Signs of overheating have begun to emerge in the Irish economy, the Organisation for Economic Cooperation and Development (OECD) has warned.
In its latest economic outlook report, the Paris-based agency said new mortgage loans and loans to small firms – largely driven by construction-related activity – had risen sharply in recent months.
While the Central Bank’s lending restrictions, such as the loan-to-value and loan-to-income caps, have reduced the share of risky loans, the OECD said they may need to be extended to cool the current level of credit growth.
Figures published on Wednesday by the Banking and Payments Federation showed the value of new mortgage lending approved in April jumped by 20 per cent to €842 million compared to the same time last year.
In its report, the OECD also raised the prospect of “another property bubble” if the current rate of annual house-price growth, now running at 13 per cent, continued.
The warning follows a Central Bankstudy earlier this week which said nearly 4 per cent, or almost 8,000 mortgages taken out before the crash could default in the event of a financial shock. These loans are currently not in default.
The last time the OECD warned about the possibility of a housing bubble in Ireland was on the eve of the financial crash in June 2006, a warning that was ignored by the then government.
The OECD’s caution comes amid ongoing political turmoil in Italy that has rocked bond markets in recent days and renewed concern about the sustainability of national debt levels in several EU member states.
The head of the NTMA, however, said on Wednesday night that the steady performance of Irish government bonds in the face of such market turbulence was evidence that investors had “reclassified” the nation’s credit worthiness.