Bank  of Ireland believes average house prices will rise by 10 per cent this year, above its previous forecast of 5 per cent.

In its latest quarterly analysis of the property market, the bank says the housing market has turned in "a remarkable performance" in recent months.

"As a long-time bull on the Irish residential property market, we find ourselves in the unusual position of having been too bearish on prices this year," the bank's chief economist, Dr Dan McLaughlin, said.

In the six months to June, prices were up by 6.5 per cent while housing completions were running at 13,440 in the second quarter, a seasonal record.

The bank believes the market is nearer equilibrium than in the 1990s with demand now matched by rising supply. It notes that the housing stock in the Republic is now increasing by around 4 per cent per annum compared to just 0.8 per cent in Britain.

As a result, it expects real house prices to remain broadly flat in the next few years, just keeping pace with general inflation. The current figures, it says, point to a new record of 55,000 house completions this year, up from 51,600 in 2001.

In cash terms, the average house cost €227,000 in the second quarter and Bank of Ireland expects this to rise to €231,000 by the year end.

Prices in Dublin were higher with an average house costing €298,000 in June and likely to rise to €302,000 by the end of the year.

Mortgage lending was also very strong in the second quarter, with gross lending of €2.7 billion, a 37 per cent increase on the same period last year. The number of loans paid out rose by 15 per cent to 20,500 in the second quarter while the average mortgage size was up by 18 per cent to an average €133,000.

Bank of Ireland believes the number of mortgages issued this year is likely to exceed 74,000, matching 2000's level, while the average mortgage size for the year as a whole is expected to rise to €129,000 from €115,000 last year. The rise in loan to value ratios points to the numbers of first-time buyers in the market.

"We have long argued that the housing market can only generally be undermined by an interest rate shock or an employment shock, with Ireland's EMU membership effectively ruling out the former," Dr McLaughlin said.

Meanwhile, despite a rise in the unemployment rate from 3.7 per cent to 4.3 per cent, the labour market remains in reasonably good shape with employment rising by 35,000 in the year to May.

The report also considers the issue of affordability. It admits that on the basis of the price to income ratio, house prices have risen from 3.5 times earnings in the early 1990s to 7.7 times earnings last year with house prices this year likely to come in at eight times earnings.

However, if the cost of buying a home is considered in terms of the cost of servicing a new mortgage relative to income, affordability is better than in the past.

While the ratio risen from 20 per cent in 1994 to 31.8 per cent last year, it is still below the 35 per cent recorded in the 1980s when houses were far cheaper. The report also notes affordability is set to improve further this year when the ratio falls to 29.9 per cent.

On the issue of whether to opt for a variable or a fixed mortgage rate, the bank advises borrowers to stick with the variable option, particularly as there is a chance the European Central Bank will cut euro interest rates. "Having said that, a two-year or a three-year fixed rate of below 5 per cent would be well worth considering," the report says.

But if things look good on the residential property side, the outlook for commercial property is gloomier.The bank forecasts negative gains on commercial property for 2002 as a whole, the first since 1991. A recovery is dependent on an upturn in corporate investment expenditure which is currently hampered by falling equity markets and the uncertainty surrounding US intentions toward Iraq, the report said.