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ESRI: No end in sight to rent and house price spiral

  • Brexit and the housing crisis are the main factors that threaten the economy
  • Housing costs pose a 'significant challenge' to domestic competitiveness
  • Prices to continue to spiral
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Donal O'Donovan

Donal O'Donovan

There is no end in sight to the housing misery that is leaving thousands of families struggling with spiralling rents or unable to afford homes, a leading think-tank warns today.

Brexit and the housing crisis are now looming as the main factors that threaten to damage the economy.

The stark warning from the ESRI lays bear both the human and economic toll from the drastic shortage of homes.

It warns housing costs currently pose a significant challenge to domestic competitiveness for Ireland.

Supply is still well below demand and falling unemployment, wage growth and inward migration are all set to drive prices higher, it said.

Despite recent calls on Finance Minister Paschal Donohoe to use a strict Budget to cool possible overheating in the economy, the ESRI says slamming on the fiscal breaks just as Ireland could be hit by a chaotic Brexit risks making a bad situation worse.

It says Government should prepare for the risk a no deal scenario presents by keeping spending ticking over - including crucially maintaining investment in homes.

Turning to housing, the ESRI's Quarterly Economic Commentary says low income households in the private rented sector are worst hit.

With the supply of new homes still below the level of "structural demand" - a measure of the numbers needing homes - upwards pressure on rents and house prices is set to continue, the ESRI said.

It thinks housing policies should be targeted at lower income groups - including provision of social and affordable homes, within the push to increase overall supply.

The Central Bank's mortgage rules do appear to be moderating house price inflation, in Dublin in particular, said ESRI Research Professor Kieran McQuinn.

House building is also accelerating with completions up 34pc in the second quarter of this year compared to a year ago - but not enough to contain prices rises. "We still see housing demand continuing to increase upward pressure on prices and rents but not enough to stop the price rises - exacerbating the current situation," said Prof McQuinn.

The housing crisis means there is a strong case for public capital investment to take heat out of the economy.

But the housing crisis, combined with the risk of a no-deal Brexit that could sucker-punch the economy, means a neutral Budget is best, the ESRI said.

That means no major spending cuts and any tax cuts should be matched by a tax rise elsewhere.

A small surplus is still likely next year, but maintaining overall spending through any Brexit shock would help Ireland escape the worst of an external downturn.

"In a small open economy such as Ireland, at this point in the cycle, the most prudent policy would be to run budgetary surpluses and reduce the level of indebtedness," the report said.

"This would provide buffers to withstand future economic shocks. However, with the infrastructural deficits in areas such as housing, and the potential adverse implications of Brexit, there is a case that Budget 2019 should be a 'holding budget' and should, therefore, look to neither inflate nor deflate the economy."

The ESRI dramatically hiked its forecast for growth in the economy, measured in GDP, to 8.9pc from 4.5pc this year.

That is largely driven by payments and investments within the multinational sector, ESRI economist Conor O'Toole said, but growth in the domestic economy is picking up pace.

Growth is forecast to be 4.5pc next year, but that is based on the likelihood of a relatively benign Brexit deal.

Original article here