The Organisation for Economic Cooperation and Development (OECD) is the latest to warn that the Irish economy is showing signs of overheating and that the prospect of another housing bubble looms on the horizon if property prices keep rising at the current rate. How worried should we be?
Five reasons to be concerned
1 The OECD was one of the first organisations to set the alarm bells ringing about the Republic's economy prior to the 2008 crash. In 2006, on the eve of the meltdown, it warned that Ireland's supercharged housing market was driving the economy off a cliff. The warning was roundly ignored by politicians and policymakers, who maintained a blind faith in the "soft landing" theory of property prices until it was too late. As a result the OECD's pronouncements should be ignored at our peril.
2 The influential think tank bases its overheating warning on the rapid rise in new mortgage lending and lending to SMEs, which it says is being driven by construction-related activity. Recent figures from the Banking and Payments Federation Ireland indicates new mortgage lending rose by nearly 30 per cent to €7.3 billion last year. This rate of increase, which has continued into 2018, is remarkable given the Central Bank's strict lending caps, which are designed to dampen excessive borrowing.
3 In its report, the OECD also warned that house price growth could accelerate even further - it's currently running at 13 per cent year on year - triggering an additional pick-up in construction, which may "induce another property bubble". The rapid growth in house prices, the swift erosion of affordability and the parallel pick-up in construction are all too reminiscent of the boom and bust of the previous period and therefore can't be ignored.
4 Sustainable economic growth - annual growth of 2-4 per cent in the view of most economists - always seems to elude Ireland. We're either growing too fast like now, or not at all like during the austerity years. Overheating refers to the stage of the economic cycle when demand is so strong that it eats up every bit of spare production capacity - think of the current infrastructural bottlenecks in housing, health and transport. Left to fester, this usually bids up prices and wages and erodes competitiveness, and this was the OECD is warning about. Ireland is already a high-cost location for many employers and a further erosion of competitiveness could choke off inward investment.
5 All these problems would be significant in any economy, but in a country as indebted, nationally and domestically, as Ireland, they are doubly so. In its report, the OECD warned that elevated debt levels here left the economy "sensitive to rising interest rates". The European Central Bank is expected to begin winding down its post-crash stimulus programme later this year as a forerunner to raising interest rates in 2019. The OECD's comments mirror a similar warning by the Economic and Social Research Institute, which suggested Irish households could be hurt more by ECB rate rises because of the high dependency on variable rate mortgages here.
Five reasons not to panic
1 The OECD's original warning to Ireland back in 2006 made much of the "large tax advantages" being doled out to developers and the overly lenient lending practices of banks. These accelerants are not in play this time around. As anyone who has gone through the process of securing a mortgage knows, banks are extremely cautious. And, in any case, their lending is tightly controlled by the Central Bank's lending caps, which are there to prevent another credit-fuelled bubble.
2 Despite the headlines about overheating and property bubbles, the OECD's report was broadly positive about Ireland's economy, noting conomic activity here would remain robust in the near term, fuelled by "solid employment growth and consumption", before gradually easing. It also noted the Government's fiscal position continued to improve and this would act as a buffer against future shocks.
3 Equally talking about overheating when inflation is negative; credit held in check by tight lending rules; employment still below its pre-crash peak and wages growing by just 2 per cent seems misplaced.Overheating is at best a nebulous concept and while there are certain imbalances in the Irish economy, most obviously in housing, our macro credentials in terms of employment growth and domestic demand are solid.
4 Ireland's recovery is also more broad based this time around with nearly all sectors enjoying an upswing in activity. In contrast to the boom, when we put all our eggs into one basket, namely construction, the current growth spurt is more spread out. At the height of the boom more than 300,000 workers here were employed in construction, nowdays it's half that.
5 As one of the most open trading economies in the world, Ireland's fortunes are heavily tied into the ups and downs of the global economy. The OECD's main economic outlook report suggests the global and euro zone economies are in a reasonably healthy place, even with the threat of trade wars hanging over them. It also noted that global economy is on course for a 40-year low in unemployment, all which is good news for Ireland's export-led economy.
