The Central Bank has intensified its warnings about the state of the Irish property market and signalled growing concern about the quality of the economy's performance.

Forecasts contained in the bank's annual report for 2005, published yesterday, suggest that the economy will continue to grow strongly in 2006. But in the report itself, the bank warns about rising levels of debt, and says that the economy is becoming over-reliant on domestic consumption.

Minister for Finance Brian Cowen reacted to the news by saying that the Government and the Central Bank expected a soft landing in the housing market.

According to the latest forecasts, the economy will grow by 5 per cent this year, close to the performance of recent years.

The report also points to several risks facing the economy, including rising house prices, rapid growth in borrowing and the economy's over-reliance on domestic demand. But it predicts that interest rate increases will provide "much-needed beneficial stabilising effects on the economy".

"Up until last year house prices were moderating. But since then there has been a re-acceleration and this is a matter for concern," Central Bank governor John Hurley said yesterday.

While refusing to say that house prices were overvalued, he said that a gap may be emerging between actual house prices and "the price warranted by the fundamentals". The risks of a correction in prices were increasing, he added, although he said a gradual easing was still possible.

According to the latest Permanent TSB / ESRI index, house price inflation has increased from 6 per cent last autumn to 14.5 per cent last May, despite interest rate increases last December and March. It was too early to assess the full impact of recent rate rises on the housing market due to the time lag between rate rises and house price trends, Mr Hurley said.

Recent Central Bank statistics show that private sector lending is increasing yearly by 30 per cent, a trend it frequently describes as worrying. "The household sector's debt to income ratio is now very high by international standards," Mr Hurley said yesterday.

In a reference to a Bank of Ireland study published last Monday suggesting that the Republic was the second wealthiest country in the world, Mr Hurley cautioned that the Republic's wealth could be too reliant on property values.

"It would be better if it was more diverse; 70 per cent of assets referred to were in the property market." While average property owners were in a positive equity position, an increasing number of borrowers were finding themselves in an exposed position, he added.

"There are some segments of the market with positive equity. But there are younger borrowers who are highly indebted and have family commitments. They don't necessarily have that equity."