Housing market overvalued but stable - OECD

The housing market is overvalued but unlikely to crash, according to a report published yesterday.

While praising the economy's performance to date, the Organisation for Economic Co-operation and Development (OECD) has warned that an overvalued property market and lack of competition both pose threats.

"The Irish housing market is very buoyant. The housing boom is driven by strong economic growth, dynamic demographics and low interest rates. However, large tax advantages and relatively lenient credit policy by banks have also played their part, and prices may have become overvalued," the report says.

The report avoids quantifying the extent of overvaluation in the market. However last November The Irish Times revealed the contents of an OECD memorandum warning that property prices here were overvalued by 15 per cent.

The memo - which was sent to OECD general secretary Donald Johnston - said that Central Bank officials had broadly agreed that Irish house prices were overvalued, but suggested that any precise estimate of this "should be presented only with extreme caution to avoid destabilising the market".

In contrast with the original memorandum, yesterday's report emphasised that most of the increase in house prices was justified: "It is worth noting, however, that around 80 to 90 per cent of the increase in house prices since 1995 is justified by the fundamentals." It says Ireland's housing market regime has been partly responsible for overperformance. "The tax treatment of housing in Ireland has been more favourable for home ownership than in most other EU countries.Access to mortgage finance is less restrictive in Ireland than elsewhere, especially compared with continental Europe."

The OECD report broadly praises Ireland's economic record to date. But it warns that a lack of competition in other sectors threatens the economy's competitiveness. "Reforms are needed in the electricity and telecom sectors, and unnecessary restraints in services such as law, pharmacies and the pub trade should be removed. In the retail sector, the government decision to abolish the Groceries Order is welcome."

Noting the recent buoyancy in Revenue returns, the report nonetheless warned that budgetary pressure could arise in future: "As economic activity slows towards more normal rates of growth, the budget may come under increasing pressure from social spending and the large infrastructure programme."

The OECD called on the Government to implement results-oriented reforms in the public sector and to modernise hiring and promotion practices in the civil service. It also criticised the decentralisation programme and called for the removal of remaining tax reliefs

Fine Gael TD Richard Bruton said the housing market was the biggest internal threat to the economy and accused the Government of fuelling a pre-election boom: "The Government has forgotten the hard lessons of the 1980s. The OECD report is a timely reminder that we cannot live off past successes."