The country's booming housing market is likely to ease rather than crash, the OECD said today, although it said a sharp correction was a possibility.
The Central Bank had warned earlier this year that rapidly climbing house prices and big increases in household indebtedness were two of the main risks to a thriving economy but the OECD offered some comfort.
'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,' the OECD said in an economic survey of Ireland. Average house prices here have tripled in real terms in the last 10 years, faster than any other OECD country.
The global think-tank said a soft landing was the most likely scenario but a sharper fall could not be ruled out so the Government ought to take steps to ensure the health of the public finances. '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,' it added.
Despite having some of the highest rates of economic growth in the OECD, it said that further progress would need strong productivity growth and increases in labour supply. It said the main areas where policy could make a difference were competition, education, innovation and infrastructure.
Competition reforms were needed in electricity and telecoms and restraints in areas like law, pharmacies and pubs should go. The ESB still dominates the electricity market despite six years of efforts to liberalise the sector. The OECD recommended separating the transmission and production sides of the business.
In telecoms, the main problem was slow broadband uptake. The OECD said the regulator should fast track the process by which Eircom opens up its local loop.
It also noted that university funding was still a problem and mooted re-introducing tuition fees, backed by income-based loans.
To boost labour supply, more women needed to participate in the labour market, the OECD said, and this would be helped by expanding day and out-of-school care for children.
To encourage innovation, the organisation suggested funding agencies could be amalgamated or better co-ordinated. The group also said upgrading the country's infrastructure was essential to maintaining high rates of productivity growth.
'Rigorous cost-benefit analysis of infrastructure projects should play a greater role in decision-making than has been the case in the past,' the OECD said. 'Moreover, an increasing number of projects should be financed by users'.
