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Contents | Executive summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Ireland published on 16 April 2008.
Contents
The housing market cycle has turned
The buoyant housing market helped to sustain strong economic growth in recent years as housing investment reached almost 16% of gross national income (GNI), the highest in the OECD. But the market has turned since 2006. Much of the exceptionally large increase in house prices can be justified by Ireland’s strong income growth, population expansion and the rising share of younger households. However, house prices appeared to have overshot their long-run equilibrium level and a rebalancing of demand and supply in the housing market was necessary. Some further easing in house prices is possible and there is a risk that prices could fall below their long-run level before recovering. Housing investment has fallen sharply and indicators of future activity, such as building permits, are much weaker than in recent years. In line with international experience of housing construction cycles, it is anticipated that this downswing in activity could soon be over and that house-building would fairly quickly return to the rate needed to meet the growing demand for housing. On this basis, GNI growth is projected to decline from 5% in 2007 to 3% in 2008, before recovering again in 2009, while unemployment could rise to 5½ per cent. Downside risks to growth prevail. The slowdown in the housing market could be sharper and more protracted, with greater implications for employment and the wider economy. Risks of lower growth also stem from economic weakness in the United States and the United Kingdom, and the strength of the euro against the dollar. Ireland is particularly sensitive to such developments due to the direction of its trade flows and the important role played by US firms in FDI.
House prices rose faster than income but have eased
Average 1990 Q1 - 2007 Q2 = 100
Source: OECD (2005), OECD Economic Outlook, No. 78, updated data.
The Irish housing tax system is among the most favourable in the OECD. This generosity has generally contributed to the volatility of the housing market, although the recent reforms to stamp duty were well-timed to support the housing market during the current slowdown. Such instability is particularly costly as Ireland is a small member of a much larger monetary union. It can no longer use monetary policy to slow house price growth or cushion the broader effects of a sharp slowdown in the housing market. Tax breaks favouring owner-occupation also contribute to making housing expensive. These effects should be reduced either by limiting mortgage-interest tax relief with the aim of phasing it out over time, or by introducing a property or capital gains tax. While this makes economic sense, in the Irish context where over 80% of households own their home, a profound tax reform of the housing sector is unlikely to be implemented any time soon. However, the experience of other countries shows that these reforms can be made and that a gradual approach is likely to be successful.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Ireland 2008 is available from:
- SourceOECD for subscribing institutions and many libraries
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Government officials with accounts ( subscribe) can go to the "Books" tab on OLIS
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Additional information
For further information please contact the Ireland Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Sebastian Barnes and David Rae under the supervision of Peter Hoeller. Research assistance was provided by Isabelle Duong.
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