Risk of another housing bubble remains low, Moody’s says

Moody’s has played down the risk of another Irish housing bubble, suggesting the level of credit growth accompanying the current upturn in house prices was not enough to warrant concern.

However, in its latest Irish credit analysis, the rating agency warns that house price inflation, which has accelerated to double digits in most parts of the State, needed to be monitored carefully.

It said price growth here was primarily a product of supply shortages and that while construction had picked up since 2014 it was likely to remain below demand “for quite some time”.

However, the agency also linked the current price spurt to the Government’s Help-to-Buy scheme and a relaxation of the Central Bank’s mortgage lending rules, noting both measures were explicitly aimed at first-time buyers.

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“Consequently, mortgage lending has accelerated strongly in the opening months of the year, after a policy-induced slowdown in the first half of 2016,” it said.

Despite its warnings, Moody’s said house prices were still about 10 per cent below the levels seen in the mid-2000s prior to the “bubble period”, and about 30 per cent lower than the peak reached in 2007.

Credit growth

It also noted that mortgage lending and overall credit growth were extremely modest in comparison to previous periods and that while building investment was recovering, this was from a very low base.

“Hence, in our view the strong recovery in the housing market is not (yet) a cause for concern,” it said.

Moody’s maintained Ireland’s sovereign debt rating at an A3 level, noting the improving trend in economic growth and public finances were likely to continue in the medium term.

It also said that Ireland’s banking sector was far less of a risk to the Government’s balance sheet than in the past and that the State’s external balance had shifted into large and sustained surpluses.

However, it warned that Brexit and possible changes to the US corporate tax code posed serious risks.

“Risks to the generally positive outlook emanate mainly from the UK’s withdrawal from the EU, which will affect Ireland more than most other countries, given the very close trade relationships between the two countries,” senior vice-president at Moody’s and the report’s author, Kathrin Muehlbronner, said.

“Ireland will likely draw some benefits in the form of stronger foreign direct investment as firms move operations away from the UK but overall we believe that the economic impact of Brexit will be negative for Ireland,” she said.

Corporate tax rate

Ms Muehlbronner also highlighted US tax reform as a risk, noting that about half of all foreign direct investment originates from the US and that Ireland’s low corporate tax rate had been a key driver for multinationals to locate here.

In its report, Moody’s said the risk of an overly pro-cyclical fiscal policy, an important contributor to the unsustainable boom prior to the crisis, remained limited.

“It is clear that the pace of fiscal consolidation has slowed since 2015 and fiscal policy now adds stimulus to an economy that is growing at a very healthy rate, but the Government has also put in place some mitigating factors that should guard against an excessively expansionary stance,” it said, citing the Government’s proposal to create a “rainy day” fund and reduce the public debt ratio to 45 per cent of gross domestic product by the mid- to late 2020s.