The rise in house prices in Ireland cannot be explained by economic trends, leaving the market vulnerable when interest rates start to rise, according to a new analysis from the International Monetary Fund (IMF). Cliff Taylor, Economics Editor, reports.
Ireland is one of a number of countries identified by the IMF as having house price levels between 10 and 20 per cent above values justified by factors such as growth and low interest rates, with the others being Australia, the UK and Spain.
Its analysis, included in a chapter from its forthcoming World Economic Outlook, suggests the overvaluation in the Irish market is towards the top of this range.
The IMF study breaks new ground by examining how house prices move together across international markets. The current upturn in house prices has been a "global phenomenon" across many industrialised countries, it suggests, warning that "any downturn is also likely to be highly synchronised across countries, with corresponding implications for the world economy".
Higher international interest rates is the most likely factor to trigger a downturn, it says. In many cases this will be "manageable".
However it warns that in countries where houses are highly priced - such as Ireland - "there is a risk that an increase in interest rates could trigger a sharp house price drop with more severe consequences for economic activity".
In these countries it says that "early but gradual" increases in interest rates appear the best approach. This is the approach being adopted in the UK, where successive rate rises by the Bank of England are starting to cool the housing market. However interest rates here are controlled by the European Central Bank which has held rates at a low level.
The IMF analysis follows a warning from the Central Bank earlier this week that borrowers were not taking sufficient account of the likelihood of higher interest rates when calculating the size of mortgage they could afford.
The bank has said that unless the rate of borrowing growth slows, the rate of indebtedness in many Irish households could soon approach danger levels.
The latest warning is one of several comments from the IMF about the dangers facing the property market here. The latest study includes comprehensive new economic analysis looking at the factors behind rising house prices between 1997 and 2003.
Prices here have approximately doubled over the period, it says, saying that about 80 per cent of the increase could be explained by factors such as low interest rates and higher disposable incomes.
Ireland is one of the markets where it finds "an important portion of the increase" in prices remains unexplained by these underlying economic factors, leading to its concern about vulnerability in the face of rising interest rates and higher loan repayments.