Economic outlook brightens but housing crisis could yet deepen, ESRI warns

The think tank increased its growth forecasts and lowered its projections for inflation this year

The ESRI estimates 27,000 new homes will be built this year, down from almost 30,000 units in 2022, as building costs soared.

The outlook for the Irish economy has brightened, but price pressures and higher-for-longer rate hikes will likely weigh on many households and hit key sectors such as house building, the Economic and Social Research Institute (ESRI) has warned. 

In its latest quarterly report, the leading think tank increased its growth forecasts and lowered its projections for inflation this year since its previous report in December.  

GDP will expand by 5.5% this year and quicken further to 6% in 2024, it said in the new forecasts that are also significantly higher than the 4.9% and 4% growth rates forecast by the European Commission last month. 

Inflation pressures will ease considerably but vulnerable households will continue to face "significant challenges", while further rounds of interest rate hikes by the European Central Bank could hit house building and other key sectors hard, the ESRI warns.

Kieran McQuinn, economics professor at the ESRI, said new census data later this year, which will likely show the population is growing faster than previously thought, will highlight the continuing acute demand for housing.  

ESRI researchers in the past estimated that 30,000 to 35,000 new homes a year were required to start meeting demand and help to keep house price and rental inflation in check. 

However, the new census data will likely in turn mean that the ESRI increases its new homes targets, Prof McQuinn said.

"House building costs is one of the reasons, I think, you saw the [house] commencement data down last year and in turn why the overall supply levels are likely to be lower this year than what they were last year," Prof McQuinn said.

ESRI professor Kieran McQuinn said new census data later this year, which will likely show the population is growing faster than previously thought, will highlight the continuing acute demand for housing.  

Building costs soar

The ESRI estimates 27,000 new homes will be built this year, down from almost 30,000 units in 2022, as building costs soared. It forecasts 31,000 completions in 2024, boosted by Government housing policy, but noted "numerous risks on the downside to these forecasts such as interest rate increases, broad financial stress and further inflationary factors".  

Meantime, inflation and further interest rate hikes have pushed up building costs, made securing a first-time home loan less likely, and could increase demand for rental properties "which are already under pressure", Prof McQuinn said.   

The ESRI, nonetheless, predicts a modest rise in house prices this year.  

Recession looks less likely than it did at the start of the year, although the banking crisis of recent weeks could weigh later this year, according to the report.  

The reasons, the ESRI highlights, include consumption holding up, low levels of unemployment through the pandemic and through the cost-of-living crisis, and robust government finances, which will lead to a further annual budget surplus this year.   

The Irish domestic economy faces heightened risks should interest rates stay higher for longer and should the information and communications tech giants hit further turbulence. The ICT firms employ 165,000 people in Ireland and contribute billions of euro to the €22.6bn the Government collected in corporation taxes last year.