Average house prices in Dublin will top the half million-euro mark by the end of the year as mortgage lending rises to record levels, according to Bank of Ireland's latest review of the property market.

The bank yesterday predicted the market would expand 12 per cent in 2006, compared to its earlier growth forecast of 9 per cent. This would put the average nationwide price of a house at about €395,000 and push Dublin prices to an average of €532,000, Bank of Ireland said.

At the end of 2005, national house prices were €350,000 and prices in the capital averaged €475,000.

"Especially around the Greater Dublin area, young couples are no longer able to aspire to own a home in the area they grew up in," said Emmet Stagg, the Labour Party's chief whip. "With mortgage rates likely to increase further later this week, the screw is likely to tighten even further on young families."

A separate report from Permanent TSB yesterday showed house prices in Dublin rising 16.1 per cent to €402,329 in the 12 months through June, while the national average climbed 15.2 per cent to €299,929. Bank of Ireland's survey is based on data from the Department of the Environment, which collates statistics from all lenders in the State.

House completions will likely rise for a 13th consecutive year in 2006, climbing 11 per cent to about 90,000, Bank of Ireland predicted. The size of the average Irish mortgage will probably increase to €220,000 this year from €200,000 in 2005.

Feverish demand for housing is being driven by employment growth, wage increases, and an expanding population, according to Dr Dan McLaughlin, Bank of Ireland's chief economist.

Competition between lenders is intensifying, prompting banks to attract borrowers by offering products such as interest-only mortgages, 100 per cent mortgages and longer mortgage terms.

"These measures can offset the impact of higher rates for a time but we retain the view that affordability will become a more significant factor in the market, particularly in 2007, when the ECB's rate may rise to 3.5 per cent," Mr McLaughlin said.

The rate of house price growth in the Republic is set to slow to 3 per cent next year as higher interest rates make mortgages more expensive, Bank of Ireland believes. Dr McLaughlin expects mortgage rates to range between 4.5 per cent and 4.6 per cent in the first half of next year.

"There will probably be no dramatic increase in bad debts but the rate rises will take the froth off housing prices," he said.

Irish residential property prices rose by a cumulative 270 per cent in the decade to the end of last year, at a time when inflation accelerated just 30 per cent, a report published earlier this summer showed. The Central Bank this month intensified its warnings about the property market.

The National Youth Council of Ireland called for the Government to reintroduce a grant for first-time buyers, at a new rate of €8,000, to help young people reach the first rung of the property ladder.