IIB warns against plans to cool house prices

A "badly judged" intervention by the Government is the biggest risk for the property market and could backfire spectacularly, one of the Republic's mortgage lenders warned yesterday.

The chief economist at IIB Bank, Austin Hughes, said he was concerned by "noises" that the Government could use the next Budget to introduce a measure in the hope that it would quell house price inflation.

"If it ain't broke, don't fix it", was IIB Bank's response to comments by Minister for Housing Noel Ahern, who last month criticised property speculators who, he said, were fuelling house price inflation, and financial institutions that he said were offering "new gimmicks" to increase their market share.

Mr Hughes said the recent acceleration in house prices reflected strong demand and improved borrowing power rather than speculation by investors.

"The reality is that sentiment is critically important to the housing market and these noises about measures in the Budget could have a big effect. Anyone who is in the market and is worried about capital gains tax might decide to take back all their chips in October or November."

Even rumours about an anti-speculative measure such as an increase in capital gains tax could result in an abrupt softening in the property market, he added.

"The record of Government intervention in the Irish housing market is not particularly encouraging. Previous initiatives have added to uncertainty and created considerable short-term volatility in the market."

IIB Bank forecasts that house prices will rise 13 per cent this year and 7 per cent in 2007.

The latest IIB / Economic and Social Research Institute (ESRI) consumer sentiment survey shows that rising interest rates are beginning to take their toll on consumers.

Three out of 10 people interviewed for the survey in August, after the European Central Bank (ECB) increased interest rates for the fourth time in nine months, said their household finances were not sufficient to withstand the impact of higher interest rates.

When asked what they considered to be the greatest risk to the economy, almost half - 48 per cent - said higher energy bills and 23 per cent said rising interest rates. Some 12 per cent said a sharp increase in the general cost of living was the biggest risk, while only 7 per cent mentioned job losses. The results are based on the responses of 854 people.

Mr Hughes said he expected more Special Savings Incentive Account (SSIAs) holders would use their maturing accounts to pay down debt.

"The average consumer isn't feeling that the economy will skate through next year," he said.

As a result, IIB predicts that only about one-quarter of the SSIA money will be spent and that a generous Budget will also be required to help offset the effects of rising mortgage repayments and energy bills.

"If you rely on SSIAs to deliver the promised land next year either politically or economically, you risk disappointment."