Central Bank warns of dangers if property bubble bursts

The strong rate of growth in personal borrowing linked to the recent acceleration in the housing market poses an increased risk of a sharp correction to the market, according to the Central Bank.

Speaking at the launch of the Central Bank's Annual Report for 2005, the bank's Governor, John Hurley, warned that a gap may be emerging between actual house prices and the price warranted by fundamentals such as demographics, employment and income.

The relatively unbalanced nature of growth in recent times is a concern, according to the Bank.

While an additional 87,200 people were at work in 2005 and the unemployment rate averaged at 4.3 per cent, the Bank warned that the construction sector accounts for an exceptionally high ratio by international standards.

Modest developments in productivity despite increases in employment point to the need for "a major effort" to improve productivity growth across the economy.

Mr Hurley pointed to an increase of 30 per cent inrease in residential mortgage lending repeating last year's warning that Ireland's household sector's debt to income ratio is very high by international standards.

Higher energy prices and an increase in services sector inflation have led to and increase in inflationary pressures so far this year. This has led to "a significant gap"  between Irish and euro area inflation.

Mr Hurley said this was a concern "particularly in view of the fact that the price level is already high by international standards."

However, Mr Hurley said conditions "need not necessarily lead to a sharp correction" in the property market. He said the market could ease over time if a "broad stabilisation of prices and continuing improvements in the fundamentals" are realised.

Despite the increased risk of a sharp correction, Mr Hurley said the gradual easing of the market over time - or a soft-landing - continues to be the bank's expectation.

The Bank says the overall performance of the economy has been positive over the last number of years, and is predicting growth of 5 per cent this year, a slight reduction on last year's growth level of 5.4 per cent.

Following robust performance in the labour market in 2005 the Bank says the economy is now operating "at capacity." The State's budgetary position was described by Mr Hurley as "very sound" and the outlook remains positive.

"The main driver of growth is likely to continue to be domestic demand. Strong growth in consumer expenditure and investment is forecast on the back of strong employment growth, the maturing of the SSIAs and rising income levels," Mr Hurley said.