Strong house price growth likely to continue for next year or more, Central Bank warns

Regulator says mismatch between supply and demand will fuel further inflation

The mismatch between supply and demand is likely to fuel "significant house price growth" in the near to medium-term, the Central Bank has said.

In its latest Financial Stability Review, published on Wednesday, the regulator also warned that while the outlook for the Irish economy had improved on foot of the vaccine rollout, the recovery was likely to be “bumpy and uneven” with some sectors continuing to struggle.

The review, which assesses the risks facing the financial sector and the wider economy, said low levels of housing supply coupled with already high demand was placing upward pressure on residential property prices.

The shortage of housing is compounded by an acute deficit in second-hand stock for sale and this will keep house prices, and to a lesser extent, rents high relative to incomes, it said.


Central Bank governor Gabriel Makhlouf said he expected to see significant house price growth this year and next.

“One paradox of the pandemic is that, while job losses are at a scale never seen before, the strength of economic activity in unaffected sectors combined with the level of additional savings owing to a lack of spending opportunities, precautionary behaviour and direct fiscal support, mean that there is ample scope for a liquidity-driven growth in house prices coinciding with never-seen-before economic disruption in some sectors,”Mr Makhlouf said.

He was speaking as figures from the Central Statistics Office (CSO) showed house prices grew at an annual rate of 4.5 per cent in the 12 months to May, the highest level of growth recorded in nearly two-and-a-half years.

In its review, the regulator however warned that while accommodative monetary conditions have been necessary to cushion the shock from Covid-19, they have also incentivised and increased risk-taking in financial markets.


This presented the possibility of “a sudden financial market correction, prompting a tightening of global financing conditions”.

The effects of a correction could be amplified by pandemic-related government borrowing "with adverse consequences for the economic recovery, particularly in Ireland, " it said.

In general it said the expansion of vaccination programmes here and abroad provided “a clearer path to economic recovery” while noting recovery was likely to be uneven across countries and sectors and “could be susceptible to unexpected setbacks.”

The full extent of borrower financial distress is likely to become apparent only as government supports start to unwind, it said.

“There will come a point when it will become clear that some enterprises will not have a viable future, due to a combination of the effects of the pandemic, and the strength of the business proposition,” Mr Makhlouf said.

“ It is in the best interests of the economy as a whole that, for this subset of businesses, an orderly liquidation process exists that can allow capital, labour and entrepreneurial talent to be reallocated,” he said.

On changes in the global tax environment, Mr Makhlouf cautioned against drawing conclusions about how the changes might play out for Ireland.

He said the Government was right to assume a reduction in corporate tax receipts while noting that much of the multinational investment that is already here was not necessarily going to move as a result of the proposed changes in headline tax rates.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times