The Organization for Economic Co-operation and Development has voiced fears that the economy is overheating. This comes soon after the Fiscal Advisory Council heeded similar warnings earlier this week.
The OECD believes that the banking system is still fragile, with bad loans still accounting for 17% of the total. And while the government has already put into place plenty of macro-prudential policies, there is still the possibility that rapidly rising prices lead to another bubble and burst that would disrupt the delicate economy.
Indicative of OEDC’s stance, overall property market prices are up 8.2% this year at the end of April. The boom in construction is already visible on Dublin’s skyline. Irish Times counted 70 construction cranes towering over Dublin from the 7th floor of their office building on June 1st. This number represents a sizable increase compared to the number Irish Times counted in the first few months of this year. The number of cranes is predicted to continue to rise based on the number of large developments already planned and based on government construction initiatives.
On the opposite side of the argument, Minister of Finance Michael Noonan believes that the increase in construction activity is necessary to meet current demand. He stated: “we need to build a lot more houses for all the young people who are founding families, and for the economic activity which is generating so many jobs.” Mr. Noonan’s position is supported by Central Bank Governor Philip Lane, who is confident that the bank’s tight mortgage lending regulations will act as an anchor to keep prices from inflating. The state is also subject to the EU’s debt to GDP ratio of 60%, a further limit placed on housing growth. Furthermore, the increase in properly prices is mainly drive by a supply shortage, rather than the availability of credit, which was more reflective of the most recently crisis. It is likely that prices will become more stable once construction catches up with demand.
There is also worry that most of the developments planed and currently in construction are for commercial housing such as offices and retail lofts instead of residential housing, which is what current demand is for. Increases in construction without meeting the demand for residential housing would predictably further exacerbate increasing price. Trinity professor of property economics, Mr. Ronan Lyons proposes that properly developers are likely driven towards commercial developments because of laxer regulations making it more profitable than residential developments. If this is the case, like the OECD suggests, “authorities should stand ready to tighten prudential regulations if needed”.