A hard Brexit could see Irish house prices fall because of fire sales by cuckoo funds that have invested heavily in property here but could cut and run in a crisis.
The Central Bank warned yesterday a disorderly Brexit could create a double hit to property prices, due to a rise in unemployment among owner-occupiers and the potential for quick sales by cuckoo funds that have snapped up huge numbers of properties.
The bank’s Financial Stability report yesterday advised that the UK crashing out of the EU without a deal would shave six percentage points off economic growth over two years.
“The main outstanding source of risk to financial stability and the wider economy is a larger-than-expected macroeconomic shock in a disorderly Brexit,” it said.
As well as the risk of a Brexit-induced plunge in house prices, the report showed there are warning signals in the €2.5trn investment funds sector domiciled here. Those funds have €18bn invested in property and, in the event of a financial shock, they could hit the local market hard if they were forced to dispose of their portfolios in a hurry due to the effects of Brexit.
While data from the Central Statistics Office (CSO) showed the economy has continued to grow strongly, the Central Bank report warned Brexit could also hit the banks through loans to the many small companies whose export markets in the UK are at risk from hefty tariffs, as well as from their direct loans to the UK which account for a quarter of their total exposure.
Sharon Donnery, acting Central Bank chief, warned that Ireland was still “more sensitive to developments in the global cycle” and more prone to economic shocks due to its high debts and dependence on exports.
The stark warnings came as the CSO dramatically raised its estimates of economic growth for 2018 to an eye-watering 8.2pc, up from 6.7pc. This compares with the 1.8pc growth registered in the eurozone as a whole.
According to the CSO’s new calculations, the economy is worth €321.4bn, €12bn larger than it originally estimated. That figure is inflated thanks to the financial engineering of multi-national companies who accounted for most of the growth thanks to an export surge.
Using a measure that gives a better estimate of real activity – called GNI star – the economy was worth €184bn, €134bn less than the headline figure, a difference that is equivalent to the entire economic output of fellow EU state Hungary, a country with twice the population of Ireland.
However it is measured, strong growth has persisted into this year, according to Investec chief economist Philip O’Sullivan.
He said the 6.3pc year-on-year expansion in the first quarter was well ahead of his 4.3pc forecast for the full year, although he said Brexit and assorted “trade spats” could hit hard later in the year.
The post-crash recovery has also been a boon for workers, in contrast with many other rich economies where wage rises have been meagre despite strong employment growth. The recovery in pay followed a 7pc drop in real earnings from 2009 to 2011 as a result of the crash.
“Real after-tax household income in the economy has grown by one-quarter in just five years,” said Gerard Brady, chief economist at employer group Ibec. “This has been matched by no other economy in the developed world.”