The latest Permanent-TSB/ESRI index shows that house prices rose by 12 percent to November and the cost of the average home in Ireland is now euro 203,000, compared to euro 183,000 a year ago.
In its winter bulletin, the Central Bank says easy credit conditions may be fueling the “rapid acceleration in residential property prices.”
Mortgage lending has been particularly strong with the pace accelerating sharply this year. In the first quarter of the year it was running at a rate of 15.6 percent, but by the third quarter it was up to 23.5 percent.
“While there are a number of fairly strong fundamental factors underlying demand in the housing market, such as demographics and employment, the Bank is nonetheless concerned about the recent re-acceleration in house prices,” the bulletin says. “The concern is heightened all the more because the increases are coming on the back of house price levels that are already high by international standards.”
The Central Bank has asked building societies and commercial banks to stress test their customers and ensure lending is made at sensible levels despite the intensive competition in the financial services sector.
If interest rates go up and there is more widespread loss of jobs with increased industrial closures, many homeowners could quickly get into financial difficulties.
Tom O’Connell, head of economic research at the Central Bank, said the move was “pre-emptive” rather than an indication that anything was fundamentally wrong at this stage.
“We have seen internationally that it is the property sector that does cause bad loan problems for banks,” he said. “There is no real issue here at the moment in that respect.
“The Central Bank over a number of years has been in communication with the banks really to urge them to be cautious and not to overextend themselves.”
The bank’s winter report reduces its growth forecast for next year to less than 3 percent GNP and 3.5 percent GDP and says even that depends on a recovery in the international economy.
In its autumn quarterly, published in October, the bank had predicted the economy could grow by about 4.25 percent GNP, or 4.75 percent GDP, in 2003.
“An improvement in the international recovery is critical to any domestic recovery to sustainable growth levels, although this seems unlikely to happen now until well into 2003,” the report said.
It said a significant gap had opened this year between GDP and GNP.
GNP growth, the bank’s preferred measure, this year is now unlikely to be more than 2.5 percent, with GDP increasing by about 4.5 percent.
“This gap is due to a substantial increase in net factor income outflows in the early part of the year,” the bulletin says. “Irish growth has reduced sharply from 10.7 percent two years ago.
“It was generally accepted that growth would have to decelerate, due to capacity constraints, but the speed and extent of the reduction has been greater than expected.”
Inflation is forecast to be 4.5 percent next year with indirect taxes in Finance Ministers Charlie McCreevy’s Budget 2003 earlier this month being partly offset by recent reductions in mortgage rates.
The bank expects unemployment to increase and average about 5 percent next year.