House prices in Ireland are still not expensive, in terms of being affordable, according to a new study by ABN-Amro.

While prices will continue to rise, the rate of increase will be slower, in response to higher interest rates and increased supply. The market could tolerate a substantial rise in interest rates before reaching the uncomfortable cost levels historically associated with falling real prices of houses, the study says.

ABN-Amro concedes that house prices are not cheap when the common measure - the ratio of house prices to income - is used. But this is not relevant in Ireland's case, the study argues, as it does not take into account the shift caused by joining EMU. As this ensures permanently lower interest rates, ABN-Amro says it is more appropriate to look at an affordability index which take account of the cost of borrowing for an average mortgage. Falling tax rates have also enhanced affordability, which is not captured in the gross income data.

This affordability index shows house prices are relatively cheap. In 1999, the average mortgage cost to average income amounted to an estimated 19.2 per cent down from 24.9 per cent in 1998 and well below the peak of 37 per cent in 1980. This is expected to rise to 21 per cent in 2000. Dr Dan McLaughlin, analyst with ABN-Amro, noted that in 1990, the average mortgage was £31,500, with a rate of 12 per cent and annual payment of £3,750. More recently, the average mortgage was £71,000 with a rate of 4.9 per cent but the servicing cost was only £3,480. The affordability index is confirmed by another ratio. The tax burden and mortgage cost as a percentage of average income was 71.2 per cent in 1990. This fell to 48.9 per cent in 1995 and is expected to fall to 42.7 per cent this year. The study expects further tax reductions to bring this down by 3 per cent over the next five years to just under 19 per cent of income. "This", it adds "will further enhance mortgage affordability going forward".

A chart shows Ireland had three distinct property booms in the last 25 years; in the mid-to-late 1970s, the late 1980s, and the current one which began in the mid-1990s.

ABN AMRO notes the 1970s and early 1980s were periods of high consumer price inflation. Based on real prices (house price inflation minus CPI), the current boom has seen the highest yearly rise in house prices, as well as the largest cumulative increase in prices.

It says prices have doubled in real terms since 1996. While the pace of increase is slowing, real prices still increased by 21 per cent last year compared with 29 per cent in 1998. While noting that euro interest rates are on the way up, the study says the average mortgage rates are unlikely to be much higher in 2000 than they were in 1999. If pay increases by 5.5 per cent this year and the average mortgage rises by only 10 per cent, the affordability would remain unchanged. The study says there is little danger of an imminent correction in the upward move in house prices and mortgage rates would have to rise to 6.5 per cent to 7 per cent - 40 per cent to 50 per cent above current rates - before having a major impact.

A sharp rise in Irish rates is possible only if inflation in Germany and France, the dominant partners in the euro zone, accelerates sharply or if the euro continues to fall, the study concludes.