Ireland's housing market: bubble trouble

The housing sector was a significant driver of Ireland's growth performance during the last decade, reflecting strong country-specific fundamentals. While supply and demand factors can explain much of the developments of prices during last 27 years, there is evidence of overshooting in the later part of the period. The housing market peaked in 2006 and the sector is now undergoing an adjustment that is warranted by an apparent overvaluation of house prices and needed reallocation of resources to more productive sectors. Given the weight of the residential construction sector in output and employment, the correction in this sector is acting as a drag on overall economic growth as well as on public finances. It remains to be seen whether past structural reforms can help bring about a rapid return to the medium term growth or whether the recovery will be more drawn out, similar to the experience of many industrialised countries that have undergone housing market busts in the past 30 years.