Rapid increases in house prices could be creating the conditions for significant financial and social problems in the future, the ESRI has warned. In the institute's latest Quarterly Economic Commentary, Mr Terry Baker, senior research officer, has warned that rapid house price increases could continue unabated in 1998 with interest rates due to fall.
Mr Baker also warns that if the catch-phrase "it's payback time" were to become the dominant spirit, society as a whole could be paying for it for years to come by way of higher unemployment and lower real incomes.
According to Mr Baker, both mortgage lending and credit borrowing are at a "worrying level".
He also warned that people who think their jobs are secure may find that this is not the case over the longer term and could find themselves very exposed. He pointed to the job losses at Seagate as an example of an area where employees may believe that their job is secure when it is not.
"There will be job losses in places and if people are at their borrowing limit, they could be really in trouble," he added.
In addition, he noted, it would become even more difficult to enforce Central Bank credit lending guidelines after the advent of the euro next year, which is likely to bring further lenders to the Irish market.
To maintain recent economic achievements there is a need for fiscal responsibility on the part of the Government, continued realism from the social partners and a considerable degree of prudence, particularly with regard to personal borrowing, on the part of financial institutions and, crucially, of individual borrowers, according to Mr Baker.
Overall, he is expecting economic growth to slacken perceptibly in 1998. The increase in Gross National Product is expected to slow to 6 per cent this year from 9 per cent in 1997.
Such a rate of growth should lead to a rise in employment of 42,000, although he warns there will continue to be some job losses as well as new jobs coming on stream.
At the same time, he forecasts inflation at 2.3 per cent this year, although he said this could be as high as 3 per cent following the fall in the value of the pound this month.
The principal danger here, according to Mr Baker, is that it could undermine existing pay agreements, jeopardising output and employment growth in future years.
A revaluation of the pound's central rate in the ERM - meaning we would join monetary union at a higher rate - could only affect the rate by as much as 0.5 of a percentage point. This is relatively small, compared to the affect which swings in the value of sterling and the euro could have.
Mr Baker called for more policy measures to help people shift from dole to work and said the recent Budget missed the opportunity which would have been afforded by substantially increasing personal tax allowances.
In addition, future pay settlements ought to contain greater flexibility, through profit sharing or a significant bonus element which would only be paid in periods of favourable market conditions, such as 1997.
