Ireland’s central bank chief has warned against starting a spending spree to address the country’s shortage of affordable housing after the problem led to a surge in support for the nationalist Sinn Féin party in elections last month.
Gabriel Makhlouf told the Financial Times that even though the Irish economy was one of the top performers in Europe last year with growth of close to 5 per cent, there were risks ahead that could cause a sharp downturn.
Mr Makhlouf said a no-deal Brexit was the biggest immediate risk to the Irish economy because of its close trading links to the UK. He added that Ireland’s economy is also likely to be hit by trade tensions, changes to international tax rules and the disruption of the coronavirus outbreak.
“I’m calling this an interesting conjecture because in a bad scenario . . . you could suddenly find the fiscal surpluses that the current government has forecast are suddenly challenged very much by that change in sentiment and activity,” he said.
Ireland’s lack of affordable housing was the dominant subject in last month’s general election, which boosted Sinn Féin and left the country with a deadlocked parliament.
Sinn Féin’s left-leaning manifesto tapped into the anger over housing by promising a big increase in spending on public housing, a rent freeze and changes to banking rules to cap mortgage rates — which are higher than in much of Europe.
The central bank has found that one dwelling was built for every seven extra people in the population over the past eight years. Irish house prices have rebounded since the 2008 crisis, although they dipped last year and remain below pre-crisis levels. Rents have risen 40 per cent in the past five years, while average earnings are up only 14 per cent.
“Absolutely the supply of housing needs to be addressed,” Mr Makhlouf said. “Whether you can do that overnight is extremely unlikely, so it is going to take a while. It is not simply construction.”
He said the supply of housing would also depend on changes to the planning system, public infrastructure and availability of labour. “When you are running, as Ireland is at the moment, an economy at full capacity, you have to meet all of those challenges in my view to deliver the housing supply that you may want and need,” he said. “It is more than a fiscal question.”
Ireland’s public debt ratio has almost halved in recent years to just over 60 per cent of its gross domestic product but that figure is distorted by high foreign direct investment.
The country’s per capita debt remains one of the world’s highest. Although the outgoing government achieved a 0.4 per cent of GDP budget surplus, the central bank has predicted that growth could drop to below 1 per cent in a no-deal Brexit. Ireland is also heavily reliant on increased corporation tax revenues from multinational companies with large Irish operations, such as Apple, Google, Facebook and Microsoft
A British citizen born in Egypt to a Cypriot-British father and Greek-Armenian mother, Mr Makhlouf is the first overseas official to lead Ireland’s central bank. The 60-year-old’s appointment last year was clouded by controversy in New Zealand, where as head of its treasury department, he was found to have wrongly blamed hackers for a budget leak.
He said public housing concern could threaten the credibility of the Irish central bank. On a recent visit to a technology college in south-west Ireland, he asked the audience what inflation had been in the past decade and most people said it had been around 6 to 7 per cent — above the actual level close to 1 per cent.
“If people’s reality is different to the one that we assert then we have got a problem,” he said. “Housing costs, I think, at least in Ireland are the main issue” in creating a gulf between public perceptions of price rises versus the official data.
He added his voice to those calling for the cost of housing to be given more weight in the way inflation is calculated in the eurozone. The EU has long debated if it should follow the US, UK and other countries by including the cost of owner-occupied housing in its inflation data, even though it is hard to measure.
“The main thing here is it’s not how you do it. It needs to be done,” he said. “The key thing is credibility, for me, and connecting much more with people.”
The mismatch between people’s perception of prices and the reality will be an important matter in the review of the European Central Bank’s monetary policy strategy. Mr Makhlouf — who sits on the ECB governing council — said he would support changing its core inflation target of “below but close to 2 per cent” into a range, such as 1.8 to 2.2 per cent.
“My gut instinct is that a range with a focal point of two is that just a little bit more credible than just two,” he said. “It’s just that little bit easier to explain to people.”