House price inflation in the Republic between 1995 and 1999 far exceeded that of the rest of the world's leading economies, according to a report released today.

The Basel-based Bank of International Settlements (BIS), bank and forum to the world's central banks, ranked the Republic top in the world in both house and commercial property inflation. The study focused on the dangers for banking of heavy lending to the property sector.

Adjusted for inflation, house prices in the Republic rose 76 per cent between 1995 and 1999. The Republic also topped the poll for commercial property, with an inflation-adjusted increase of 170 per cent during the same period.

The bank said there were potential risks tied to soaring property prices worldwide coupled with heavy lending to the sector and that the phenomenon bore close watching.

"Experience indicates that, at least in those countries where price increases have been particularly rapid and prices are beyond or close to previous peaks, developments warrant close monitoring."

The implications of lending to the real estate sector had largely been ignored over recent years as attention focused on risks posed by soaring global equity prices. But property prices had also risen, it said, noting: "It is in fact the extensive use of real estate as a collateral that has been the primary source of losses for banks".

In a run-down of property price developments it said gains in residential property prices had been "quite substantial in some markets. While inflation-adjusted house prices rose by 9 per cent between 1995 and 1999 in the US, increases exceeded 25 per cent in Denmark, Finland, Norway, Sweden, the Netherlands and the United Kingdom".

In Ireland the trend was more pronounced. Home prices on an inflation-adjusted basis were up 76 per cent in the same period. Commercial real estate, traditionally a more volatile market, had seen even stronger gains than residential housing.

Amsterdam, Stockholm and major cities in the US recorded price increases of more than 40 per cent over the last four years, while prices in Madrid doubled.

Dublin reported the largest increases, with inflation-adjusted commercial real estate prices up by more than 170 per cent between 1995 and 1999.

Credit growth was a significant factor alongside gains in the economy, especially with regards to commercial real estate.

"In fact, credit growth significantly in excess of GDP [gross domestic product] has been a rather widespread phenomenon" the bank said.

In Europe, securitisation of mortgage lending has boosted that market. Total issuance in 1999 set a record of just over $7.5 billion (€8.31 billion), the bank said.

It said stocks were starting to react at times more strongly to market-moving news than bonds. This changed how these two markets behaved and influenced each other. The implications could include a more unpredictable and volatile environment for debt markets.

"In the past, bond markets had tended to be the first to reflect macroeconomic developments with implications for monetary policy, and equity markets to respond to movements in the yield curve," it said.

"But with bond markets beset with liquidity problems, equity markets have increasingly been reacting in their own right rather than taking their signals from bond markets," it said.

Liquidity in bond markets has decreased partly as a result of governments, including the US Treasury, paying down debt.

The bank noted that "on several occasions changes in expectations about the near-term course of US interest rates had a significant impact on equity markets but a muted impact on fixed-income market".

In a review of second-quarter activity, it said credit spreads "remained at an exceptionally high level" in the period. This was due partly to moves in the equity markets which "appear to have been transmitted more directly to bond pricing in secondary markets than in the past, particularly in the US market".