The Paris-based OECD in its Economic Survey of Ireland 2006 that was published today, says that Ireland has continued its exemplary economic performance, attaining some of the highest growth rates in the OECD.
After a remarkable decade, per capita income has caught up with and overtaken the EU average. Further progress will require strong productivity growth and continued increases in labour supply. These challenges are familiar to most OECD economies. But it also faces some issues that are less common: it is going through a transition phase in upgrading its social services; infrastructure levels need to catch up with the boom in activity and population that has occurred over this period; and it has to manage some sizeable macroeconomic risks.
Maintaining high rates of productivity growth. As Irish activity comes to rely less on foreign firms and more on home-grown services, productivity gains will become harder to achieve.
The main areas where policy could make a difference in sustaining productivity growth are:
Boost competition. There are too many sectors where producers are shielded from competition, raising prices and stifling growth. Reforms are needed in the electricity and telecom sectors, and unnecessary restraints in services such as law, pharmacies and the pub trade should be removed.
In the retail sector, the government’s decision to abolish the Groceries Order is welcome.
Improve education. Funding is still an issue in universities. One option is to re-introduce tuition fees, but backed by an income-contingent loan scheme. In secondary schools, the key challenge is to target resources on students who are struggling.
Encourage innovation. The science framework needs to improve before public spending is increased further. The many funding agencies could be amalgamated or better co-ordinated; public support could shift towards market-driven measures; and resources should not be spread too thinly.
Upgrade infrastructure. Rigorous cost-benefit analysis of infrastructure projects, including those in the ten-year transport plan, should play a greater role in decision-making than has been the case in the past. Moreover, an increasing number of projects should be financed by users.
Boosting labour supply. An important option for boosting labour supply is to raise female participation. Expanding day-care for infants and out-of-school care for children will help. From the point of view of labour market participation, childcare supports such as the new Early Childcare Supplement should be linked to employment status or made conditional on actually using formal childcare. A mutual-obligations approach for sole parents would help reduce child poverty by assisting parents to get a foothold in the labour market. As regards older people, work incentives in the public-pension and welfare systems could be improved. Migrants will also continue to play an important role in alleviating labour supply bottlenecks. The attractiveness of Ireland for immigrants will be influenced by the overall price level (including house prices) and the quality of public services.
Macroeconomic risks are high. As one of the OECD’s more open economies, Ireland is particularly exposed to external risks. But it also faces domestic risks. House prices may have overshot fundamentals to some extent, although this does not imply that they will fall significantly; and house building will eventually ease. A soft landing is the most likely scenario but a sharper fall cannot be ruled out. Hence, the government needs to leave plenty of breathing space by balancing the budget or running a surplus, curtailing tax breaks and pushing ahead with public management reforms to get better value for money from public expenditure.
International comparisons house prices
The OECD says that it is difficult to compare prices across countries because the size, quality, location and amenities of houses can differ substantially. Comparisons are a little easier if they are restricted to the major cities, but this does not solve the problem entirely. Bearing this in mind, the available evidence suggests that average prices in Dublin are higher than in comparable cities. In a comparison of average sale prices in 2004 across a dozen European cities, the price per square metre was higher in Dublin that everywhere else. Some further evidence comes from cost-of-living comparisons conducted by various private-sector consultancies.
These usually focus on prices or rents of inner-city apartments typically bought or rented by business executives. Here Dublin does not stand out so dramatically. This may be because rents are not especially high in Ireland but it may also reflect urban sprawl. Anecdotally at least, there is not a great deal of diversity in the housing stock. The centres of the main cities have not been taken over by apartment complexes and there is relatively little high-density in-fill housing. If preferences change and Irish people become more comfortable living in downtown apartments or in higher-density housing with no garden, then the distribution of prices may become more uneven: house prices in the central city may rise significantly relative to prices in the suburbs and city fringes. There is some evidence this may be happening already (Policy Exchange, 2005).
Owning versus renting and the "great ratios"
In a majority of countries, the ratios of prices to rents and prices to disposable income do not have strong trends when considered over long periods of time. The ratios may rise sharply during housing booms, but they usually fall back again through a combination of falling real house prices (i.e. a lower numerator) and rising rents or incomes (the denominator rising to catch up). In Ireland’s case, the increase in these two ratios far outstrips the cycles that have been seen in other countries before the most recent global housing boom, although the increase in the price-to-income ratio is in line with some other countries that have also enjoyed booming house prices in the last five years.
Demand for second homes appears to be another important factor in the housing market. Although housing supply has risen tremendously in recent years, a surprisingly large proportion of it appears to be satisfying demand for second-home properties (in 2005, around 15% of homeowners aged 35-54 owned a second home). As in the case of the buy to-let market, some properties may have been acquired with the expectation that house prices would continue to grow at a fast pace for the indefinite future.
Click for Policy Brief with the main conclusions
Copyright OECD 2006