The Central Bank has issued its strongest warning about the possibility of a collapse in house prices.
It also warned that property price rises could threaten the State's financial stability and economic performance.
In its quarterly bulletin issued yesterday, the Bank views the continuing strength of the property market with alarm. It says a continued rise in house prices could be followed by "quite a disruptive adjustment as prices revert to their fundamental values".
The Bank, which incorporates the Irish Financial Services Regulatory Authority (IFSRA), says the property market may be overvalued to some extent. It is important that borrowers do not assume excessive debt and that lenders maintain prudent lending standards.
Dr Michael Casey, the Bank's assistant director general, said the continued increase in house prices was a particular concern and signalled that there could be some small correction or levelling off of prices.
The Bank has been analysing the factors that have historically led to borrowers getting into difficulties in repaying their mortgages. It concluded that rising unemployment is the most significant threat. The Bank is relatively upbeat about employment prospects and, with interest rates expected to remain low, Dr Casey said its warnings about a potential drop in house prices were "partly hypothetical".
Yesterday, the European Central Bank left interest rates unchanged at its monthly meeting in Frankfurt.
Irish Central Bank governor Mr John Hurley has written to the financial institutions to warn them about the importance of adhering to sound lending policies at a time when economic growth rates were slowing. Most of the financial institutions have responded and the IFSRA is examining the replies and seeking additional information if necessary.
It is expected to conclude its examination by the end of the month when its findings will be presented to the IFSRA board. It will then decide what measures, if any, need to be introduced.
The Bank is expecting a slower-than-forecast growth rate in the economy this year and in 2004 but is cautiously optimistic about its general prospects.
It forecasts the economy, as measured by gross domestic product (GDP), will expand by 1.75 per cent this year, one percentage point below its previous forecast. In 2004, growth will pick up to 3.25 per cent - below its earlier expectations of a 4.25 per cent rise in GDP.
It warns that issues such as a resurgence in foreign direct investment in the economy, particularly from the US, together with improvements in competitiveness will be crucial in determining the degree to which the State benefits from an international economic recovery.
The indigenous sector will be the Republic's "Achilles heel" in the years to come, according to Dr Casey. The Bank signalled that many firms in traditional industries could go out of business and it highlighted the need for greater planning to move employment to more high-tech sectors.
Figures released yesterday showed 2,563 redundancies last month - the sharpest increase this year.
Irish inflation is almost twice that in continental Europe and there are few signs of that gap narrowing. The Bank said the price level in the State was 12 per cent higher than the EU average, with only Sweden and Denmark more expensive.
