There’s a catch-22 at the heart of the Irish economy that’s not easily resolved. If there is a big supply response to the current housing crisis, as it seems everybody wants, we risk overheating the economy, which is fast approaching full employment anyway. Such a scenario – with prices and wages being bid up by a turbo-charged construction sector similar to what happened in the mid-2000s – would severely damage our cost base and erode competitiveness on a grand scale, potentially choking off inward investment and halting the current upward trend in growth.
On the other hand, failure to address the current housing crisis, apart from the severe social problems that would be left to fester, also has the potential to damage competitiveness, with rising property prices and rents eventually feeding into wage pressures.
Compensate
Companies will have to pay workers more to compensate them for the higher cost of living if housing costs keep on climbing. Equally, forcing those with jobs to live further and further away from their places of work, apart from creating further transport congestion, requires greater state investment in transport infrastructure. Both issues will eventually make Ireland an undesirable location for foreign investors.
The problem was nicely eludicated by economist Martina Lawless, who on Wednesday appeared before the Oireachtas committee on budgetary oversight as a member of the Irish Fiscal Advisory Council.
Social imperative
While noting there was a stong social imperative to increase housing supply, she said we had to be careful that the construction sector “doesn’t distort the overall balance of the economy in the way that it did in the lead-up to 2007”, noting that an increase of about 10,000 housing units generally added 1 per cent to GDP growth.
Conversely, she said there was an immediate risk to competitiveness in the absence of a housing supply response, with price pressures translating into higher wages. A pick-up in activity in the housing sector needs to be counter-balanced by a dampening-down of activity in other sectors, she suggested by way of a solution. A delicate balance, no doubt.
