Central Bank plays down OECD fears

Analysis: Not with a bang, but with a whimper. That is how the Organisation for Economic Co-operation and Development (OECD) says that our housing market will come down to earth.

Last October the OECD used so-called econometric analysis - a sophisticated form of statistical measurement - to put our property market under the microscope. According to a memorandum seen by The Irish Times, the OECD analysis suggests that Irish property prices are 15 per cent higher than they should be.

Two years ago the Economist Intelligence Unit predicted our property prices were overvalued and last year the IMF put a figure on this of 20 per cent.

Indeed no less a figure than ECB president Jean-Claude Trichet - that nice man who sets our interest rates - commented thus when questioned in a recent interview about Ireland's property market. "Although not alarming at a euro area level . . . in some countries of the euro area, which are very dynamic and have a lot of real growth, there is a case for as appropriate action as possible."

Whereas private sector economists will grab you by the lapels and say the property market is overvalued, Central Bank economists will clear their throats and mutter that you might deign to consider taking "appropriate action".

So the OECD is in prestigious company in thinking that our property prices are overvalued. Nothing new there.

What is new is that, according to the memorandum, it seems that the Central Bank has since last October been in agreement with them.

What is also news is in its Financial Stability Report last week, the Bank was silent on whether it felt property prices were overvalued. If anything it lowered the tone of recent warnings and said house price growth was less of a concern than before. But it did say that it would be concerned about any resumption of strong growth.

There is not necessarily a contradiction between the two positions. The Central Bank may agree that there is froth in the market. But it sees this as easily correctable over a few years of moderate house price growth, rather than any sudden fall. But crucial to that soft landing is ensuring that nothing frightens the horses. Hence the Bank's fear of inflammatory predictions.

The housing market and construction industry are crucially important to our economy. Recent employment data shows the construction sector now accounts for one-third of job creation.

The Budget should examine the role SSIAs and tax reliefs can play in ensuring our property does, as the OECD hopes, come down to earth with a whimper and not a bang.