Vol. 476 No. 6
4 Mr. McCreevy asked the Minister for Finance the recent discussions, if any, he has had with the Governor of the Central Bank regarding inflationary pressures in the economy and in the housing market in particular; and if he will make a statement on the matter. [7730/97]
The Central Bank is responsible for the day-to-day operation of monetary policy, which has as its objective the achievement of price stability. Essentially price stability means low inflation, which has been a cornerstone of Ireland's economic success in recent years. As Minister for Finance, I am concerned about the possible emergence of inflationary pressures, including pressures in the housing market, in the context of the impact of inflation on the performance of the economy. The Deputy can be assured that my concerns in relation to inflationary pressures are conveyed, as appropriate, to the Governor and board of the Central Bank by the Secretary of my Department, who sits on the board of the Bank. At an operational level, I assure the Deputy also that officials of my Department and of the Central Bank exchange information on inflationary developments in the economy.
In its spring bulletin released last week, the Central Bank expressed concerns about the possible emergence of inflationary pressures in the economy, citing in particular the situation in the domestic housing market. While sharing the Central Bank's concerns in this regard, my Department forecasts a continuation of moderate inflation in 1997, with the consumer price index forecast to rise by just over 2 per cent for the year as a whole. This forecast is based on a number of factors. On the external front, the strength of the pound on a trade-weighted basis, combined with subdued international inflation, should exert a downward influence on Irish inflation. Domestically, the new national agreement, Partnership 2000, should ensure wage moderation over the next three years. A heightened level of competition in many areas of retailing, such as health insurance, mobile telephony and consumer electronics, should also prove helpful, as will the Government's commitment to a vigorous competition policy, as shown by the reconstitution, with new powers and greater resources, of the Competition Authority.
The rate of house price inflation, which is currently considerably higher than the general inflation rate, partly reflects the remarkable progress of the economy in recent years. Lower interest rates, changing demographics, increased incomes and unprecedented employment growth can all be related to the trend in house prices. Nevertheless, there are clear grounds for concern that persistent high house price inflation may generate inflationary pressures indirectly in other areas of the economy, perhaps mediated through what economists call a "wealth effect". Such a development would be detrimental to the interests of borrowers and lenders alike, the construction industry and the economy generally, and so the trend over the near term future will require close attention. I should add that the monthly statistics for inflation, which we are required to publish from this year, are available today for the month of February, and the figure is 1.5 per cent. The harmonised index of consumer price inflation for the whole of the European Union is 1.7 per cent.
I am taking this question in ordinary time.
The Minister expressed some concern about inflationary pressures in the housing market, as has the Governor of the Central Bank and many others. Has the Department of Finance given any consideration to introducing measures to reduce inflation in this regard? We do not have to look too far to realise the way people's lives can be adversely affected if there is a downturn in the market or interest rates rise. Has consideration been given to introducing some measures in the future?
I am concerned about this matter. Notwithstanding the fact that much of the demand in the housing sector is additional demand and, therefore, quite healthy, there appears to be a great deal of evidence, confirmed last Friday in the business section of The Irish Times, of some lending institutions breaking the conventional criteria of lending prudence, the 2.5 per cent ratio of the first income and 95 per cent of the purchase price of the house. That is an imprudent process, perhaps being undertaken by some lending institutions because of the strong competitive pressures in the lending market. In some cases, if the borrower is facilitated in excess of what prudence would otherwise recommend, any change in that borrower's circumstances could create difficulties.
We are all aware of the outrageous way in which the British housing market was run, largely driven by banks and brokers, in the mid 1980s when multiples of four times a person's income could be obtained.
In some cases two strangers, not a married couple or a couple living together, but two strangers not romantically involved were able to get separate mortgages on the same property and thus were locked into the ownership of the property. If, as happened from time to time, one of them got into difficulties, there were problems in exiting the contract because of the fall in the housing market. As to what we can do about it, I was criticised by a number of people when I increased stamp duty from 6 per cent to 9 per cent on second-hand residential property valued over £150,000. One would have thought, given classical economics, that raising the access price or putting a levy on it would have damped down prices. It does not appear to have done that, but I do not think the Deputy is recommending that I increase it.
No.
I wanted to confirm that. The Central Bank has written to all the lending institutions to remind them of the prudent criteria that should apply with regard to lending. I will be having further talks with the Governor of the Central Bank and others to see if there are other measures we can take. One does not want to interfere with a healthy demand. Nor should the lending institutions fuel this process by lending more than is prudent.
I am aware of today's announcement that inflation is at 1.5 per cent, and I concur with the view that the figures are remarkable. In the past six or seven months, on the occasions we had the Governor of the Central Bank before the Select Committee on Finance and General Affairs, it was anticipated on the markets, with good reason, that inflation should be higher than indicated by the figures now coming out. That is not to say that I am unhappy with the figures; I am delighted with them, but they leave me with some questions. Given difficulties we had in the past, is the Minister entirely satisfied with the criteria used in arriving at those figures, and can he stand over them?
