Recent data on the housing market in both the UK and Ireland highlights continued strength in prices in both markets.

A survey by the Halifax in the UK found that the average house price in the UK rose by 4.2 per cent in May. This means that over the past 12 months house prices in the UK have risen by 18.5 per cent.

In Ireland the mini-slowdown of last year has been replaced by a resumption of inflation in house prices. A highly significant factor in the recent strength in the British and Irish housing markets resides with the strength of demand from investors rather than owner-occupiers.

In Ireland the reintroduction of the ability to offset mortgage interest against rental income seems to have reignited the entire market. In the UK, the "buy-to-let" segment of the market has been growing steadily in recent years.

Falling interest rates combined with strong and sustained growth in underlying demand for accommodation has been the key factor in generating investment demand for property. Another significant factor that has generated investment interest in property has been the poor performance from equity markets over the past year.

This is highlighted in the accompanying table that shows the year-to-date performance of the Irish market and the major international equity markets. Coming on top of a very poor 2001 the statistics make grim reading for anyone with substantial investments in equities.

In America the S&P 500 and the Nasdaq have fallen by 9 per cent and 20 per cent respectively in 2002. In Europe the picture is only marginally better with the FTSE Eurotop 300 down by almost 8 per cent and the FTSE 100 down by 2.5 per cent. The only bright spot is a rise of 13 per cent in the Japanese Nikkei 225 index.

This provides cold comfort as most investors exited the ailing Japanese stock market many years ago.

Compared with the stellar returns generated from residential property in particular it is not surprising that many private investors have switched their interest from equities to property.

However, over the long term most studies of historical returns show that equities generally outperform property. This has not been the case over the past three years as share prices have declined and property prices have continued to rise.

There is now some evidence that there is a softening in commercial and industrial property, although residential prices continue to soar in the Irish market. While a slowdown in property price inflation seems inevitable at some stage, a resumption of strong growth in equity prices still seems to be some distance into the future.

Developments in the US markets always set the tone for the rest of the world.

Despite the fact that the US economy is now performing very satisfactorily, American equity markets have been unable to regain their composure. After more than two years of declining share prices investor sentiment in America is weak.

Furthermore, investors continue to be buffeted by a seemingly endless stream of bad news concerning the accounting policies of corporate America.

With company profits not all that they seem to be, American shares still look very highly priced when compared with long-term historical norms.

This suggests that any recovery in American share prices will be modest even if the economy manages to sustain recent rates of growth.

Another potential negative for the American market is the recent weakness in the dollar exchange rate. In recent years there have been several false dawns concerning dollar weakness.

In each case the dollar quickly resumed its upward trend. It is too soon to conclude that the current phase of dollar weakness marks a major long-term turning point. However, there is a growing body of opinion that the tide has finally turned against the dollar.

A precipitate fall in the US currency seems highly improbable, rather a gradual weakening with the euro reaching parity against the dollar seems the more likely outcome.

In such a scenario demand from overseas investors for US assets will weaken making it that bit more difficult for US share prices to recover.

In contrast share prices in Europe do offer better value and could well outperform their American counterparts. A strengthening euro would also be positive for European markets and should serve to generate extra demand from non-European investors.

While a stronger euro will help to underpin share prices, a strong equity market recovery will require a sustained improvement in the pace of European economic growth and this will only become apparent later in the year.