OECD warns of overheating in Irish economy

Signs of overheating have begun to emerge in the Irish economy, the Organisation for Economic Cooperation and Development (OECD) has warned.

In its latest economic outlook report, the Paris-based agency said new mortgage loans and loans to small firms – largely driven by construction-related activity – had risen sharply in recent months.

While the Central Bank’s lending restrictions, such as the loan-to-value and loan-to-income caps, have reduced the share of risky loans, the OECD said they may need to be extended to cool the current level of credit growth.

Figures published on Wednesday by the Banking and Payments Federation showed the value of new mortgage lending approved in April jumped by 20 per cent to €842 million compared to the same time last year.

Signs of overheating in Irish economy, OECD warns

---

New mortgage approvals rise 14% in April

---

Ireland to skip ECB banking chair battle as top Philip Lane role eyed

---

High debt levels could damage Ireland’s economic prospects, OECD warns

---

In its report, the OECD also raised the prospect of “another property bubble” if the current rate of annual house-price growth, now running at 13 per cent, continued.

The warning follows a Central Bank study earlier this week which said nearly 4 per cent, or almost 8,000 mortgages taken out before the crash could default in the event of a financial shock. These loans are currently not in default.

The last time the OECD warned about the possibility of a housing bubble in Ireland was on the eve of the financial crash in June 2006, a warning that was ignored by the then government.

The OECD's caution comes amid ongoing political turmoil in Italy that has rocked bond markets in recent days and renewed concern about the sustainability of national debt levels in several EU member states.

The head of the National Treasury Management Agency (NTMA), however, said on Wednesday night that the steady performance of Irish government bonds in the face of such market turbulence was evidence that investors had "reclassified" the nation's credit worthiness.

Surged

The market interest rate, or yield, on Italy’s 10-year bonds spiked on Tuesday at 3.44 per cent, their highest level since 2014, having surged by more than 90 per cent in the space of four weeks, as investors feared the country was hurtling towards fresh elections that would become an unofficial referendum on its continuation in the euro zone.

This prompted a sell-off across a range of assets internationally, particularly Spanish and Portuguese bonds. However, the yield on Ireland’s 10-year bonds have remained within a tight range around the 1 per cent level for the past month.

“Unlike previous periods of euro zone uncertainty, it seems that investors have in effect reclassified Ireland as much closer to the euro-zone core than to the periphery,” NTMA chief executive Conor O’Kelly said.

Hopes that Italy could avoid another bruising election on foot of reports that the country’s two anti-establishment parties were renewing efforts to form a government, rather than force the country to the polls for the second time this year, lifted European markets on Wednesday.

In its report on Ireland, the OECD said economic activity here would remain robust in the near term, fuelled by “solid employment growth and consumption”, before gradually easing.

Future economic shocks

It said, however, that the Government needed to keep improving its fiscal position to create a buffer against future economic shocks, most notably Brexit, which posed the biggest downside risk to Ireland’s economic outlook.

“Property prices may increase more strongly, which would boost further construction activity in the near term but may induce another property bubble associated with a strong surge in credit growth,” it said.

European Commission officials also warned on Wednesday that "persistent supply shortages" in Ireland's housing market was fuelling property price increases.

Appearing before a sitting of the Oireachtas Committee on Budgetary Oversight, Carlos Martinez Mongay, the commission's directorate-general for economic and financial affairs, said "years of reduced government investment are taking their toll on the availability of housing" and the Government needed to address infrastructure bottlenecks for sustainable and balanced growth in the future.