Central Bank raises fresh doubts about Government’s housing plan

Regulator says scheme is unlikely to deliver more supply

The Central Bank has raised further concerns about the Government's new shared equity loan scheme for struggling home-buyers, suggesting it is unlikely to elicit more supply.

The regulator's director of economics and statistics, Mark Cassidy, said "the main effect" of the proposed scheme was likely to be on demand as there seems to be "some sluggishness" around how supply reacts to changes in the market.

The implication being that the initiative could trigger further price inflation.

The scheme, which is still being finalised, involves the State paying for up to 30 per cent of the cost of new homes in return for a stake in the property. Minister for Housing Darragh O'Brien hopes it will boost home ownership and increase supply at the same time.


The Central Bank has, however, raised several concerns about the efficacy of the scheme, suggesting it may saddle participants with more debt while driving up house prices.

"We cannot yet provide an assessment on what the exact impact on prices might be because we don't have enough information regarding the design of these measures," Mr Cassidy told the Oireachtas Committee on Budgetary Oversight.

Asked if central banks should consider the impact on house prices when setting interest rates, a move which is under way in New Zealand, he said: "Whether or not house prices should be taken into consideration in assessment of price stability is an extremely topical, important and relevant issue."

Mr Cassidy said the European Central Bank, which the Central Bank here is part of, is currently undertaking a review of its monetary policy strategy, which will assess whether house-price stability should be included in its overall assessment of price stability.

On the wider economy, Mr Cassidy said the recent resurgence in coronavirus cases and the reimposition of strict containment measures had weakened the near-term outlook, making it more uncertain.

He also noted that strong exports last year “masked” a severe decline in domestic economic conditions.

Growth rates

The Irish economy grew by 3.4 per cent in gross domestic product (GDP) terms last year, one of the biggest growth rates recorded anywhere in the industrialised world, driven by a surge in pharma and IT exports.

However, Mr Cassidy said “this masked a decline in domestic demand which was among the most severe in the EU” .

He said with the exception of pharma and IT, output declined in all sectors of the economy, while private consumption, a leading indicator of activity, fell 9 per cent.

The current containment measures have dampened economic activity significantly in the first quarter of this year, but the Central Bank expects the Irish economy to rebound in the second half of the year, and ultimately to grow by 3.8 per cent in 2021, assuming successful deployment of vaccines.

Mr Cassidy warned, however, that recovery in the labour market was likely “to lag somewhat” until the broader economic recovery becomes more established.

The Covid-adjusted unemployment rate, which includes Pandemic Unemployment Payment (PUP) recipients, was 24.8 per cent in February. Including the employment wage subsidy scheme (EWSS), around 960,000 people, or 39.3 per cent of the labour force, are currently in receipt of one form of income support or other.

“The outlook is considerably uncertain and contingent on key assumptions on Covid-19 developments,” Mr Cassidy said.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times