House price spurt worries Central Bank

House price spurt worries Central Bank

July 12, 2006 11:42

The Central Bank says it expects economic growth of around 5% this year, but has expressed concern about the recent pick-up in house price growth.

Governor John Hurley, speaking at the launch of the Central Bank’s annual report, said the relatively ‘unbalanced’ nature of Irish growth was a concern, as it was concentrated in construction and services, with more modest growth in manufacturing and a disappointing export performance.

He said the main driver of growth this year would be domestic demand, helped by employment growth, rising incomes and the maturing of SSIA accounts.

On housing, Mr Hurley said the recent re-acceleration of house price growth had increased the risk of ‘a sharp correction’ in the market. He said house prices in recent years had been supported by factors such as demographics, employment and income growth, but this did not seem to be the case with the recent rises. The Governor said this suggested prices could be overvalued, though the bank still expected a gradual easing of house price growth.

Mr Hurley also said the level of household debt was now very high by international standards, while inflationary pressures were further eroding competitiveness. He added that Ireland was more dependent on oil than most developed countries, and therefore more at risk from volatility in prices.

He repeated the European Central Bank’s warning earlier this month that it would exercise ‘strong vigilance’ to ensure it kept a lid on inflationary pressures. Most commentators expects the ECB to raise rates at its next meeting in August.

Meanwhile, the Central Bank recorded a profits of €122m last year, up from €107m in 2004. It paid a surplus of €109m to the Exchequer.

**Central Bank warns of dangers if property bubble bursts **

By Éanna Ó Caollaí

Last updated: 12-07-06, 11:31

The strong rate of growth in personal borrowing linked to the recent acceleration in the housing market poses an increased risk of a sharp correction to the market, according to the Central Bank.

Speaking at the launch of the Central Bank’s Annual Report for 2005, the bank’s Governor, John Hurley, warned that a gap may be emerging between actual house prices and **the price warranted by fundamentals such as demographics, employment and income. **

The relatively unbalanced nature of growth in recent times is a concern, according to the Bank.

While an additional 87,200 people were at work in 2005 and the unemployment rate averaged at 4.3 per cent, the Bank warned that the construction sector accounts for an exceptionally high ratio by international standards.

Modest developments in productivity despite increases in employment point to the need for “a major effort” to improve productivity growth across the economy.

Mr Hurley pointed to an increase of 30 per cent inrease in residential mortgage lending repeating last year’s warning that Ireland’s household sector’s debt to income ratio is very high by international standards.
Higher energy prices and an increase in services sector inflation have led to and increase in inflationary pressures so far this year. This has led to “a significant gap” between Irish and euro area inflation.

Mr Hurley said this was a concern “particularly in view of the fact that the price level is already high by international standards.”

However, Mr Hurley said conditions “need not necessarily lead to a sharp correction” in the property market. He said the market could ease over time if a “broad stabilisation of prices and continuing improvements in the fundamentals” are realised.

Despite the increased risk of a sharp correction, Mr Hurley said the gradual easing of the market over time - or a soft-landing - continues to be the bank’s expectation.

The Bank says the overall performance of the economy has been positive over the last number of years, and is predicting growth of 5 per cent this year, a slight reduction on last year’s growth level of 5.4 per cent.

Following robust performance in the labour market in 2005 the Bank says the economy is now operating “at capacity.” The State’s budgetary position was described by Mr Hurley as “very sound” and the outlook remains positive.

“The main driver of growth is likely to continue to be domestic demand. Strong growth in consumer expenditure and investment is forecast on the back of strong employment growth, the maturing of the SSIAs and rising income levels,” Mr Hurley said.

© 2006

Economist questions new jobs quality

July 12, 2006 11:58

Friends First economist Jim Power has said many people are questioning their quality of life, despite the unprecedented economic prosperity of the last few years.

In his quarterly economic outlook, the economist says the Irish economy is growing strongly and providing lots of jobs, but many of these are in relatively low productivity activities, and many jobs are being replaced by lower paid jobs elsewhere.

Mr Power says this could explain the relatively disappointing take from income tax in the Exchequer figures. He also fears that the construction and public sectors cannot keep up their current rates of growth.

The economist also believes that the skills of many foreign workers are not being fully used, as many are being recruited into ‘transient and relatively low quality areas’ of the economy. He calls for new support structures to integrate foreign workers fully into the economy and society.

On housing, Mr Power calls for a radical change in planning to make more of the new housing supply, such as apartments, more suitable for families.

His outlook predicts that house prices will rise by 10% this year, while interest rates will climb by 1.5 percentage points over the next 18 months.