Major slump in housing output likely this year due to Covid-19

Appearing before the Covid-19 Oireachtas Committee, officials from the Central Bank have warned that should a second wave occur, the shortfall by 2022 will be 17,000.

Mark Cassidy of the Central Bank said the pandemic has had a significant impact on the country’s house building and this is only exacerbating the shortfall in supply of new homes into the market which was present before the pandemic emerged.

He told Fianna Fáil’s Cormac Devlin that before the pandemic occurred, the Central Bank estimated that 26,000 new houses in 2020 and 32,000 by 2022.

“Now we think 16,000 new houses and by 2022 it will be 22,000,” he said.

He said that in its ‘severe scenario’ housing output could fall to just 15,000 in 2022.

A fall of approximately 20% in underlying domestic demand in the second quarter of this year, the Central Bank Governor Gabriel Makhlouf has said.

Speaking at the Oireachtas Covid-19 Committee, he said the current spending and borrowing to combat the pandemic is “absolutely warranted” at present but said such borrowing does present medium-term risks.

He was speaking as the European Commission released its latest forecast which showed that Ireland’s economy will shrink by 8.5% this year due to the pandemic.

Mr Makhlouf said reducing borrowing now would be the wrong course of action now but said the Government will have to consider a roadmap when it comes to Budget time in October.

He said Covid-19 has caused a very sudden and severe contraction in economic activity across the world.

The speed and scale with which this unfolded has been unprecedented and has posed an unparalleled challenge to the community and to governments and policymakers everywhere.

Real-time data for the Irish economy point to a trough reached in April, and an increase in activity as the economy re-opened, he said.

“In recent weeks we have seen the beginning of a return to work in some sectors and a decline in the numbers in receipt of income supports.

"Payments data also point to some rebound in spending.

However, overall, economic output has declined substantially in recent months and remains significantly below pre-Covid levels.

"Our latest projections imply a fall of approximately 20% in underlying domestic demand in the second quarter of this year,” he said.

Mr Makhlouf said he and the bank have made it known to insurance companies who are accused of not paying out business interruption claims because of the Covid-19 pandemic.

He said that in the cases where provision is made in policies, the companies must pay out on those claims.

“I have made very clear our expectations as to how the insurance industry should respond. We expect the companies to pay and not to drag things out where policies are clear,” he said.

In another group of claims where the cover is not clear, he said the bank is seeking to bring clarity to the situation as quickly as possible, conscious that some companies have already begun legal actions against the insurance companies.

Mr Makhlouf said the outlook is very uncertain.

“The path ahead for the economy will depend on the future path of the virus, the degree to which containment measures need to remain in place or be re-introduced, and the immediate and longer-lasting effects on behaviour and economic activity,” he added.

The unemployment rate is set to decline from its second quarter peak of about 25% as the year progresses and is projected to be around half that level by the end of this year, committee members heard.

GDP is projected to fall by 9% in 2020. Output recovers to its pre-crisis level by 2022.

Under the severe scenario, GDP would fall by over 13% this year and output would not recover to its pre-crisis level until 2024, he said.

“Both scenarios assume that a Free Trade Agreement between the EU and the UK, with no tariffs and no quotas on goods, takes effect in January 2021.

"If that doesn’t happen, it is likely that growth in the Irish economy will be weaker,” he added.

The unprecedented challenges posed by Covid-19 have been met by exceptional policy action.

The Irish Government’s response to the pandemic is estimated to cost around €9 billion, with a further €7 billion being made available through indirect supports such as credit guarantees and rate deferments, he said.

As for monetary policy, the Eurosystem has put in place a series of measures aimed at supporting the smooth provision of credit and further operations to support bank lending, as well as expanding the large-scale asset programme, which should also help keep the cost of borrowing for governments low, he said.

Mr Makhlouf told committee members that households, businesses and the financial system have entered the current crisis in a more resilient position compared to the onset of the financial crisis a decade ago.

He said policy should continue to focus on supporting the productive capacity of the economy and avoiding scarring effects such as long-term unemployment.

“Any such action by the Government is likely to be costly in the near-term but will benefit the fiscal position over the medium term if it is effective in reducing the degree of damage to the economy’s productive capacity,” he said.

“Second, the rise in the government deficit and debt ratios is both warranted and necessary and is currently affordable.

"But the high level of debt will leave government finances vulnerable to future shocks and it will be important for the Government to provide a clear and credible return to much lower and sustainable deficit and debt positions,” he added.