OECD Irish warning from 2006 resonates

The last time the OECD warned about the possibility of a housing bubble in Ireland was on the eve of the financial crash, in June 2006.

In a 26-page report on Ireland’s housing boom, economists David Rae and Paul van den Noord investigated what was driving this country’s surging residential property price market. They asked whether prices had already overshot. Their warning was ignored. The OECD was subsequently one of the international organisations that came under fire for not ringing the alarm bells loudly enough.

The 11-year-old report resounds to this day. It echoes most of the concerns about current housing supply and prices here raised by the Irish Fiscal Advisory Council and the European Commission, even though in its report two weeks ago the commission found “no evidence of overvaluation” in house prices.

Back in 2006, the OECD economists wrote: “The Irish housing market is very buoyant. The housing boom is driven by strong economic growth, dynamic demographics and low-interest rates. However, large tax advantages and relatively lenient credit policies by banks have also played their part, and prices may have become overvalued.”

They went on: “To the extent that high house prices reflect favourable tax treatment they may lead to economic inefficiencies by drawing excessive resources into residential construction”.

And they concluded: “While a soft landing appears the most likely prospect, a disorderly correction of house prices would pose risks for macroeconomic and possibly financial stability. In this context, one policy lever available to the government would be a phased removal of the tax advantages associated with housing. In addition, banks should remain cautious in their lending and provisioning policies.”

The tax incentives the OECD had in mind in 2006 were the huge breaks the government had directed to developers. Large swathes of housing that no one wanted were built up along the Shannon, from Leitrim down to Limerick.

The banks, meanwhile, were pumping credit to house builders and commercial and retail developers. At the same time, the lenders were throwing huge sums at buyers of houses and commercial and commercial real estate. In 2006, it was probably already too late. Irish banks had pumped up the property market with reckless lending for the previous three or four years.

Last year, analysts roundly criticised Finance Minister Michael Noonan for introducing the help-to-buy incentive, a scheme for first-time property buyers to save towards the deposit needed to secure a mortgage.

Central Bank governor Philip Lane has insisted that the loosening of its mortgage controls won’t add to house price inflation. But burnt back then, it appears the OECD is taking no chances with Irish property this time.