An end to the house price boom would be unlikely to hit house values or have a major impact on the economy, according to a leading economist.
Mr Robbie Kelleher, chief economist with Davy Stockbrokers, says in the firm's weekly market comment, published this morning, that debt servicing had not risen in real terms over the past eight years.
Mr Kelleher points out that, by the end of the year, Irish people will have more than four times as much debt as they had in 1996. Consumers will owe €84 billion to financial institutions at the end of 2004, compared with €18 billion eight years ago.
Mortgages account for around €8 out of every €10 that Irish people owe to their banks.
"The servicing of this debt has been made easier by the decline in interest rates over this period," Mr Kelleher says.
"Mortgage rates have fallen from 7.5 per cent to 3-3.5 per cent. Nevertheless, the debt servicing burden has risen significantly, from 9 per cent of incomes in 1996 to an estimated 15 per cent of disposable incomes in 2004.
"However, in assessing whether this level of debt is affordable or serviceable, it is not the ratio of debt/income that is most important, it is what is happening to the real value of residual incomes after debt servicing obligations have been met."
He says that disposable incomes have risen 50 per cent over the same period.
"A typical consumer is paying a much higher proportion of his income in debt service than his equivalent in 1996; but the real value of what is left over after debt service is still some 50 per cent higher than it was in 1996," he says.
"We would attach a higher probability than most to the likelihood of a material correction in house prices occurring in the Irish economy at some point, but what comforts us more than most is that we see that the consequences of such an adjustment - unless it is of very substantial proportions - would not be material for the economy as a whole, or indeed for asset quality within the loan portfolios of the Irish banking system," he says.
Mr Kelleher's comments are a reaction to an International Monetary Fund (IMF) warning that Irish house prices were overvalued by up to 20 per cent and Central Bank concerns that Irish borrowers were not taking the impact of a likely interest rate rise into account when calculating what size mortgages they could afford.
The IMF singled out the Republic as one of a number of countries where property values were higher than justified by factors such as economic growth and low interest rates.
It warned that, in these countries, there was a "risk that an increase in interest rates could trigger a sharp house price drop with more severe consequences for economic activity".
