Irish property market at risk of new boom to bust cycle, OECD warns

Disorderly Brexit ‘could plunge the economy into a recession’

Property prices may strongly surge again, the OECD says. Photograph: iStock

Property prices may strongly surge again, the OECD says. Photograph: iStock

 

The Irish property market remains vulnerable to “rapid changes in prices” and the influx of foreign investors could create a new source of risk, according to the latest economic outlook from the OECD.

It warns that property prices here could surge again, laying the foundation for another boom-to-bust cycle, particularly if the market is fuelled by more borrowing.

The latest outlook from the OECD forecasts that the Irish economy will slow, but the Paris-based body expects that GDP growth at 3.9 per cent this year and 3.3 per cent next year will remain “ robust” and well above the international average.

However, it highlights a number of risks, including a disorderly Brexit, which “could plunge the economy into a recession” or international corporate tax changes, which could hit foreign direct investment here.

The main domestic risk it identifies is from the property sector, where it says residential and commercial prices are still high, despite growth rates having moderated.

“Property prices may strongly surge again, which would further boost construction activity in the near term but may lay the foundation for another boom-and-bust cycle if associated with another surge in credit growth,” it says.

It also warns that the presence of foreign investors, who are responsible for about half the investment in the commercial property market, still leaves the Irish property market “vulnerable to rapid changes in prices” and open to new risks due to their funding from outsider the Irish banking sector.

The Government should focus on sustainability in the public finances, the OECD says, and the local property tax should be allowed to rise along with house prices. As well as raising revenue this would help to moderate demand, it says.

International

Overall the OECD sees growth here slowing in line with international trends. Global growth will slow to 3.2 per cent this year, it says, well below the recent average, with significant risks due to international trade tensions which have led to tariffs between the US and China.

International business investment growth will slow to about 1.75 per cent this year and next , it says, from 3.5 per cent in 2017-18, largely due to trade concerns.

The OECD urges the Government needs to stand ready to react to a disorderly Brexit.

The international recovery in recent years has not led to higher wages or a better standard of living for most people, it says. It calls for a more expansionary economic policy in countries in strong budget positions, such as Germany, the Netherlands, Sweden and Switzerland.

This international slowdown, together with capacity constraints in sectors such as construction, will slow growth here, it says. Unemployment will continue to fall, albeit at a slower pace, and wage pressures will build.

The OECD welcomed Government plans to cut income tax for those on lower wages and urged it to stop spending overruns, particularly in health.