IRISH RESIDENTIAL property prices are undervalued, according to the latest edition of The Economist magazine, published today.

During the boom the influential London-based publication repeatedly warned that Irish house prices were overvalued and at risk of crashing.

In the latest of its regular surveys of house prices internationally it said that Irish prices are 5 per cent lower than they should be.

The estimate is based on the long-run relationship between house prices on the one hand and incomes and rents on the other.

Of the 21 countries covered in the index, prices are undervalued in only six other countries, said The Economist.

Irish prices have fallen further than those in any of the other 20 countries, when measured against both 2007 and 2011.

While average Irish prices have halved over the past five years, the next worst performing market was the US, where prices fell by more than one-quarter.

Spain was in third place, with prices down by slightly less than one-quarter over five years.

This follows predictions that more mortgage holders are set to go into arrears, according to a report by Davy Stockbrokers.

The Davy research, published yesterday, predicts that mortgage arrears among owner-occupiers in Ireland could peak at 16.5 per cent, from 13.4 per cent in the first quarter of this year.

The report also raises concerns about arrears on buy-to-let mortgages, which Davy projects running at more than twice the rate of the owner-occupier category.

The Central Bank plans to publish details of arrears on buy-to-let mortgages for the first time.

These will appear alongside regularly published arrears figures on owner-occupier mortgages in the next set of figures on the performance of mortgages in the third quarter of this year.

The figures are due in November.

The bank also plans to provide more detailed information about the number of mortgages that were restructured to help borrowers meet repayments but that have fallen into arrears again.

These details will be in the arrears figures for the fourth quarter of this year, which will be published in February 2013.

The additional information is an attempt by the Central Bank to provide greater understanding about the state of the Irish mortgage books and to show whether the forbearance measures taken by the banks on distressed cases – under their mortgage arrears resolution strategies – are resolving distressed loans cases and leading to a slowdown in the increasing rate of arrears.

In an analysis of the mortgage arrears situation, the Davy report said banks needed to move beyond short-term measures.

“Restructured mortgages have had limited success in restoring loan performance, with interest-only and principal payment modifications prevalent.

“A remarkable feature of the Irish housing market bust is the lack of principal write-downs and repossessions,” the report said.

Irish banking mortgage losses will exceed the €9 billion assumed in the worst-case scenario used in last year’s stress test, according to the Dublin-based securities firm.

“Eventual losses of €10 billion to €11.5 billion could be absorbed within the remaining €8.5 billion of unused capital from deleveraging requirements,” Davy said in a note.

“Tactical delinquency, increased bankruptcy, further property price falls and macroeconomic developments pose risks to this view.”

Legal rights group Flac said the Davy report was a “stark indicator” of the need to ensure lenders were more realistic and reasonable in their proposals around mortgage debt for Irish consumers. – (Additional reporting: Bloomberg)