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IMF Says Ireland’s Rent Controls Should Be Scrapped and Warns Housing Policy Fuelling Demand

Interventions by the Government and Central Bank could stoke demand for housing and push up prices, the International Monetary Fund has warned.

In a report on Ireland’s economy published on Friday, the Washington-based fund said Central Bank mortgage measures “should not be used to address broader housing-affordability issues” and advised that rent controls be scrapped.

However, the IMF largely sided with the Government on its budget for next year, saying that although it could have been better targeted, a departure from the 5pc spending rule is “modest and temporary” and more investment is needed to make up for past cuts.

The support will come as a relief to the Government after the Irish Fiscal Advisory Council accused it of “fiscal gimmickry” and of gaming the spending rule to massage the public finances, criticising its repeated breaching of the 5pc limit.

“While the 2024 budget entails a slightly expansionary policy, it still targets a sizeable surplus,” the IMF said in its annual ‘Article IV’ report on the Irish economy, welcoming the creation of two new savings funds for excess corporation-tax receipts.

“The departure from the 5pc spending rule, which has played an important anchoring role in recent years, is modest and will be temporary. In the IMF’s view, a smaller and better targeted package would have been less costly while still protecting the most vulnerable.” It also said that cost-of-living supports in the previous budget were “substantial and largely targeted”.

The IMF is more upbeat on the Irish economy than many other institutions, such as the ESRI, EU and OECD, which are predicting a recession this year. The IMF is still forecasting a 1.5pc growth in gross domestic product (GDP) for 2023, accelerating to 2.7pc next year.

Modified gross national income — a measure that strips out some volatile multinational transactions that can skew Ireland’s GDP — is forecast to slow sharply from close to double digits last year, falling to around 2.5pc this year and next, the IMF said.

Inflation is expected to average 5.3pc this year, falling to 3.2pc next year and averaging 2pc in the following years, meeting the EU’s target.

“The outlook is a soft landing,” the IMF said in its annual report, which was drawn up following a mission to the country at the end of October. The report is critical of the Government’s policy on housing, however. It follows comments last month by Yan Sun, IMF’s mission chief for Ireland, who said rent controls tend to reduce supply and increase demand for homes. Rent controls of 2pc are in place in pressure zones across the country.

House prices picked up again in October, increasing nationally by 2.3pc according to the CSO, with experts predicting they are likely to keep rising in the new year.

In the report, the IMF said the Central Bank’s recent increase in the borrowing limit for second-time buyers – which rose from 80pc to 90pc of the value of a home – “is not advisable” as they tend to be riskier purchasers. “These measures could be counterproductive from a housing-affordability perspective were they to increase housing demand and prices,” the IMF report said.

“The [Central Bank] should continue to carefully monitor the impact of the changes to the measures to ensure they are achieving their objective of ensuring sustainable lending standards in the mortgage market.”

Michael McGrath, the finance minister, welcomed the IMF’s backing for the budget, saying it “struck an appropriate balance” between offsetting high inflation for people and meeting investment and public service needs. Paschal Donohoe, the minister for public expenditure, and who has been tipped for the top job at the IMF, said he “shared the Fund’s assessment” on the need to increase housing supply.

Simon Coveney, the enterprise minister, said on Friday — ahead of the report’s release — that rising homelessness and a lack of housing is not deterring investment in the country. He said Ireland is on track to build “in and around” 32,000 houses, and closer to 40,000 next year. However, he pointed out that Ireland needs to build 45,000 homes per year to meet demand.

Source : Irish Independent