THE REPUBLIC’S house-price fall has levelled off but no recovery is in sight, according to a European housing market report published by Standard & Poor’s (S&P).

The ratings agency indicated yesterday that while Irish house prices have “completed their correction”, market activity is not expected to resume any time soon. It noted that prices in Ireland have suffered the largest contraction in western Europe, falling 33 per cent from their 2010 peak.

But while the Republic has almost “fully corrected the excess of the previous housing bubble”, with current prices returning affordability to pre-2000 levels, it will be another couple of years before we see tangible signs of market activity resuming.

The agency listed oversupply as one of the key factors in the predicted sluggish recovery. It cited figures from the Bank of Ireland's December 2010 Irish Property Review, which puts oversupply in excess of 300,000 homes and also refers to recent estimates from the Department of the Environment that indicate a much lower number of 23,000 dwellings – a figure which it says is based on a smaller survey of recently completed estates.

The State’s economic outlook, along with buyer caution, is also linked to the predicted slow recovery of the housing market. The agency stated that with growth set to remain weak this year and the likely gradual rise in euro-zone interest rates, “the situation does not call for much optimism regarding the short-term housing market outlook”.

The agency noted similar trends across Europe, particularly in the UK, Spain and France where financial cutbacks and what it refers to as “the spectre of interest hikes” is likely to see potential buyers camp on the sidelines.

Of the British housing market, S&P said recent trends in mortgage approvals signal a slowly weakening market, with the Bank of England reporting mortgage approvals down 3 per cent on last year and less than half the average monthly number between 2001 and 2006.

The agency anticipates the British housing market will “drift sideways” in the coming 18 months, with prices set to fall by about 5 per cent this year and roughly flat in 2012.

After a bounce in 2010 following a two-year contraction, the rise in French house prices is slowing while in Spain the S&P report anticipates a “prolonged slump”. In contrast it noted “steady market conditions” continue to prevail in Germany.

Commenting on the ECB’s decision to increase interest rates, S&P calls on the bank to introduce new policies in an attempt to restore confidence in the euro zone. The agency said this should include underpinning sovereign bond prices in the euro zone’s periphery, curbing the price of liquidity available to financial institutions and keeping a grip on retail prices.

The report predicts that prospective homebuyers in Europe will postpone acquisitions given governments’ “austerity plans”.