Vol. 498 No. 6
12 Mr. J. O'Keeffe asked the Minister for Finance if any index of asset inflation is maintained; if so, his views on the huge increase in this inflation over the past two years; his expectations for the future; and if he will make a statement on the matter. [27551/98]
There are, however, statistics available for some important classes of assets such as financial assets and property.
As the Deputy will be aware there has been very strong growth in the prices of these assets over the last two years. For example, the ISEQ index of Irish share prices has increased by over two thirds over the last two years, notwithstanding the volatility experienced in recent months, and new house prices have increased by over one third since the third quarter of 1996.
Strong growth in asset prices overall is not surprising in the light of the exceptional performance of the economy over recent years with the value of nominal GDP estimated to have increased by almost 30 per cent since 1996.
Increases in asset prices are not in general a cause for concern providing they are consistent with overall economic stability and with the fundamental determinants of the asset's underlying value, and are not fuelled by speculative forces. In such circumstances changes in asset values are a key mechanism through which savings are channelled into their most productive uses in the economy and transformed into investments which boost output, employment and the economy's growth potential.
In this respect the reduction in the rate of capital gains tax from 40 per cent to 20 per cent announced in my 1998 budget is an important structural measure to improve the functioning of asset markets in the Irish economy. By releasing pent-up investment funds and improving the incentive for the acquisition of capital assets this measure is helping to encourage investment and economic growth in the future.
The situation in relation to houses is, of course, a special case since investment returns are not the primary motivation for the majority of purchasers.
The most recent figures released by the Department of the Environment and Local Government early last week and developments in the Irish Permanent index of house prices indicate that the measures introduced by the Government in response to the conclusions of the Bacon report are being successful in dampening down house price increases. The rate of increase in new house prices has slowed markedly in the third quarter of this year to an annualised rate of increase of under 7.5 per cent as compared with annualised increases running in excess of 20 per cent over the preceding three quarters.
As far as future prospects for asset prices are concerned my role as Minister for Finance is to provide a stable macroeconomic environment conducive to long-term output, incomes and employment growth in the economy. The realisation of this objective will help underpin sustained long-term growth in the value of financial assets in the economy which in turn will be crucial in helping to meet the challenge of an ageing population which we face in the next century.
