Opinion:There are signs that the big 'freeze' in housing transactions during 2007 may be starting to thaw, says Austin Hughes

The darkest hour, according to one Chinese version of the old proverb, is just before it goes entirely black. In early 2008, it seems that most people are bracing themselves for more bad news on the Irish economy and the housing market in particular. Although we face a testing start, I think this year could end on a notably less gloomy note. Both the Irish economy and the housing market may prove more resilient than many expect.

It is not difficult to understand why confidence is at such a low ebb. Concerns about the health of the world economy, a particular nervousness about the outlook for employment in Ireland and a sharply changed view of house price prospects have combined in the past year or so to transform sentiment towards property.

The catalyst for this turnaround was the increasing difficulty the average Irish consumer faced in buying the average Irish house. A doubling of interest rates between December 2005 and June 2007 had a dramatic impact, in part, because it came after a period of particularly sharp increases in house prices. This squeezed many potential purchasers out of the market and made monthly loan repayments more painful for recent buyers.

Although higher borrowing costs were troublesome, in isolation they might have prompted a notably more gentle slowdown than occurred. Throughout 2007 gloomy news and even gloomier predictions caused consumers to repeatedly downgrade their views in regard to the long term health of the Irish economy and, with it, the likely trend in house prices. Add to this near chaos in relation to stamp duty that fuelled hopes for a dramatic drop in the "up front" costs of house purchase, and buyers could choose from any number of reasons why they should stay away from the market.

While bad economic news may remain commonplace in early 2008, some more helpful developments shouldn't be overlooked. US policymakers have already taken significant steps to improve economic prospects there. Sharply lower taxes will help but the major response has been a dramatic drop in interest rates. The scale and speed with which US interest rates are falling will translate into a far less threatening interest rate outlook for Irish borrowers.

The European Central Bank initially adopted a much tougher line than its US counterpart. However, economic growth is weakening in both the US and UK, the two main trading partners of the euro area.

Global financial markets remain fragile while business and consumer confidence is slipping. Encouragingly, the ECB recently removed its threat to raise rates further and hinted that rates may fall.

I think the ECB will reduce interest rates two or three times in the coming year. This will boost sentiment towards the Irish housing market.

Stronger spending power should also assist the market in 2008. House prices have fallen and mortgage interest relief has increased dramatically. So, affordability is returning towards levels last seen in an altogether more buoyant Irish housing market in 2005. Because rents have increased sharply in the interim, the arithmetic is looking far more supportive of house purchase than it has been for some time.

If lower borrowing costs support demand, changes in supply should also contribute to a healthier housing market in the year ahead. Talk of a large overhang of unsold properties has been a key ingredient in poor sentiment towards the housing market through 2007 but builders have responded very aggressively and sharply cut housebuilding.

I think housing starts could fall to around 40,000 this year, well under half the average of the past three years and some way short of long term demand.

Alongside reduced supply, price cuts seem to be having some impact. Anecdotal evidence suggests that the recent drop in prices at several new developments have encouraged a pick-up in sales. So, there are tentative sings that the big "freeze" in housing transactions that characterised the market in 2007 might be starting to thaw.

The Irish housing market and the broader economy still reflect worries that the inevitable consequences of a strong and long boom might be a painful and protracted slump. In the next year or so we should discover a third and slightly unfamiliar way. Neither the Irish economy nor its property market have experienced anything that might be described as "normal" conditions in a very long time. That could be set to change.

The Irish economy remains well placed to weather a testing period while rising rents and a young and growing population imply the demand for property should be solid. Confidence is unlikely to rebound dramatically but a more measured improvement might be no bad thing. This year could see steps towards the emergence of a more "mature" housing market in a still healthy Irish economy.

Austin Hughes is chief economist with IIB Bank