Bank of Ireland has forecast that second-hand house prices will rise by 12 per cent this year, an increase of one-third on its earlier predictions.

In Dublin, prices are expected to climb 14 per cent, taking the average price of a second-hand home in the capital to 363,000 compared with €270,000 in the rest of the country, the bank's Irish Property Review says.

New homes are expected to show more modest gains, but Bank of Ireland advises those hoping for a price dip not to get their hopes up.

Declining interest rates and relative stability in the labour market - due in part to last year's jump in Government recruiting - was fuelling inflation, said the bank.

Reflecting this is an increase in mortgage lending, with gross mortgages expected to be worth €12.8 billion in 2003, up 15.6 per cent from last year.

Accelerating price rises were predicted despite a 30 per cent rise in house construction in Dublin this year, said Dr Dan McLaughlin, chief economist at Bank of Ireland.

Some 12,000 new residences are due to be completed in the city, when annual demand is running at around 50,000.

Dr McLaughlin said: "With 30 per cent of the Republic's population living in Dublin, the figures imply a need for even greater supply in the capital."

Warnings of cooling in the rental market may be overstated with rents generally unchanged since last year, except for Dublin suburbs where some softening may have occurred, according to the bank.

Dr McLaughlin dismissed claims that the buy-to-let market is oversupplied and will spill over into weaker house prices, pointing out that buy-to-let investors are acquiring equity in their properties.

"Rents are broadly unchanged from last year and although \ may have softened in the suburbs of Dublin, our own inquiries point to a firm rental picture in the city as a whole," said Dr McLaughlin.

He added: "The argument used by the house price bears that the buy-to-let market is oversupplied and that this will eventually spill over in weaker house prices misses one simple point: the buy-to-let investor is acquiring equity in his property."

The commercial sector is expected to recover in 2003 with annual returns set to exceed 10 per cent, compared with 2.2 per cent for 2002. Lower supply and greater business spend are the major factors.

Second-hand house prices rose 10 per cent last year and 8.2 per cent in 2001.