Limited risk of another housing bubble in Ireland, says European Commission

Strict lending rules have reduced risk in the financial system, Commission review concludes

There is a limited risk of another housing bubble developing in Ireland due to stricter rules that have reduced risk in the financial system, the European Commission has found in an in-depth review.

The review was triggered in 2021 because during the height of the Covid-19 pandemic European Union officials identified Ireland as having macroeconomic imbalances due to high private and public debt levels.

However, Ireland is no longer experiencing such an imbalance, partly due to an “exceptional” economic growth of 13.5 per cent last year, the commission found. Ireland was the only EU country to avoid recession, bolstered by the strong performance of multinational companies, and the economic outlook remains positive as the country is relatively sheltered from the effect of the war in Ukraine.

“Overall, effective macro prudential policy settings suggest risks of another housing bubble remain limited,” the review found.

“Overall, the financial sector looks much healthier compared to the run-up of the great financial crisis. Since then Irish banks have become significantly more resilient and the introduction of stricter rules and requirements contributed to addressing many pre-crisis vulnerabilities of the banking sector.”

Price increases

House prices are expected to continue to increase this year due to a combination of factors including inward migration, households funnelling increase savings into real estate, and pent-up demand following the pandemic.

“House price growth is expected to remain high in 2022 as demand continues to outstrip supply,” the report stated.

“The influx of refugees from Ukraine is expected to increase housing demand pressures. Population growth was concentrated in urban areas where the shortage of housing was most acute.”

A sharp increase in mortgage approvals in 2021 suggests that a backlog has built up, which may “contribute to continued house price inflation in 2022”, it found.

Measures introduced by the Government “have had an overall positive impact” on housing availability, according to the review, which found that public investment in social housing and reforms of the planning and development process will “increase the housing supply”.

However, labour shortages and inflation in the cost of building materials will challenge the government’s Housing for All plan, by delaying projects and making them less affordable.

Illustrating the pressure, it noted that the price of rough timber rose by 43 per cent while reinforcing metal rose by 35 per cent in 2021, due to a combination of higher shipping costs, Covid-19 factory closures, price increases in iron ore and energy and the pre-selling of stock materials.

The knock-on effects on raw material prices from the war in Ukraine and strong competition from large-scale retrofitting projects “may continue to keep prices amongst the highest in the EU”, it predicted.

The “extraordinarily marked” economic growth of the past decade in Ireland has decreased both private debt and public debt, the review found.

There are risks to the Government’s finances ahead, however, including the public spending required to address the “persistent undersupply of housing”.

In addition, the economy requires major intervention to become more sustainable and bring down net greenhouse gas emissions per capita that are 80 per cent higher than the EU average, “which will require significant action over this decade”.