The housing market will move towards a soft landing over the next few years, as low interest rates and a robust jobs market make a crash highly unlikely, a new study from AIB has found.
The bank's economists believe that housing supply will need to decline, however, warning that too much building over the next year or so could tip the market into damaging imbalance.
The bank's housing model foresees housing output falling from about 70,000 units per year to about 52,000 by 2006.
AIB chief economist Mr John Beggs said yesterday that the housing market displayed no sign of "a bubble about to burst", despite repeated speculation on an imminent crash. Mr Beggs recognised, however, that housing was far from homogenous, with parts of the market, such as rental properties, "soggier" than others.
"I don't rule out declines in some places," he said, singling out holiday homes as an area where prices could come under pressure. He said segments of the investment market would remain strong but predicted that rental income would continue to decline as the market gets used to a sustainable rental sector.
AIB advises that rents for residential properties should be monitored closely as long as the housing market remains vulnerable to the withdrawal of investors. "We're not looking for the market to fall out of bed. It will stabilise over time," Mr Beggs said.
AIB's economists are expecting the rental sector to be underpinned in the long term by a high level of pent-up demand for housing from individuals who are unable to afford a house purchase. This untapped demand will remain in place unless the market witnesses a shift towards lower-cost housing, according to Mr Beggs.
He acknowledged, however, that house-building firms were both flexible and responsive, with the construction of smaller, more affordable houses already evident in planning applications.
AIB believes a large part of the house-buying population has reached the limit of what is affordable for them as the market stands.
Against this backdrop, the bank is expecting price growth to moderate over the next few years, falling from 14.3 per cent in 2003 to 7 per cent this year.
"Prices are unlikely to crash and the risk of negative equity on any meaningful or material scale is small," the bank's research concludes.
Mr Beggs said he simply could not see where other commentators were finding the "mechanics" that would lead to a housing collapse. He pointed to positive demographic trends and immigration as supports for the market in the coming years.
AIB is also expecting interest rates to remain low, with the cost of paying back a mortgage unlikely to rise dramatically in the medium term.
"We believe central banks will now be extremely cautious in re-establishing rates at the required levels," said Mr Beggs.
