European Commission warns of major risks to Irish economy

The shortage of housing supply and the significant increases in property prices are posing a major risk to the Irish economy, the European Commission has warned.

In its latest post-programme surveillance report, seen by The Irish Times, the Commission says the introduction of rent pressure zones has been ineffective and contributed "little to containing price rises".

It says rental inflation is "well above" the 4 per cent prescribed by the rent pressure zones, despite them being introduced more than a year ago and across the major population zones.

Increases in property prices and rents are continuing and the supply response has been insufficient and below the level needed to address long-term housing demand, the commission says.

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Recent Government measures are going in the right direction, it says, but it advises there is a need for “timely and efficient implementation”.

Elsewhere the commission warns against reducing taxes and increasing expenditure in the upcoming budget as it may lead to a repeat of the "pro-cyclical stance of the past".

It accepts a failure to reduce some income taxes could “face political hurdles” but stresses the economy is already operating close to its capacity. It again points to the reliance on corporation tax among a small number of large multinationals.

“In view of the heightened external risks, reducing tax expenditures and broadening the tax base would be prudent ... It is less painful to revamp the tax system when the economy is experiencing an upswing.”

Property tax

The commission points to the current review of the local property tax and says it should examine "more regular re-evaluation of the tax base while addressing the horizontal inequality issues embedded in the current system".

Consideration should also be given to the introduction of a vacant property tax to increase the supply of homes for rent or purchase to meet demand.

Other risks include the uncertainty surrounding the ongoing negotiations on the terms of the United Kingdom’s withdrawal from the European Union and changes to international taxation.

In relation to the banking sector, it says important challenges remain despite the improvement in their capital position. Lenders' exposure to the property market remains high and the growing uncertainty elsewhere represents an additional challenge, the commission adds.

Arrears problem

Long-term mortgage arrears continue to pose difficulties and are still the most critical part of the nonperforming loans.

“This is partly due to the heavy use of loan-restructuring solutions, which has left behind a substantial number of borrowers with long-term arrears who are unwilling – or unable – to engage with their banks.

“At the same time, repossession activity remains relatively limited, as banks face reputational concerns for exercising collateral enforcement options, especially on vulnerable borrowers, while the length of proceedings continues to be protracted.”

Staff from the European Commission and the European Central Bank conducted a visit to Dublin in May as part of its post-bailout surveillance. This is the ninth such visit, and the commission prepares a staff report for the Department of Finance.

The report, which will not be published until mid-February, was sent to the Oireachtas committee on finance.