Despite signs of a slowdown in house price growth, financial services group Friends First is still predicting prices to rise by a further 10 per cent this year.
In its latest quarterly outlook, prepared by economist Jim Power, the firm said demand for housing was been driven higher by solid fundamentals such as population growth, employment creation and an improvement in credit availability.
Against a background of limited supply, this was driving prices and rents higher, it said.
“Not surprisingly, the debate has started again about the bubble-like properties of the market. The argument about whether it is a bubble or not, is not really the point,” the report said.
“The crunch for any market comes when it is hit by a shock, such as the sub-prime crisis back in 2008,” it said.
“If rising house prices have pushed debt levels higher, which is now happening, then the whole market and the economy becomes very vulnerable as was found out a decade ago,” it said.
Property websites MyHome.ie and Daft.ie both recorded a slowdown in headline inflation in their most recent quarterly reports.
Mr Power warned of the potential dangers of allowing Ireland’s strong economic growth to overshadow the need for “rigorous risk assessment” so as to avoid repeating the political and economic pitfalls of the past.
In the report, he highlighted the current pressure on Ireland’s corporate tax system and its reliance on a small number of very large companies; the erosion of competitiveness from rising rents and house prices, and the impact that inflated measures of gross domestic product (GDP) on fiscal parameters, as key risks.
Nonetheless, he said positive economic growth was now synchronised globally with the global economy in a relatively "sweet spot". While headline GDP here rose 7.8 per cent last year, the group said the 3.9 per cent rise in "modified domestic demand" - a measure devised by the Central Statistics Office to weed the effects of globalisation - was a more accurate measure.
“This growth number appears like a much more realistic and believable snapshot of what went on in the economy last year,” Mr Power said.
Friends First is forecasting growth of 5 per cent in 2018, ahead of the Department of Finance’s forecast of 3.5 per cent, albeit this is expected to be revised upward as part of the Government’s Stability Programme Update later this month.
According to the report, a greater focus on providing support to the indigenous economy is required.
“Due to the gathering momentum of the global corporate tax debate and increased attention on Ireland’s corporate tax structures, Ireland’s foreign direct investment (FDI) model faces some level of threat,” Friends First said.
However, the report goes on to identify the real problem as being Ireland’s over dependence on a small number of very large multi-national companies for corporation tax receipts. Recent data from the Revenue Commissioners indicate that 37 per cent of the Republic’s €8 billion in corporate tax receipts come from just 10 companies.
“All in all, the indications for the coming year are positive. It is essential that national policy focuses very strongly on broadly-defined competitiveness,” Mr Power said.
“This includes wages and other business costs; IT infrastructure and capability; high quality public services; prudent management of the public finances; and the personal tax burden,” he added.
