Central Bank warns of potential for ‘significant’ house price increases

Governor Gabriel Makhlouf told reporters the problems for supply in housing were already longstanding going into the Covid crisis.
Central Bank warns of potential for ‘significant’ house price increases

The Central Bank said a paradox of household savings may fuel the rising house prices.  Picture: Eamonn Farrell/RollingNews.ie

The Irish economy is by-and-large weathering the Covid crisis, but there is a risk that housing shortages will fuel significant house price increases in the coming months, the Central Bank has warned.

The warning is made in the regulator’s latest financial stability report which sets out the risks and the resilience of the Irish economy, as well as the financial health of companies, households, and its banks.

The report makes clear that the disruption to new house building during the Covid crisis is a major risk, potentially made worse if savings built up by some households during the crisis leads to increased demand for housing.

“While a fall in residential property prices arising from a prolonged Covid-19 shock remains possible, it is finely balanced with the potential for a widening of the mismatch between housing demand and supply to fuel significant house price growth in the near to medium-term,” the report said.

“With existing supply constraints, a high degree of pent up demand and a recovery in the flow of mortgage credit, the conditions for significant upward momentum to house prices in the months ahead appear to exist,” it said.

The report said that a rise in prices could increase the ability of buyers to take on more borrowings, which “may lead to borrowers and banks becoming more vulnerable to potential income shocks and/or house price declines that could arise in the event of further economic shocks”.

Household savings paradox

The Central Bank also pledged that any potential house price inflation will not destabilise the financial system, as happened 10 years ago.

Governor Gabriel Makhlouf told reporters the problems for supply in housing were already longstanding going into the Covid crisis.

"The conditions for significant upward momentum to house prices in the months ahead appear to exist," said the Central Bank in its latest financial stability report. Picture:Leah Farrell/RollingNews.ie
"The conditions for significant upward momentum to house prices in the months ahead appear to exist," said the Central Bank in its latest financial stability report. Picture:Leah Farrell/RollingNews.ie

But he said “paradoxically” a feature of this economic crisis could be that demand for housing will potentially be driven by the large level of savings households built up since early last year.

He said the Central Bank was not predicting the level of house price increases could be under its warning for the potential significant price growth.

However, Mr Makhlouf said the role that bank lending could play in driving house prices “was limited” -- unlike the case during the credit boom that helped lead to the banking and property market bust 10 years ago.

The Central Bank said its review of its mortgage lending rules which were put in place in the wake of the last financial crisis is ongoing.

The governor said that overall the risks facing the economy and banks since its previous report had fallen as the reopening gets underway.

Nonetheless, “the understandable” caution in reopening during the ongoing health challenges will have some effect later in the year, Mr Makhlouf said.

Cushion of government supports

The viability of some businesses will be tested as Government Covid supports come to an end and the financial health of many households is still weak.

He said it would be prudent for the Government to plan for lower corporate tax receipts amid the drive to reform the ways multinationals are taxed around the world.

Government supports have cushioned the shock but SMEs have suffered losses depending on how closely they were affected by the lockdowns.

The report reiterates that company insolvency numbers have been at low levels since the onset of the crisis last year because the Government has injected billions into helping corporates. However, the report said that this benign picture may change as those supports are reduced and lifted in the coming months.

For households, the report also said that the crisis has been eased by the income supports. 

The report notes that banks made financial losses in 2020 and took significant provisions to cover potential loan losses.

The lenders are in better shape to take on financial stress, according to the stability report.

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