Irish house prices are overvalued by at least 7 per cent and the property market is likely to experience a sharp slowdown in the coming months, the Economic and Social Research Institute (ESRI) has said.
In its latest quarterly bulletin, the think tank said that wider inflationary pressures and higher interest rates would weigh on demand.
However, it stopped short of saying whether this would result in a house price correction or a period of falling prices, suggesting it was too early to tell.
Kieran McQuinn, a research professor with the ESRI, said the recent increase in house prices was due to the growth in savings during the pandemic, which were then used as deposits. This led to the hike in house prices which was “above and beyond what we expected them to be given the general economic conditions.”
However, he warned that there were “headwinds” coming down the line in the market, in the form of rising interest rates, which had been clearly signalled by the ECB. “I think that will cool the market considerably over the next period.”
Prof McQuinn warned that most people will experience a decline in their living standards this year because of rising inflation.
It was clear that wages were not keeping pace with the cost of living which is predicted to rise by 7 per cent over 2022 and 2023, he told RTÉ’s Morning Ireland.
Recent one-off measures in the budget will help to insulate family incomes and provide some stability, he said.
The Irish economy remained robust despite pressures such as the war in Ukraine, he said. It was clear that the economy would continue to grow in 2022, but there was evidence that it would begin to slow somewhat because of inflationary pressures.
Energy was a key element of the State’s infrastructure – the whole issue of energy security had really come to the fore with the situation in Ukraine, he said.
On the issue of corporation tax, one of the key dynamics of growth in the recent CSO data was investment and that was tied linked to data centres.
“There are choices there to be made – on the one hand data centres are providing large dynamics and growth in the economy, but equally they come with significant demands in terms of energy usage.”
Prof McQuinn said there were also “serious concerns” about the stability of the UK economy and the impact it could have on Ireland. There were many Irish SMEs and firms trading with counterparts in the UK who were exposed to the volatility of exchange rates and the general macroeconomic conditions in the UK.