The Central Bank may need to be ready to tighten its controls over mortgage lending amid “some signs” the economy is over-heating and could be heading toward another property price bubble, the Organisation for Economic Co-operation and Development (OECD) has said.
In its latest report, the Paris-based think tank said with house prices rising and investment in construction ramping up that “some signs of over-heating are emerging” in the Irish economy.
It said that the so-called macro-prudential rules that help the Central Bank limit the amount of credit banks provide homeowners and SMEs for property loans are helping to reduce risks.
Nonetheless, it warns of a scenario that could lead to a further crash in property should house price increases “induce another property bubble associated with a strong surge in credit growth”.
“The property market is buoyant, as house prices and construction investment are rising strongly.
Notwithstanding high bank lending rates, new mortgage loans and SME loans (largely driven by construction-related ones) are increasing sharply, albeit from a very low base,” said the OECD.
“Macro-prudential policy tools currently in place, such as the loan-to-value and loan-to-income caps, have reduced the share of risky loans, and should be extended if necessary.”
Domestic watchdogs such as the Economic and Social Research Institute and the Irish Fiscal Advisory Council have longed warned about the risks of an over-heating economy as unemployment falls.
But the watchdogs have also said that the economy is not over-heating at this time.
Other economists believe there is more capacity in the labour market than the strong employment figures suggest.
The OECD said the economic outlook will remain “robust” but projects that GDP growth of 4% this year will slow to 2.9% in 2019.
It forecasts unemployment will fall to 5.3% next year from around 6% currently.
It supports plans by the Government to spend €116bn over 10 years on its National Development Plan but it wants a careful scrutiny of any spending to help ensure it secures value for money and only goes ahead if the Government debt pile is reduced first.
“The Government should remain committed to improving the fiscal position, thus making room to use fiscal policy against potential negative shocks, notably that of Brexit,” it said.