In the latest OECD economic survey on Ireland, the global think tank says that house prices are more likely to level out rather than crash
In the past decade, house prices have risen faster than in any other OECD country, and average prices have roughly tripled in real terms.
The OECD said that most of this increase is justified by the economic and demographic driving forces such as surging incomes, a rising population and changing living habits, with an additional fillip from low interest rates.
“House prices may have overshot fundamentals to some extent, although this does not imply that they will fall significantly; and house building will eventually ease,” the OECD said.
The OECD said that while the most likely outcome is that there will be a soft landing for house prices, there are alternative scenarios on the upside and downside that could have significant macro-economic implications.
The first is that the housing boom may not run out of steam of its own accord, leading to serious overvaluation and imbalances throughout the economy. The eventual fall-out in this scenario could be severe, according to the OECD.
With monetary policy now set by the European Central Bank, taxation is the main policy lever to influence the housing market.
The OECD said that Ireland’s tax system is significantly more favourable to housing than in most other OECD countries and the government should avoid any tax changes that make housing more attractive.
The think tank said that aside from not fuelling the housing market, there are efficiency and equity reasons for reducing the tax advantages.
“A property tax could be introduced to help fund local infrastructure. This would also redistribute some of the windfall gains that accrue to people living close to new roads and public transport links and shift the cost for local services such as water and sewerage facilities so that businesses and households each pay their fair share,” the OECD recommended.
“While this makes economic sense, in an Irish context where over 80% of the population own their own homes, it is currently seen as a non-starter. The second scenario is that house prices fall sharply, either because they are more overvalued than they appear or because a negative shock hits the economy. The impact on activity and the budget could be large.”
The global think-tank said a sharper fall could not be ruled out so the Government ought to take steps to ensure the health of the public finances.
”The government needs to leave plenty of breathing space by balancing the budget or running a surplus, curtailing tax breaks and pushing ahead with public management reforms to get better value for money from public expenditure,” it said.
Economic Survey of Ireland 2006
OECD rules out housing market crash
OECD Economic Survey of Ireland 2006: Too many sectors where producers are shielded from competition