I am happy with the criteria and methodology for compiling the figures because, in effect, they are compiled in consultation with Eurostat, the European Union body which is similar to our Central Statistics Office and which compiles the component elements that go to make up the basket of consumption against which the consumer price index is measured. The Irish domestic CPI on a year to year basis is up to 1.5 per cent against a projected annual average of 2 per cent. If one were to take the European basket, which is different from the domestic basket, the CPI would be up by 1.7 per cent, the reason being that the European basket does not include mortgage repayments which are low in the Irish context. Nor does it include third level fees, because in the rest of the European Union third level fees do not exist in the main, although private colleges obviously do have fees. The composition of the basket, the European and the Irish, is a matter for professional statisticians. I have no problem with that. It comes back to the impact of devaluation on inflation. There has been a shift in the world's economies to which we have not yet fully adjusted. The effect of global competition on European products and producers is much greater than many people had anticipated. The concern being expressed in recent times in Belgium and in other countries about unfair competition from one quarter to another is missing the main point, which is that Europe is now part of a much more in integrated global market and there are very strong competitive downward price pressures coming into the European market from which we, as consumers, benefit. We are losing jobs in some sectors as a result, but that is a separate debate on which the European Union has to focus increasingly. I had sight of the figures just before I came into the House. Our food and clothing prices are down more than was anticipated, having regard to conventional performance. My conclusion is that something fundamental is happening in the global economy that is having a greater impact in downward prices and, consequently, on inflation than conventional analysis would have given us reason to expect. That is a preliminary reply, not necessarily a comprehensive or complete one.
My question related to the inflationary aspects of the housing market. There is a certain unreality about the consumer price index in this regard. Because it is a consumer price index, it does not measure inflation in the price of housing. If mortgage interest rates went up they would be reflected in the consumer price index.
The purchase price of a house would not be.
The purchase price of a house is not reflected in the CPI. Therefore, this question is irrelevant to the CPI as it relates to inflationary pressures in the housing market. Furthermore, there is inflation in the housing market to the extent that wages have gone up. It is almost impossible to employ tradesmen in Dublin or in any other part of Ireland and one pays an extraordinary price for them. We have what most people see as inflation in the rising cost of housing and in the wages of people working in the industry. That is not reflected in the consumer price index, nor could it be because the consumer price index has little relevance to inflation in the housing market where inflation is occurring. In the event of a downturn in the economy or a rise in interest rates some people will be in serious difficulty. Currently there is no better way of measuring inflation. However, the consumer price index does not reflect the real inflation that is occurring in the construction sector of the economy. Another way of measuring it will have to be found. Otherwise we will apparently have very low inflation, but when the whole thing falls apart we will be wondering what happened, even though we know there is inflation in the sector we are concerned about.
The Deputy is correct, but he is confusing current account price inflation with capital account price inflation.
The Minister referred to the consumer price index.
The consumer price index is essentially the current account, comparing annual current outgoings rather than capital acquisitions. The Department of the Environment, in conjunction with the Construction Industry Federation, does publish figures relating to construction data, of which labour unit costs would be one. The last forecast that I saw from one of the private analysts was of labour unit cost inflation for last year of approximately 8 per cent against a background of 2 per cent — that would reflect what the Deputy is saying. It is also what we are all hearing. One only has to go outside this building to see the many tall cranes against the skyline. While that is very welcome, it creates its own pressures. We can respond to this in a variety of ways. As a number of building society chief executives have said, there are now far more people at work with salaries that can command mortgages who want to buy houses. Nobody should stand in the way of that aspiration, but the lag time in meeting the demand by way of additional supply is quite long because it takes time to get houses on stream. One of the ways to address this issue is to ensure that there is an increase in the amount of serviced land available. That is a matter for local authorities.
Deputy Mitchell and I served our apprenticeship on Dublin Corporation and the Deputy will well remember that in the period 1974 and beyond when Dublin Corporation wanted to build houses at a higher density than ten to the acre in what was then County Dublin, it was prevented from doing so because Dublin County Council adopted what was called a suburban attitude to housing. The unit cost of servicing an acre of land on which only ten houses were built was obviously much higher than in areas of comparable density such as Ranelagh or Phibsboro where 20 to 25 houses were built to the acre. Getting a higher density per acre would be one way of increasing supply without increasing the capital infrastructure involved, but all these things take time.
There has undoubtedly been an increase in profits by builders since the demand has increased. From our own analysis, we are aware that houses that were intended to sell at a retail price of about £150,000 increased to £170,000 or £180,000 on the day because the demand is there. Some of that money will come back in corporation tax and there will be recycling involved, but the housing market is immensely complex. My concern is that, as a society in which lending institutions have a key role to play, we do not repeat the disastrous mistakes that occurred in the United Kingdom under a Conservative Chancellor in the 1980s, fuelled by a very irresponsible policy of lending institutions of that time. The lessons of that disaster are there for all of us to analyse.
They are not being fully learned.
The Central Bank has spoken to, and will continue to speak to the lending institutions which it regulates. It will be for the bank to take whatever measures are required under its existing powers, which are considerable, to ensure we do not repeat that mistake.
