OECD warns of another Irish housing bubble amid sharp rise in prices

A sharp rise in house prices and property-related lending has raised the prospect of another Irish housing bubble, the Organisation for Economic Co-operation and Development (OECD) has warned.

In its latest economic outlook, the Paris-based group said Irish property prices were rising rapidly on the back of strong economic growth and a shortage of housing supply.

At the same time, property -related loans were also increasing fast, contributing to a recovery in new lending.

“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,” it said.

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The OECD's report comes in the wake of a warning from the Fiscal Advisory Council here about the risk to the economy of another housing boom.

In its report, the OECD noted that unemployment in Ireland had fallen rapidly in recent years, declining below 7 per cvent this year, having been as high as 15 per cent in 2012.

This has led to strong wage growth, it said while inflation has been contained by declines in global energy prices and, more recently, euro-sterling exchange rate developments.

As a result, real wages have risen, pushing up household consumption by 3 per cent last year, it said.

The OECD stood by its economic forecasts for Irish gross domestic product (GDP), predicting it to grow by 3.7 per cent in 2017, before dropping to 2.5 per cent in 2018.

It said the Irish economy was projected to expand solidly, but growth would fall toward more sustainable rates in the near future.

The OECD said the outlook for Ireland was surrounded by more uncertainty than usual, with Brexit, rising interest rates, and increasing protectionism all posing a threat to Ireland’s economic model.

“Given elevated uncertainties, policies should firmly focus on underpinning stability and making the economy resilient against shocks,” the OECD said.

“The Government should ensure that its medium-term goal of balancing the budget is met, thus leaving room to use fiscal policy to support growth if needed.”

The OECD said the Government’s budgetary stance was likely to be less contractionary than in past years as public investment reverses past declines.

Despite the evident strength of recovery, the OECD said the banking system here was still impaired, noting that borrowing conditions remained tight for SMEs, despite the accommodative euro-area monetary policy, while new lending was still being outpaced by debt repayment.

It also noted that despite a sizeable reduction over the past years, non-performing loans still accounted for around 17 per cent of total outstanding loans, and a majority of them were property-related. Nonetheless, it said the current buoyancy of the property market should make it easier for banks to dispose of impaired portfolios.

On a global level, the OECD warned world leaders that protectionist politics risk undermining an investment recovery that has the global economy improving without showing real acceleration.

World output is set to expand by 3.5 per cent this year - more than the 3.3 per cent predicted at the beginning of March and up from 3 per cent last year, the it said. The outlook for 2018 was unchanged at 3.6 per cent growth. “Investment has been a missing support for global growth, trade, productivity and real wages,” OECD chief economist Catherine Mann wrote in the report.

While improving demand and strong competition policies are helping change that, “protectionist policies in G20 countries and anti-globalization rhetoric” are creating “reservations” among investors.