Let’s begin with housing. On Tuesday, the CSO reported that residential property prices (houses and apartments) increased by 14.4 per cent nationally in the year to May. It was the second month in a row during which the pace of house price inflation has moderated, but it shows the scale of the increase, nonetheless.
After all, property prices nationally have increased by 120.5 per cent from their trough in early 2013. According to the CSO, Dublin residential property prices have risen 124.7 per cent from their February 2012 low, whilst residential property prices in the rest of Ireland are 124.9 per cent higher than at the trough, which was in May 2013.
Overall, the national index is now just 1.1 per cent lower than its highest level in 2007. Curiously, Dublin residential property prices are 9.3 per cent lower than their February 2007 peak, while residential property prices in the rest of Ireland are 2.3 per cent lower than their May 2007 peak.
Ronan wrote last week about the impact of the pandemic on property prices outside of Dublin, soberly arguing that policymakers have not been able to understand the changing dynamic of the property market. The article is well worth reading, as he forensically explains why there has been a failure of the housing system to generate the urban homes the country has needed for the past half-century.
However, for the purpose of this article, the key message is that house prices are rising and now effectively back to boomtime levels.
And it is not the only thing rising. Figures from the CSO on Thursday revealed that consumer prices grew by an average of 9.1 per cent in the 12 months to June. This is the fastest rate of price growth seen in the Irish economy since 1984, and up from 7.8 per cent in the year to May.
The main drivers were energy, fuel and food. Electricity prices were up 40.9 per cent, while gas prices rose by over 57 per cent. Petrol and diesel prices were up 43.8 per cent and 50.7 per cent respectively, while airfares were up on average by 38.4 per cent since June last year.
And this is before you start thinking about mortgages. The European Central Bank has signalled a sequence of interest rate rises from later this month.
In Ireland, the annualised inflation rate in May was 7.8 per cent. That’s the highest level since the oil shocks in the early 1980s. Across the eurozone as a whole, inflation has never been higher.
Quite simply, the price of everything bar, it seems, technology stocks is rising – and rising steeply. The cost-of-living crisis is a key reason why the government has brought forward the budget by a couple of weeks. The government knows that it can’t spend its way out of an inflationary cycle, but it also knows that it can’t not do anything either.
So, it has to make a political call. Stephen has written extensively in recent months about the so-called politics of inflation, explaining how inflation will be kept at bay with interest rate rises, which will slow economic growth and lead to impoverished workers.
As he wrote: “The tool we have to fight inflation – central bank-led monetary policy – does so at the expense of employment. You can see how this is political by considering what might happen if the correct macroeconomic tool cut profits by 20 per cent instead of employment and wages by 20 per cent to achieve lower inflation.”
This was something Sean delved into in his column last week. While we’re all fretting about inflation, Sean argued that the real problem is coming down the track: an economic slowdown brought on by higher interest rates.
Sean argued that there are good reasons to think the ECB will beat inflation. The first is theoretical: a determined central bank should always be able to control inflation. And we know the ECB is determined. Central banks in general tend to hate inflation, and the ECB hates it most of all. Plus, the market expects it to.
However, the impact of this will be higher unemployment. “The upshot of all this is that the ECB has held off as long as possible. There are no more workers to be brought back into the economy. No more free lunches. Now, it’s going to have to get tough on inflation,” he wrote.
In the eurozone, as in the Irish housing market, we’ve hit binding constraints. No amount of QE will fix them. In the eurozone, the constraint is high energy prices. In Ireland, it’s a chronic shortage of homes.
In the short term, energy prices and house prices are outside the government’s control. But in the medium term, with the right investments, there are things that can be done.
Stephen has argued before that there is undoubtedly a suite of measures to help poorer households weather the worst of the Covid- and conflict-induced inflation. Bar one or two lesser spends, he would leave it at that.
I agree. It would be better not to dump all of Ireland’s corporation tax windfall into current spending. At first glance, the public finances look in supreme shape. But, as I wrote last week, the state’s coffers have been bolstered by huge amounts of one-off windfalls from a small handful of multinationals. This is not going to last. Yes, the price rises are painful. But we need to be prudent.
We also reported extensively last week on how 231 high earners sought to dramatically curb their tax bills by creating “contrived” losses through a web of transactions in the British Virgin Islands. The scheme has now unravelled, having been shot down by both the Tax Appeals Commission and the High Court. I unpicked the history of the scheme, while tax expert Eoin O’Shea went through the tax and legal implications of the High Court judgement. I did a follow-up column on Friday looking at the wider issue of tax avoidance schemes, and the Revenue’s ongoing battle to curb them.
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