The downturn in housing prices is unlikely to impact adversely of consumer spending, according to research presented yesterday with the ESRI's quarterly economic commentary.
Housing prices and consumer spending have both increased dramatically in recent years and there has been concern among some commentators that a fall in property prices could trigger a collapse in spending.
UCD academic Dr Vincent Hogan and Pat O'Sullivan of Bank of Ireland Private Banking analysed the importance of the increased housing wealth of the population in terms of the consumption and economic boom in Ireland.
They found that there was little link between housing wealth and consumer spending in Ireland, with most spending increases being dictated by a rise in incomes. This was, in part, due to the fact that equity release has arrived in the Irish market only relatively recently, they suggest.
"If households have not used housing wealth for personal consumption purposes to date, the implication is that personal consumption will remain unaffected by a fall in house prices," they state. That would mean that the recessionary effect of falling property prices would not be as severe as might have been supposed.
However, the authors note that the economy could still be adversely affected by a decline in the housing construction sector.
In a separate paper, economist Colm McCarthy argues that Ireland should review the method used for calculating inflation in the economy.
The UCD economics lecturer says that the approach used by the Central Statistics Office to measure consumer prices is distorted by the impact of historical housing prices and mortgage interest rates.
Mr McCarthy argues that this has resulted in a "substantial overstatement" of inflation in recent quarters and that this overstatement will continue for some time. Even if prices and interest rates were to be frozen at current levels, the CPI would rise on the basis of Ireland's recent housing boom, he argues.
He suggests that the harmonised index of consumer prices (HICP) model used by EU statistics agency Eurostat, which excludes housing altogether is more reliable. The Irish HICP has been running at levels well below the headline CSO inflation figure in recent times.
