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Forecast of growth rises to 5pc - but house prices 'need close monitoring'

Rising rents and house prices in Ireland need close monitoring, Moody's has warned, but there is no sign yet that the economy is overheating.

The rating agency yesterday raised its growth forecast for the Irish economy to 5pc for this year, from a previous 3.7pc. That hike in expected growth was mainly driven by the continuing recovery of private consumption and the growth in residential investment.

It takes the Moody's forecast to around the same pace predicted by the Central Bank and the Department of Finance. The agency did however warn of dark clouds on the horizon, including the threat posed by Brexit and warned that Ireland suffers an unusually high degree of economic volatility, principally due to its open economy.

As a result, it said financial buffers need to be in place to protect the public finances for the inevitable downturn. Housing also remains a potential concern, although the Moody's analysis noted prices remain well below the 2007 peak.

"Reduced affordability - as is also evident in the rental market - might eventually have an impact on the ability to attract skilled foreign workers or sustain growth in foreign investment," Moody's said.

"The government has recognised the problem and is spearheading a number of initiatives aimed at addressing the shortage and encouraging new construction, including increasing the provision of social housing and revisions to building standards and planning procedures - with the overarching objectives of reaching an annual level of residential construction of 25,000 homes and delivering 47,000 social housing units by 2021."

The rating agency admitted those measures will need time to take effect, and warned that the capacity of local councils to deliver social housing is a key constraint.

It thinks new housing supply will remain below demand for some time, a key factor in driving house prices higher, "with most forecasters expecting another increase in average prices of 6pc to 10pc annually this year and next."

Analysts at Moody's said house prices are now around the levels seen in the mid-2000s, prior to the 'bubble' period and approximately 21pc lower than the peak.

House building itself is 65pc lower than the "unsustainable" level of 2007, the agency said.

"Hence, in our view the strong recovery in the housing market is not (yet) a cause for concern". The overall pace of economy growth includes an accelerating in wage growth, and skill shortages starting to emerge in some sectors, in particular ICT, Moody's said.

That would normally trigger a pick-up in general inflation.

Kathrin Muehlbronner, a Moody's senior vice-president and lead sovereign analyst for Ireland, said risks of overheating are generally assumed to become a material concern when the unemployment rate approaches the 5pc threshold (as it is here) and wage increases consistently exceed 3pc.

"So far, wage growth has remained moderate," she said.

Rising labour supply should help to keep wage increases in check, she added. After an outflow of people in the wake of the crash there has been net immigration since 2015, and the labour participation rate remains low, implying a pool of untapped workers, she said.

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