Sharp house price drop could hurt EU - IMF

A sharp drop in Irish and Spanish house prices could pose a serious threat to the European economy, a new analysis from the International Monetary Fund (IMF) has found.

The study on the global economy highlights the Republic and Spain specifically when identifying risks to an economic recovery in the euro zone.

An abrupt fall in house prices in some countries - "notably Ireland and Spain" - could hold back domestic demand, the IMF notes. The Washington DC-based organisation also identifies high and volatile oil prices and an increase in household savings as potential threats to euro-zone demand.

The warning on property prices is presented without explanation of the drivers of the Spanish or Irish markets.

The IMF has, however, in the past concluded that Irish property is overvalued by as much as 20 per cent. This theory, contained within an IMF report from last September, was based on a belief that the rise in Irish house prices could not be explained by economic trends.

This would, the IMF said, leave the market vulnerable when interest rates started to rise.

While such warnings will be unwelcome for any property-owner in the Republic, they will be doubly worrying for the many thousands of Irish people who also own a home in Spain.

Industry estimates suggest that as many as 50,000 Spanish properties are owned by Irish people, although growth in the market has eased over the past few years.

Six months on from the IMF's last outlook, the prospect of rising euro-zone interest rates has diminished a touch, according to the latest analysis.

The organisation is now opening the door to another cut in interest rates if the core euro-zone countries do not manage to stage an imminent recovery.

"A further cut in interest rates cannot be ruled out if current economic weakness or a further appreciation of the euro were to result in lower-than-expected inflation," the organisation notes.

The IMF has reduced its euro-zone growth forecast from 2.2 per cent to 1.6 per cent in gross domestic product (GDP) terms.

For the Republic, the IMF has pencilled in GDP growth of 4.8 per cent this year and 4.6 per cent in 2006. The forecasts are at the low range of current expert predictions, some of which envisage GDP growth of more than 6 per cent for next year.

Irish unemployment is forecast to decline from 4.1 per cent to 4 per cent next year.