DBRS Morningstar said increasingly unaffordable housing will not only exacerbate social problems but could “make the country a little less attractive” to future investors.
“Comparatively expensive housing may also place a drag on Ireland’s growth model over the medium term,” the agency said in a note on Wednesday.
“The economy is highly open and welcoming of the free flow of trade and people, and while its strong competitiveness depends on many factors – including its proximity to Europe’s large single market, its skilled workforce, and the strong governing institutions – the housing affordability crisis could make the country a little less attractive to future foreign capital inflows.”
The warning comes a day after the cabinet signed off on a mini budget for housing to help speed up the building of new homes.
The three measures are expected to cost over €1bn and aim to activate stalled planning permissions around the country. They include a €750m subsidy for cost rental apartments, a waiving of development levies for new homes (at a cost of around €380m) and increased grants for renovating vacant and derelict homes.
DBRS said the housing crisis will be “expensive for the government” and that it may need to spend even more to respond to public demands.
The US-headquartered ratings agency points to a 35pc increase in the cost of building and construction materials over the last two years, with timber, steel and cement rising higher.
It also highlights a 2022 Central Bank of Ireland survey showing 70pc of builders expect construction costs to continue to rise in the 2-5 years, with almost a third expecting inflation of between 10pc and 20pc.
Indirect costs such as the price of land, professional and administrative fees and construction-specific levies and taxes could also rise, DBRS said, further driving construction inflation.
“Correcting the housing supply-demand mismatch is key for Ireland to maintain its competitiveness, and to accommodate more workers and tax payers,” DBRS said.
Meanwhile, an expected hike in interest rates, designed to cool inflation, is set to make buying homes less affordable, particularly for first-time buyers.
The European Central Bank is expected to announce a seventh rate rise next Thursday, with a hike of 0.5 percentage points possible.