Government think tank warns of increased risk of house price crash

A LEADING government think tank has warned the risk of a house price crash has increased significantly in recent months.

According to the Economic and Social Research Institute’s (ESRI) latest economic bulletin, several factors have increased the risk of a bubble in the market.

Since mid-2005, house prices started to rise again, increasing in value from 6% in mid-2005 to over 10% at present.

That upward spiral followed a warning last year from the Organisation of Economic Cooperation and Development (OECD) that house prices in Ireland were over valued by as much as 15%.

When those two factors are taken into account, on top of the threat of another 1% hike in European Central Bank (ECB) interest rates over the next 12 months, “it is impossible not to come to the conclusion, even if it is a tentative one, that the possibility of a house price bubble has increased,” said Dr Alan Barrett, co-author of the bulletin.

If the market collapses Dr Barrett said that the dip in prices “could be much higher” than the 15% OECD estimate last year.

While the risks of a bubble have increased, Dr Barrett said a “soft landing”, where prices would stop rising was still the most likely scenario.

Meanwhile, following the PD’s pledge at their annual conference to cut taxes if returned to government, the ESRI warned any cuts in taxation “would have to be matched by a similar cut in overall government spending.”

It was important that the economy was not primed any further, given that it is continuing to grow strongly, said the bulletin, and any priming would be better used when the economy moved to a period of slower growth later in the economic cycle.

The ESRI also expressed concern at the ongoing loss of competitiveness in exports, which has continued since 2003.

While exports will rise in 2006, in global terms Ireland will continue to lose market share, the ESRI said, noting that the main problem is that wages are rising at the rate of about 5% while productivity is close to zero.

However the ESRI remains positive on the economic outlook and has revised its growth forecast up modestly for this year to 5.1%.

Employment will remain strong and is set to increase by 67,000 in 2006. To meet that demand will require an inflow of up to 53,000 immigrants in the current year.