House prices could drop by 12% if more homes are built, study suggests

House prices could drop by as much as 12 per cent if housing output increases by 10,000 units a year, according to a new paper by the Economic and Social Research Institute (ESRI).

The study also found that increasing output would not necessarily lead to significant wage inflation in the construction sector.

The paper by ESRI researchers Paul Egan, Eoin Kenny, and Kieran McQuinn, which focuses on the economic impacts of increasing future housing supply, advises the Government to add construction trades such as carpentry and plumbing to the State’s critical skills list, which would make it easier for qualified workers from outside the European Union to get visas here.

It also pointed to question marks over whether the financial system in Ireland can provide the credit necessary to meet the demand for residential property.

The paper warns that the domestic banking sector could struggle to increase lending sufficiently to the construction sector to meet housing demand.

The researchers say the “highly litigious” nature of the Irish property sector could scupper any moves to give the Land Development Agency rights to acquire private land for housing.

They also suggest that the hangover of bad debts from the last property crash continues to constrain lending to the construction sector.