THE Government has been urged to consider adding a temporary tax on new mortgages and the tightening of lending regulations to curb rising house prices.
The recommendations are made by the Economic and Social Research Institute (ESRI), which says rising house prices may fuel pay demands.
The ESRI also warns the impact on the pound of sterling's continuing strength may have to be addressed, possibly by allowing the pound to depreciate on the currency market. It admits this would spark inflation, but says it is a worthwhile risk to avoid entering EMU with an overvalued currency.
Writing in its Quarterly Economic Commentary, ESRI economists say that it would be "desirable" to curb house price increases. The obvious way would be through increasing interest rates, but this route is not feasible because of currency considerations.
Mr Terry Baker, one of the report's authors, told The Irish Times that a surcharge on new mortgages would, depending on the charge, have the same effect at a half or 1 per cent increase in interest rates.
He said it was necessary to ensure that "unwise lending" was not taking place, but there was no great evidence" of "mortgages being shovelled at people who cannot afford them". He said the Government should have the powers to curb rising house prices should the trend continue.
The ESRI is concerned that, with pay rises remaining moderate in future years, a greater proportion of people's income could he consumed by mortgage repayments. Such a scenario could also lead to a rise in borrowing for general purposes, fuelling inflation.
"I don't see a big rise in interest rates coming, but if the whole EMU project were to collapse, it could happen," Mr Baker said.
Mr Baker said sterling's strength could not continue indefinitely and that it was as uncompetitive now as it was in 1992. "The hope is that it will come down, in time, and get us to where we want to be," he said.
The ESRI says that although it remains reasonable to hope for some depreciation of sterling later this year and early next year, it would be "imprudent" to rely on it. If depreciation does not occur, the ESRI warns that the problems associated with the pound moving to an appropriate EMU entry level will have to be addressed.
It says a depreciation of the pound against the continental currencies, sterling and the dollar simultaneously would almost certainly result in a once off rise in Irish inflation next year and the year after. "This would appear to be a worthwhile price for avoiding entering monetary union with an overvalued currency," it says.
In this case, it predicts a rise in the Consumer Price Index to about 3 per cent by the end of 1998, which would prove temporary. The subsequent depreciation of sterling would reverse inflation in following years.
The ESRI says the "most immediate challenge is to keep public expectations in check, especially where the power of unrealistic expectations is reinforced by sectoral interest groups with industrial or political strength."