House price growth is expected to slow to 6 per cent next year, after increasing by 12 per cent in 2003.

A strong increase in housing stock - 65,000 new homes will be completed this year - and the fact that prices may be approaching the limits of what buyers are willing to pay, are the major factors driving the slowdown, according to the Bank of Ireland Property Review.

But the divide between prices in Dublin and elsewhere is widening with homes in the capital 37 per cent more expensive, Property Review reveals.

The average home increased 11 per cent in value to €267,600 since January and is expected to rise another point by close of 2003, the bank says.

House prices rose 14 per cent in 2002.

House prices are unlikely to actually fall in the medium term, according to Dr Dan McLaughlin, chief economist with Bank of Ireland.

"We continue to expect a move to equilibrium in the housing market, implying a deceleration in house price inflation over the next 12-18 months," he says.

"We doubt that this will be the catalyst for a fall in house prices as periods of relative weakness in housing usually give rise to a fall in transactions rather than prices."

Second-hand houses are climbing in value more quickly than new homes, according to the survey.

In the year to the second quarter, new houses increased 13 per cent in value, compared with 17.9 per cent for second-hand homes.

There is evidence that buyers are prepared to pay a premium for a second-hand house in a more convenient location - adjacent to an urban centre and/or with good transport links - according to Mr Joe Larkin, managing director of Bank of Ireland mortgages.

There has been a sharp fall-off in the building of detached homes - representing only 18 per cent of new houses constructed in the year to date, Bank of Ireland notes in its review of the sector.

In contrast, construction of semi-detached homes rose to 35 per cent of the total from 28 per cent.

Terraced houses and apartments accounted for 12 per cent and 20 per cent respectively.

Interest rates are not likely to rise until next spring, the bank says.

Even when rates do rise, an improvement in general economic conditions will probably cushion the blow.

"Although interest rates have reached the lowest rate they are likely to, mortgage holders should not see a rise in variable rates until the first half of 2004," Dr McLaughlin says.

"We feel any interest rate increase will be mild and will be set against a backdrop of rising incomes and employment, ensuring a continuation of current affordability levels."