House prices will rise by 15 to 20 per cent this year before the increase in prices eases off, according to one of the Republic's top economists.
Speaking to the Irish Home Builders' Association, Mr Jim O'Leary, chief economist at Davy Stockbrokers, also said a house prices "bust" is unlikely and that the key policy issue on which the Government should focus is affordability.
According to Mr O'Leary, spiralling house prices "undermine the economy's competitiveness". He added that as Government assesses policy where there is a conflict between affordability and the protection of existing valuations of house price, affordability should win out.
"The notion that a collapse in house prices would be an economic catastrophe is without a robust foundation. But it would be a disaster if economic policy were driven by the perceived need to avert a sharp fall in house prices." According to Mr O`Leary, there is a "bubble" in the Irish housing market, but it has not come close to the size where it is in "imminent danger" of "bursting".
However, if prices were to continue rising at the same rate this year as last the risk of the bubble bursting would be significantly increased.
Overall, with supply also set to increase, he said the most likely outcome for the market is that it is in for the "softest of soft" landings.
But shocks such as a global recession, a sharp fall in sterling or the tight labour market and yawning infrastructure gap resulting in a rapid erosion in competitiveness could severely impact on price levels.
He also pointed out that previous collapses in Britain, Boston and Los Angeles were preceded by significant overvaluations, greater than the amount which Irish house prices are estimated to be overvalued.
According to Dr Maurice Roche of NUI Maynooth, prices were 10 per cent overvalued at the end of 1998, whereas prior to the British collapse prices were 25 per cent above their warranted level.
There is also evidence that only about 40 per cent of the increase in house prices in New England and California during the 1980s could be explained by economic fundamentals. Dr Roche's research suggests the corresponding proportion for the Irish market from 1993 to 1998 is 80 per cent.
Economic growth is also expected to continue at a fairly rapid, although slowing pace . Supply is also likely to be positive. According to Mr O'Leary, completions will reach 50,000 this year or next.
One risk, he says, is a "spontaneous implosion" of the market. This would happen if people began believing that prices are about to fall and reverse their buying decisions, delaying the moment when they purchase a home. "The reversal of expectations-driven demand would conceivably have an enormous negative on housing market activity and on prices. But, while this is a risk, its proponents are likely to be proved wrong," Mr O'Leary said.
