Ireland has several economic problems, such as rapid jobs growth and overflowing Government coffers, that many countries would dearly love to have. However, there is nothing at all unique in the rapid increase in property prices here.
A recent headline in the Economist magazine warned that, globally, “the house price supercycle is just getting going”, with lower borrowing costs, demographics and planning all contributing.
That warning is ominous when you consider that, across the OECD, house prices have risen by a cumulative 80 per cent over the past decade. According to the OECD, the increase in Irish residential prices, at 78 per cent, is broadly in line with the average – certainly faster than the 45 per cent increase in Germany but slower than the 94 per cent rise in US property prices or a jump of 113 per cent in Portugal.
A quintessentially Irish solution to what is not uniquely an Irish problem has been suggested. Rather than deal directly with the problem by aggressively tackling planning problems and/or increasing property taxes significantly, one line of reasoning is that we should take the indirect route and use fiscal policy to slow the Irish economy and thereby limit pressures on the property market.
Any examination of global property trends in recent years will suggest that, even in economies where growth in activity and population is slow or negligible, property prices are rising quickly. Finding a fiscal setting that would cool the property market here without inflicting collateral damage elsewhere in the Irish economy would be far from straightforward. Britain’s Brexit-induced slowdown provides worrisome pointers in terms of unwanted policy effects.
There is little doubt that the pace of population growth has a material impact on conditions in the property market but population growth is not shaped by decimal places in economic growth. In recent years, Ireland’s experience has been altogether more forcefully shaped by Russia’s invasion of Ukraine.
Fortunately, a healthy and growing Irish economy has meant the ready integration of many Ukrainians into employment as well as delivering fiscal resources to support those fleeing war. A slower-growing Irish economy might have found this more of a struggle.
More generally, population growth has much more to do with the composition of growth. For example, it is significantly influenced by specific skills shortages in the tech industry and in other areas that are only loosely tied to general economic conditions. It is also a reflection of economic preferences and variations in wage levels across sectors and countries that lead to “domestic” mismatches and a need for workers from abroad in areas such as the hospitality and healthcare sectors.
The continuing increase in Irish property prices is not being driven by excess demand but by a decade of underinvestment in construction. For that reason, it is very unclear how much a blunt macro instrument like fiscal policy would have to be tightened to achieve a slowdown in economic growth that, in turn, would achieve a “Goldilocks” cooling in the property market.
As the general calibration of public spending and taxes offers only a very indirect route to property prices, the likelihood is that it would take a major tightening of fiscal policy to significantly alter their current trajectory. Such a fiscal shock would likely have substantial adverse impacts on the Irish economy.
Would continued fiscal support be worse? While standard theory might suggest that an expansive budget could curb private sector activity through crowding out effects, research recently presented at an ECB conference suggested that a sustained fiscal stimulus might instead boost private sector activity by making firms more confident of a continuing demand for their output.
Beyond the pure economic impacts of a fiscal pullback, it is likely that the significant burden of adjustment would fall on those most reliant on public services and/or those most affected by tax changes. In other words, slowing the Irish economy to shift resources towards construction risks being quite regressive and threatening social fracture. Consider, for example, who would bear the brunt of the social fallout of a significant shortfall in public spending on health.
Economics is often described as the study of the allocation of scarce resources. Unusually, but importantly, money is not the scarce resource in relation to Ireland’s housing and broader infrastructure problems. The focus in discussions of policymaking must shift from how much we spend to how effective that spending is and what obstacles need to be removed to make it more effective.
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Policy design and delivery must be centred on measures needed to markedly boost infrastructure spend in coming years. What is true of housing is also true of healthcare and climate change measures. If the Irish economy is to be successful and sustainable, it will have to run “hot” in coming years. How that can be done properly, and prudently, needs to be discussed a great deal more.
Austin Hughes is an economist