Housing slump likely to worsen, warns OECD

THE Organisation for Economic Co-operation and Development (OECD) said worsening housing conditions in the US, Ireland and Spain could dampen consumer spending and slow global economic growth.

“Downturns in housing investment already under way in the US, Ireland and, to a lesser extent, Spain are likely to become more pronounced,” the Paris-based group said in its economic outlook yesterday.

The property contraction was undermining growth in the OECD’s 30 member countries, including Ireland, it said.

In Ireland’s case the report warned GDP growth would fall to 3% next year, but pick up again in 2009 to reach a level of 4.5%, as housing construction levels return to more sustainable levels.

It warned also that exchequer returns, which gained significantly from the property boom, will suffer a sharp hit to its coffers in the years ahead.

Due to the growth constraints emerging here, the OECD — echoing some of the sentiments of Finance Minister Brian Cowen’s budget — warned priority would have to be given to capital investment, while current spending would have to be constrained.

In that context, “sharp pay increases in the public sector needed to be avoided” to ease the strain on the national finances it said.

Over the 10 years of the housing boom, the sector became a growing part of the economy, accounting for more than a tenth of GDP in 2006, the highest in the OECD.

The fall in housing investment is having a substantial effect on construction output and job losses are starting to emerge while house prices have fallen and “are likely to fall further”, it warned.

It remains to be seen however, what the final impact of this easing in demand for housing will have globally.

However the OECD said it expected the housing “adjustment will lead to major subtractions from growth for most countries, as is currently the case in the US”.

“At the very least it will mean the disappearance of a factor which was previously boosting growth in many countries.”

Because of the deteriorating conditions, the OECD has cut its growth for its member countries to 2.3% from its previous projected figure of 2.7%, made in its May report.