Senior officials from the OECD and the Central Bank recently accepted that the Irish property market is overvalued by 15 per cent, according to a confidential account of their meeting produced by the Paris-based body.
Central Bank officials, however, were reluctant to disclose such a figure in case it might destabilise the Irish property market.
At a meeting of senior officials from the Organisation for Economic Co-operation and Development and the Central Bank on the subject of the property market, Irish officials were informed of OECD research which suggests that Irish prices were 15 per cent overvalued.
The memorandum records senior Central Bank officials attending the meeting as agreeing this was consistent with their own judgment. An account of the meeting produced by the OECD, and seen by The Irish Times, states: "There is clearly a speculative element and econometric work by the OECD secretariat suggests prices are 15 per cent overvalued."
The think-tank represents 24 of the world's leading economies, including Ireland. It conducts in-depth studies of a range of policy topics and issues policy advice to its member states.
While not disagreeing with the figure presented, the Central Bank officials indicated their nervousness about presenting such figures in public. The OECD records them as stating: "They suggested that any numerical estimate of overvaluation should be presented only with extreme caution to avoid destabilising the market."
The views of the OECD and the Central Bank are recorded in a memorandum summing up the preliminary conclusions of the next Economic Survey of Ireland, which is due to be published officially in January. Such surveys are published approximately every two years and look at the long-term policy decisions needed to maintain economic growth in individual OECD member states. The preliminary memorandum was sent to the Secretary-General of the OECD, Donald Johnston, on October 10th.
While it says it is still possible the house price boom in the Republic will end "not with a bang but with a whimper", it raises serious concerns about the direction of the market. It says that since 1995 houses prices have doubled in real terms and while most of this is justified by economic fundamentals, there is still a major speculative element. It suggests that while banks are well equipped to withstand a mild downturn in house prices, even a small slowdown in house completions could hit the building industry. "There is a macro risk from a contraction of the construction sector as the rate of house building is likely to slow from 75,000 a year at present to perhaps 40,000 to 50,000."
The memorandum suggests this could have serious implications. "It is not hard to construct scenarios whereby a shrinking construction sector knocks three percentage points off the growth rate. However, everyone is hoping for - and forecasting - a soft landing."
The OECD has suggested to Irish officials on several occasions that a property tax should be brought back as a way to avoid volatility in prices and bring about a soft landing. However, the Irish officials told the OECD this was "de facto impossible". But officials said there was a chance to abolish various tax reliefs to the construction sector.
The memorandum also talks about a major childcare package likely to be unveiled in the Budget. It says this package is likely to deal almost exclusively with the supply of childcare facilities, rather than the demand for such services.
Contacted last night for comment, a Central Bank spokesman confirmed the bank's senior economists met an OECD delegation in September and the issue of property prices was discussed. In relation to the 15 per cent figure he said: "It's not something we'd have any issue with. Different models show different results. Some show 0 per cent overvaluation, others show as much as 60 per cent."
He rejected the accusation the bank had deliberately sought to suppress specific figures because they might destabilise the market.
In preparation for its latest survey the OECD has met representatives of the Central Bank, the Department of Finance, the Competition Authority, IFSRA, the Central Statistics Office, the Irish Congress of Trade Unions, Ibec, ESRI and some of the large banks.