Professor John McHale:

On the question of house prices, we thank the committee for emphasising this issue so strongly on our last visit. We promised then that we would examine it carefully. It is something we would have considered carefully anyway in the light of recent trends in the economy, but we took the matter even more seriously after hearing the committee's concerns. We are constantly looking out for bubbles forming in house prices given the damage done to the economy by the last bubble. At this time we do not see excessive credit growth; if anything, it is the opposite. The big spike in prices appears to be partly the result of a bounce back from an initial overcorrection. There also appears to be severe supply constraints in many urban centres, including Dublin, in particular. That explains the recent movement in prices. We are, however, starting to see signs of expectations of house price increases becoming ingrained. This is at an early stage, but it is something that deserves careful monitoring. The Central Bank's recent macro-financial review outlined survey evidence that while 92% of respondents expected prices to increase, nobody expected them to fall. A significant percentage expected a price increase of more than 10%.

It is early days and, given what has been happening recently, it is not surprising that people predict the likely trend to be upwards, but it is an early sign of issue about which we need to worry. Even though initial price rises can be due to changing fundamentals and the last boom began with fundamental demographic and income changes, the price increases created a bubble like phenomenon as people extrapolated forward from past price increases. We are not there yet, but it bears careful monitoring. We must make sure we have learned the lessons from the last crisis in order that we use available tools, whether in terms of macro-prudential policy being controlled by the Central Bank or through fiscal policy, including the overall stance of fiscal policy, as well as specific instruments aimed at the housing market.