There has perhaps been only one consistent factor in the Irish property market over the past four to five years and that is . . . confusion.

One minute you can read that the property market is booming and that strong price inflation will be a feature of our lives for years to come. The next headline can declare that house prices are falling.

Such extreme views may lead many to question what exactly is happening in the market, and rightly so. No market is that volatile.

To get a clearer view of what has happened in the market during the past year, let's review some facts and figures. Firstly, it is correct to say that the supply of properties coming on the market has increased significantly in recent years. In 1993, we built approximately 21,000 houses and apartments. By 1999, we had more than doubled this output to in excess of 46,000 units.

This figure may mislead one into believing that all parts of the country have benefited equally from this increase in construction - not so. In 1993, we built approximately 7,000 houses and apartments in Dublin. By 1999, this had only increased to 10,000. In other words, the increase in supply did not take place where demand was most concentrated - the regional centres.

Another interesting fact is that despite this increase in construction activity, the supply of residential property in Ireland is still significantly below that of our European counterparts. At the end of 1999, following six years of strong construction activity, Ireland had only 300 houses for every 1,000 people living in the country.

In contrast, countries such as Germany, the United Kingdom and Sweden have between 400 and 450 houses for every 1,000 people living in the country. The imbalance between demand and supply which is so often toted as the underlying cause of price inflation has clearly not been bridged yet.

This is further substantiated by analysing forecasts of future demand. Conservative estimates suggest demand for an additional 400,000 residential units in Ireland in the period to 2011 - a 33 per cent increase on current stock levels. Given this demand it is difficult to see Ireland suffering from an oversupply of property in the next decade.

With such positive forecasts, why have we become subject to such an avalanche of negative commentary on the Irish property market in recent weeks?

Let's trace it back to the beginning. It all began in September when the auction market reopened. Commentators highlighted the increase in the number of withdrawals in the auction process with many suggesting that it reflected consumer dissatisfaction with the strength of property prices.

What such commentary failed to consider was that the majority of properties withdrawn at auction actually sold very successfully in the post-auction market. Furthermore, it is worth noting that only 2 per cent of all houses sold in Ireland and 6 per cent of all houses sold in Dublin are sold by auction - hardly a reflective selection of sales.

The real reason for the reduction in the success rate of properties selling under the hammer is probably buyer frustration towards a sales process which is not very consumer friendly. A three-week selling campaign which requires potential purchasers to have the property surveyed and secure a mortgage without any guarantee of a successful outcome is unlikely to be a popular choice for busy people who are already "time poor". Following the interest rate increase in September this negative commentary broadened to cover the entire market, with suggestions that rising interest rates would threaten both affordability and the ability of existing consumers to repay mortgages.

In order to address this suggestion we recently conducted some research on the question of affordability. Following a review of the various financial institutions it became clear that the majority of institutions have begun to calculate affordability based on a combination of both gross and net assessments. The traditional method of assessment involves the use of a multiple of the gross salary. The net assessment involves an examination of the ratio of monthly repayments to net disposable income.

Financial institutions typically allow a ratio of between 30 per cent and 40 per cent depending on existing income and the potential for growth.

To facilitate the assessment of affordability it was assumed that a couple, married with no children, would require a monthly after-mortgage income of £1,200. To assess the impact of rising interest rates we consider two couples, John and Mary and Jack and Sarah.

John and Mary are both earning approximately £17,000, the average industrial wage, while Jack and Sarah are both earning £30,000. Both couples are assumed to have limited potential for a significant increase in earnings in the short to medium term. They are assumed to be first-time buyers, applying for a 90 per cent mortgage.

If we assume that John and Mary would only be allowed to borrow up to 30 per cent of their net disposable income, that suggests a mortgage of £98,500, which is equivalent to a house value of £109,500. With a monthly mortgage repayment of £714 per month, John and Mary have a net disposable income after mortgage of £1,666, considerably in excess of the £1,200 threshold.

An increase in interest rates of 1 per cent would reduce this to £1,606, a figure still significantly greater than the prescribed minimum.

Jack and Sarah are earning relatively higher salaries and can afford a proportionally larger mortgage. Assuming that they are allowed to borrow up to 35 per cent of their net disposable income, they could afford a £195,000 house while still retaining a net disposable income of £2,356 per month. Increasing the interest rate by 1 per cent would reduce this to £2,250.

While the rising interest rate environment is an important ingredient in determining future demand, modest increases in interest rates, relative to historical trends, are unlikely to significantly reduce demand or impede affordability. It is perhaps also worth noting that the forecast reduction in tax rates would go some way to counteracting the rising interest rate environment.

What can we conclude?

Firstly, there is no denying that the level of price inflation is gradually slowing. A large proportion of this slowdown can be explained by a seasonal reduction in demand. The changes in stamp duty introduced by the third Bacon report have resulted in a dramatic reduction in investor demand, a factor which has further exaggerated the seasonal slowdown. Will this trend continue?

We are unlikely to see the heady inflation levels witnessed in 1997 and 1998 again in the short term. Supply levels have increased and price inflation will continue to ease. However, there is likely to be some pickup in inflation levels in the first half of next year as some of the investors re-enter the market.

In summary, the market is going through a period of transition as it comes to terms with the changing tax environment, but people anticipating a reduction in prices or the complete stabilisation of price inflation, will be disappointed.