The Central Bank has issued its strongest warning yet on the property market, saying it is essential that the growth rate of both house prices and mortgage borrowing slows in the near future. Cliff Taylor, Economics Editor reports
Otherwise household debt levels will reach dangerous levels and the risk of a destabilising fall in house prices will increase, it cautions.
Overall borrowing in the economy is increasing at 23 per cent per annum - four times the euro zone average - and if this continues "Ireland would become one of the most indebted countries in the euro area within a few years", according to Mr John Hurley, the bank's governor. Most of the borrowing is on mortgage loans, now increasing at an annual rate of more than 27 per cent.
The bank has again expressed concern about the continued rise in house prices, which are now among the highest in Europe. Mr Hurley, in some of the strongest comments from the bank on this issue, warned that if the current rate of increase in prices was to continue, the risk of "a significant correction" would increase.
While the bank is cautious in the wording of its warning, it is clear that it fears that further increases in house prices could leave the market vulnerable to a period of falling prices in future years.
The general outlook for the economy is good, according to the annual report. The bank has increased its forecast for Gross National Product growth this year to 4.25 per cent, one percentage point above its earlier forecast, and says growth could reach 5 per cent next year. However, it cautions that inflation must be held in check as economic recovery gathers pace in order to maintain competitiveness.
Prices here are some 12 per cent above the euro zone average, the bank points out, and only a prolonged period of lower inflation than the rest of Europe will bring them down closer to the average.
Growth in the economy is currently broadly-based, the report says, with services, manufacturing and construction "all showing significant output increases". The bank's upgrade in its forecasts follows a string of positive economic data showing a strong jobs market and buoyant tax revenues. Growth of more than 4 per cent would be more than twice the expected EU average.
The bank warns that global uncertainties could still pose a danger, pointing to the risk of higher oil prices or the threat of a sharp fall in the dollar due to the rising US trade deficit. However, it reserves its main warning for the property market and mortgage lending.
The strong growth in lending has brought Ireland from one of the lower debt countries in the EU to a level "now on a par with other high-income countries", the bank says. Its concern is that continued strong growth in borrowing driven by home loans could leave households highly indebted and vulnerable to an economic downturn or higher interest rates.
If credit growth does not slow "we will become a very indebted country, that is the concern", Mr Hurley warned. "There is clearly a limit to the extent that borrowers can sustain rates of credit growth that are substantially above nominal income increases," he added.
Housing demand remains high, the report says, but the strong increase in new home building in recent years suggests that price growth should slow. The bank was surprised at the continued buoyancy in house prices, Mr Hurley said. However, the bank repeated its warning that the buy-to-let sector "remains vulnerable", as rents have been falling reflecting increased supply.
The Irish Financial Services Regulatory Authority (IFSRA), the body which oversees the financial sector, is liaising closely with the banking sector to ensure lenders take adequate account of lending risks, according to the annual report. However despite IFSRA asking the banks to tighten up on lending practices, recent figures have shown a sustained rise in the pace of mortgage lending growth.