Education costs have increased at a faster rate than overall consumer costs since 2012 and over the corresponding period prices have risen by 18.5pc. Health insurance, which accounts for about 60pc of the insurance category, has increased. In March the rate of Irish health insurance inflation at 8.3pc was well above the euro area (2.3pc) and UK (3.8pc), the NCC said.

On housing the NCC said that taking account of the higher cost of mortgage finance in Ireland, only two cities - Amsterdam and London - had a higher 'mortgage affordability index' in 2015.

"The affordability of housing is a key component of competitiveness. It impacts upon the attractiveness of Ireland as a location for investment and directly impacts on enterprise costs," it said. The NCC also said childcare costs are the second-highest in the OECD for couples and the highest in the OECD for lone parents.

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