Building sector reliance 'must end'

THE Central Bank has warned that the economy's reliance on the construction sector cannot continue indefinitely.

The bank's governor, John Hurley, said that the size and contribution of the construction industry to the country's economic growth is "beyond what is sustainable in the long run."

Publishing the bank's annual financial stability report yesterday, Mr Hurley said the construction industry is currently building more than 70,000 housing units a year, more than the 50,000 it believes is required.

The bank said that the continued increase in the supply of housing is contributing to the surge in mortgage lending, which hit a five- year high in September.

"Our central expectation is that a lower contribution to the country's economic growth and employment will come from a gradual slowdown in the housing construction sector over the next several years," Mr Hurley said.

"However, the possibility of a sharp correction in the domestic construction sector, which is currently producing housing units apparently well in excess of medium-term requirements, cannot be entirely ruled out," he said.

The bank said that any decline in the construction industry would have knock-on effects on employment and for the public finances.

The financial stability report said borrowing - for mortgages and personal use - was expanding at a strong pace and if there was a shock to the economy many people could struggle to meet their repayments.

The bank said that any shock would be the result of external factors such as high and volatile oil prices and the risks of sharp movements in exchange rates.

As a small, open, economy, Ireland is vulnerable to outside influences, it said.

"Finally, there is a risk of a correction in international bond and some other asset markets, where possible overpricing and narrowing of spreads reflect an ongoing search for yield leading to a possible understatement of overall risks," it added.

Frank Brown, the bank's head of monetary policy and financial stability, said the high level of borrowing can be positive for the economy as a whole.

Mr Hurley added the outlook for the economy was broadly positive, with growth of 5% expected this year.

He added: "Our central scenario with respect to the state of financial stability is that the current health of the banking systems leaves it reasonably well placed to withstand pressures from potential adverse developments in the short to medium term."

On the housing market, where the bank has also expressed concerns in the bank, it said that it was pleased with the moderation in house price growth this year.