Brexit could ratchet up pressure on Dublin housing market

The decision Britain will make in June about whether to stay in the EU may be affected by the prevailing political climate rather than the merits of staying or leaving for the UK economy.

Recent economic studies have shown the negative impacts for both Britain and Ireland of a decision to leave.

In an ESRI study published in November, Edgar Morgenroth showed that if customs barriers were put up following a Brexit, it could lead to a reduction in trade between Ireland and the UK of up to 20 per cent.

In 2014, the UK accounted for 15 per cent of Irish merchandise exports. As a market, it was much more important for Irish-owned firms, our most labour-intensive sector, than for multinationals.

The impact of any new trade barriers could be very significant for firms in sectors such as food processing. Last year approximately half of Irish food exports were destined for the UK.

With agriculture accounting for 5 per cent of our jobs, and an additional 2 per cent of all jobs in food processing, a reduction of 20 per cent in our food sales to the UK could have a real impact on the domestic economy.

However, if food sales to the UK fell by 20 per cent as a result of new trade barriers, output in the food sector would not fall by the same amount.

What would happen is that firms, faced with dislocation to their UK trade, would immediately seek markets, either elsewhere in the EU or further afield.

Such a change in direction would be costly in the short term: the price of the exports might need to fall to attract new sales, and substantial sums would need to be invested in market development.

So while the impact on the volume of total output in the sector might be limited, the value of that output and its profitability would be more adversely affected.

Given the nature of the food sector, farmers could end up carrying a significant part of the burden of adjustment through a fall in the price received for milk and other produce.

In other sectors dominated by multinational enterprises, the cost of developing new markets to replace any fall in UK sales might be lower.

Set their own prices

In some sectors, such as pharmaceuticals, the firms involved are selling some fairly unique products, and they set their own prices.

In such cases, the UK might continue to buy the products, paying the price demanded by the multinational firms.

While Brexit would have a negative economic impact on Ireland, the impact for the UK of any new trade barriers with the EU is likely to be more substantial.

While Ireland, as an EU member, would retain full access to the rest of the EU market and, through EU trade deals, ready access to markets elsewhere in the world, UK firms could have to renegotiate their market access to the EU from scratch.

They would no longer be able to benefit from EU trade deals to access other world markets, which could necessitate further rounds of trade negotiations. Such negotiations take time.

The ESRI analysis also considered the possible impact on foreign direct investment (FDI).

This analysis suggested that the UK would lose foreign direct investment if it was outside the EU – leading to slower UK growth.

In turn, a less buoyant UK economy would also affect Ireland.

This analysis also suggested that, while Ireland might attract some additional FDI at the expense of the UK, this is likely to be on a limited scale in most sectors.

An exception may be the financial sector. It is quite possible that a substantial number of London-based financial sector firms might seek “asylum” in Dublin to maintain their access to the EU market.

Already there are indications that firms based in London are researching the Dublin office market to check out the potential supply of office space, and how rapidly they could acquire it.

While Dublin’s office building is recovering and, given time, could deliver a substantial increase in space, the housing market is another matter.

If a substantial number of financial sector jobs moved to Ireland as a result of UK exit, it could put major upward pressure on the Dublin housing market.

A loss of 10,000 financial sector jobs in London would barely dent the London housing market, but it could put major pressure on an already difficult housing market in Dublin.