Moody’s rating agency has warned that rising rents and house prices in Ireland could deter skilled foreign workers, although there is currently no indication that the economy is overheating
The dominant role played by multinationals, the risks of a hard Brexit, as well as house prices, are among the main threats facing the Irish economy. These factors require the Government to provide more financial buffers to offset potential shocks, according to the Moody’s Investors Service.
The rating agency has raised its growth forecast for Ireland this year to 5%, from 3.7%, mainly motivated by the continuing recovery of private consumption and residential investment.
However, the report noted that Ireland has an unusually high degree of economic volatility, principally due to its open economy, saying a buffer needs to be in place to protect the public finances.
Moody’s analysts said: “Reduced affordability — as is also evident in the rental market — might eventually have an impact on the ability to attract skilled foreign workers or sustain growth in foreign investment.
“The government has recognised the problem and is spearheading a number of initiatives aimed at addressing the shortage and encouraging new construction, including increasing the provision of social housing and revisions to building standards and planning procedures — with the overarching objectives of reaching an annual level of residential construction of 25,000 homes and delivering 47,000 social housing units by 2021.”
However, the rating agency said the measures will need time to take effect, and warned that the capacity of local councils to deliver social housing is a key constraint.
Moody’s suggests new housing supply will likely remain below demand for some time, and will therefore drive house prices higher “with most forecasters expecting another increase in average prices of 6%c to 10% annually this year and next.”
Housebuilding itself is 65% lower than the (unsustainable) level of 2007, the agency said.
Foreign-owned firms contribute 80% of the revenues the Government collects from corporation tax, meaning public finances are potentially vulnerable.
It says the EU and the Irish Fiscal Advisory Council have warned repeatedly about the Government increasing spending at a time of strong growth.
However, Moody’s believes measures such as the proposed ‘rainy day’ fund will help prevent public finances once again repeating the ‘boom-bust fiscal policy’.