Ireland should borrow more to invest in housing and could borrow an additional €4bn to €7bn a year, according to a new analysis by the Economic and Social Research Institute.

It comes as the Covid-19 pandemic has forced the suspension of Europe's fiscal rules on government borrowing and sparked a debate over how much countries can and should borrow.

In this context, the ESRI argued that Ireland's projected growth rates and the borrowing costs it faces in the markets means the country could take on an additional €4bn-€7bn in debt a year.

It said the Government should consider doubling its current investment in housing, from €2bn to €4bn, which could deliver 18,000 units a year.

It said housing is one of the main reasons the cost of living is higher in Ireland than other countries and warned the country faces "another decade of inadequate housing supply" with upward pressure on prices and rents.

The ESRI cited recent research that the demand for housing here is approximately 35,000 units a year, based on population growth, and could be as high as 45,000 units a year.

It said Covid-19 delivered a further blow to supply, which was already behind demand before the pandemic.

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Last year, 20,676 units were completed, according to the Central Statistics Office. Estimates vary for this year from between 15,000 to 21,000 units.

The ESRI warned the lack of housing supply here is "one of the biggest challenges to our competitiveness" and is the main reason the cost of living here is higher than in other countries.

It acknowledged that more activity in the housing sector could lead to "inflationary pressures more generally" and "capacity constraints in the domestic labour market" would have to be carefully considered.

It also said more housing would reduce the €1.4bn a year the State pays in rent through the Housing Assistance Payment (HAP) scheme.

It acknowledged there are other demands for expenditure on health and green technologies but warned that without significant investment in housing, the country faces another decade of inadequate housing supply with upward pressure on residential prices and rents.

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Dr Kieran McQuinn, Research Professor at the ESRI, said it is clear that unless something "fairly significant happens" as far as the supply of housing is concerned, further high costs of housing are likely in the short to medium term.

Dr McQuinn said there is potential for "crowding in", whereby increased Government investment in the economy could stimulate private sector investment.

Speaking on RTÉ's Morning Ireland, he said that 35,000 housing units a year are needed to meet demand, but only around 15,000 to 20,000 units a year are currently being provided.

Any substantial increase must include a sizable proportion of social and affordable housing, he said.

Dr McQuinn warned that if the current imbalance continues, it will only result in greater inflationary pressures in house and rent prices.

Tánaiste Leo Varadkar said that the ESRI's recommendation to build 18,000 public housing units a year "might be a good target to aim for over the course of this Government".

"That may well be doable. 18,000 may well be the right figure - and may well be where we get to," he said.

However, taking Leaders' Questions, Mr Varadkar said it would not be easy to get there.

He was responding to Sinn Féin TD Eoin Ó Broin, who noted that the ESRI has called for the Government to double its investment in public housing.

Mr Ó Broin called on the Government to make a commitment that this would be included in the budget.

Mr Varadkar said he has not seen the breakdown of the ESRI's figures, particularly between the broader category of public housing and specifically social housing.

He said the Government will look at the report and give it consideration.

The country already has a deficit of 5%, which is more than the ESRI thinks is appropriate, he added.

The Tánaiste said Government investment in social housing has "increased tenfold" since 2016.

More than a third of homes built in the State this year will be built by the State, he said.

Deputy Ó Broin said this will be the first year, in ten years of Fine Gael governments, that affordable homes will be delivered.

The Minister of State at the Department of Finance Seán Fleming welcomed the ESRI report, describing it as a "very important" contribution to the funding of house building in Ireland.

Speaking on RTÉ's Drivetime, he said the report will be examined in detail.

He said labour market shortages and Covid-19 are the "two critical things" holding back construction this year.

He said there were targets for social and affordable housing, but "Covid happened in the meantime" and the targets were not met.

"We've a target in the programme for Government for social and affordable houses of 50,000 additional houses (over five years)", he said. "The requirement is 33,000 per annum based on the ESRI's own figures... and that would include up to about 20,000 from the private sector as well for people building affordable houses and private houses."