OECD warning on new house price bubble

The housing market could be heading into another bubble and Government and regulators should be ready to act, the OECD has warned.

The Paris-based think tank said it was worried about the large increases in residential house prices. “The sharp rise in prices and lending raises concerns that another bubble may be forming, and the authorities should stand ready to tighten prudential regulations if needed,” it said in its latest report on Ireland.

The report was published on the same day that CSO figures showed house price inflation had re-accelerated to an annual 10.5% in April. Supply will likely remain restricted for “some time”, warned the OECD.

“Property prices are rising rapidly on the back of strong economic growth and a shortage of housing supply.

“Property-related loans are increasing fast, contributing significantly to the recent recovery in total new lending. Activity in the construction sector is gaining momentum, but supply is expected to fall short of demand for some time,” said the OECD.

The Central Bank did not comment on the report.

The European Commission, in a major report two weeks ago, also warned about the consequences of housing shortages but said there was “currently no evidence of overvaluation” in property prices.

The Irish Fiscal Advisory Council this week and the Economic and Social Research Institute in recent weeks said that the economy could overheat if too many resources were sucked into building houses.

The OECD also said rising home prices should help banks sell non-performing loans.

“The high level of private indebtedness leaves Ireland sensitive to a rise in interest rates. Conversely, property prices might rise more strongly than projected, which would support construction activity in the near term, but might also sow the seeds of another bubble,” said the OECD.

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