Warnings about the risks of the Irish economy overheating are becoming more commonplace as the unemployment rate drops below 6% and house prices and mortgage lending continue to rise at strong double-digit rates, writes Oliver Mangan.
Last week, the OECD warned that “some signs of overheating are emerging” in the Irish economy. It expressed concern that the pace of lending growth was “increasing sharply” and warned of the risk of “another property bubble associated with a strong surge in credit growth”.
The Paris-based economic think-tank also warned that as the labour market tightens, “wage pressures will be strong, feeding into higher inflation.”
There is no doubt that the crash landing of the Irish economy in the last decade, on the back of excessive growth in credit, has left deep scars. Nobody wants to repeat the same mistakes again and lessons have been learnt.
The Central Bank now has strong macro-prudential rules in place that curtail mortgage lending, while there are also stricter EU controls over fiscal policy.
It is true that there has been strong growth in mortgage lending in recent years, but it is important to understand that this is coming off a very low base.
In absolute terms, the level of mortgage lending remains low and is still well below that required in a normalised housing market.
At the peak of the last cycle over 10 years ago, mortgage lending was running at €35bn per annum. Last year, mortgage lending was just above €7bn, or less than 20% of this level.
Indeed, the amount of total mortgage debt outstanding in Ireland is still in decline, despite the strong pick-up in lending in recent years.
Furthermore, growth in mortgage lending is now decelerating, rising by 22% in the first quarter of this year, down from 29% in 2017.
This trend looks set to continue as growth in mortgage approvals slowed to 11%, in value terms, in the first four months of the year.
Indeed, the number of mortgage approvals has flattened out since last autumn, which is consistent with the levelling off in residential property transaction volumes seen in the first quarter of 2018.
The supply of new housing is continuing to rise, with both commencements and completions maintaining their strong growth rates in the opening months of this year.
Completions, as measured by ESB electricity connections, are now running at a 20,000 annual rate.
The strong uptrend needs to be sustained over the next number of years to bring the number of completions up to near the 35,000 level that is required to meet estimated annual demand.
This will require further good growth in mortgage lending and also in lending to the construction sector to finance house building.
Rising housing supply is also required to dampen high house price inflation and high rent levels, which are emerging as real risks to the competitiveness of the Irish economy.
In terms of broader overheating risks, the public finances are being managed in a very prudent manner. Indeed, the OECD estimates that fiscal policy will be “mildly contractionary” in both 2018 and 2019.
Meanwhile, Irish inflation averaged just 0.3% in the first four months of the year, well below other countries.
Irish average hourly earnings rose by 2.7% year-on-year in the first quarter, right in line with the US and UK. Inward migration is helping to meet the strong demand for labour in Ireland.
Overall then, it would seem to be a bit premature to worry about overheating risks in the Irish economy.
Oliver Mangan is chief economist at AIB
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