Ireland’s hot property market is a sign of health

UNDER THE plane trees by the Grand Canal, the din of diggers drowns out the screech of seagulls. When gleaming new offices rise from the rubble, LinkedIn will take up residence. A short walk away by the canal dock, Google, which already employs 8,000 Dubliners, is building three towers and converting old flour mills. Facebook plans to leave the water for a campus with room for 7,000 in Ballsbridge, a posh central district that now houses AIB, a bank.

The tech giants’ thirst for space is one sign of Ireland’s economic rebound from the chaos of a decade ago. A wild, credit-fuelled property boom collapsed, leaving a glut of homes in the wrong places, banks heading for nationalisation and the state—which in September 2008 gave guarantees to the banks’ creditors—heading for a bail-out from the EU and the IMF. It finally emerged from recession in 2012.

Gauging Ireland’s economic health is not straightforward. At 7-8%, its GDP growth is likely to be western Europe’s fastest for the fifth year in a row in 2018, but in Ireland’s case this standard measure overstates both the size and growth of the economy. (Statisticians have devised a more useful alternative, GNI*, but it is published only annually and is not adjusted for inflation. It is about 40% smaller than GDP: see chart, left.) Still, other gauges look healthy, too. This year the central bank expects domestic demand to rise by 5.6%, underlying investment by 16.4% and employment by 3%. The unemployment rate, 5.3% in November, has fallen by more than ten percentage points since 2012.

The revival owes much to foreign direct investment, for decades Ireland’s most reliable motor. Since 2015 foreign firms have invested almost €1bn ($1.1bn) a month (not including intellectual property). Drugmakers—of which the biggest all have some presence in Ireland—have been investing at twice their trend before 2015, says Fergal O’Brien of Ibec, a business federation. He attributes much of the surge to new international tax rules requiring closer alignment of activity and reported profit. It is not confined to Dublin. Cork, in the south, is home to a pharmaceuticals cluster and a big base for Apple; medical-technology companies have sprouted in the west.

However, there are signs of overheating, chiefly in the housing market. Granted, Ireland has avoided another credit craze. The central bank has capped most mortgages at 80% of the value of a house (90% for first-time buyers) and 3.5 times borrowers’ incomes. That has reined in prices, which are still 20% lower than in 2008. But rents have shot up, to 30% above the past peak, according to Daft.ie, a property website (see chart right).

Around 18,000 homes will probably be built this year. Most estimates of long-term demand are double that. In sprawling, low-rise Dublin—where those Googlers, Facebookers and others are adding to demand—height restrictions have constrained the supply of flats, though these are being relaxed. Economists and ministers alike bemoan planning delays. Marian Finnegan of Sherry FitzGerald, the country’s biggest estate agent, laments a dearth of private investors, many of whom quit the market after the crash.

Brexit may not cool the market much. Still, though forecasting its effect is a mug’s game, a hard Brexit will surely hurt. Britain is Ireland’s second-biggest export market, after America. Most EU-bound goods travel via Britain. Tourism and smaller food businesses are vulnerable to a drop in sterling. Small and medium enterprises, says Michael D’Arcy, a finance minister, “are not as Brexit-ready as we would like”. The government provided €300m in its recent budget for low-interest loans. Dan O’Brien of the Institute of International and European Affairs (IIEA), a think-tank, points out that Brexit may disrupt imports too—eg, of cereals, fruit and vegetables from Britain. Especially in food, supply chains wind back and forth across the Irish Sea and the border with Northern Ireland.

Yet Brexit’s chief effect may be to widen existing sectoral and geographical gaps. Some industries that are already thriving will probably gain, by guaranteeing access to the EU’s single market. Bank of America, Barclays and other financial firms have chosen Dublin as their post-Brexit EU headquarters. Wasdell Group, a British drug-manufacturer and packager, has chosen Dundalk, just south of the border, as the site of a new factory. Vincent Dunne, its chief executive, says a base in the EU27 eases uncertainty about mutual recognition of standards and border delays.

A change in the global economic weather—a slowing America, rising protectionism—is another, if less immediate, risk. Ireland is unusually reliant on corporation tax, which accounts for over 10% of the total take, and, notes the IIEA’s Mr O’Brien, varies with the cycle more than income tax. Just ten companies pay 39% of the haul. The crisis also casts a long shadow. Public debt still exceeds annual GNI*, a better measure than GDP of taxpayers’ capacity to service it. Bad loans still make up 10% of banks’ books. The state still owns over 70% of AIB and Permanent TSB, another lender, and 14% of Bank of Ireland, the biggest by assets. A small economy so open to the world will always have a bumpy ride, even if Brexit does not knock it off balance.