AIB warned today that current house price rises are unsustainable as rising incomes would not keep up with the constant rise in the cost of homes.
John Beggs, AIB chief economist, said average house prices were expected to rise by at least 20 per cent between 2005 and 2007, but the rise in wages would be less than half of this.
"The Irish housing market has become a hot house," Mr Beggs warned.
AIB said it expected average house prices to rise by at least 20 per cent between the end of 2005 and the end of 2007. The rise in wage incomes will be less than half this amount, the bank forecast.
"Prices cannot continue to rise at two to three times the average rise in wage incomes without eventually killing off a large number of potential first time buyers, irrespective of the support they may receive from parents and other sources," Mr Beggs continued.
"They may also be forced into short term borrowings in order to meet deposits and other costs associated with the purchase of property which would then exacerbate their debt repayment costs."
The AIB Economic Review and Housing Reportsaid the property market was moving further away from a soft landing in terms of price rises and that the situation needed careful monitoring.
It noted prices for second-hand properties were rising more sharply than new houses as supply bottlenecks were squeezing the market. Mr Beggs said it may not be the case in all areas of the country but the message of higher prices is spreading.
AIB forecast average house prices could rise by 12 per cent this year, but even higher price increases are likely in many areas.
The report stated: "Though we have growing concerns about the current pricing behaviour of the market, it has to be said that the downside risks, although rising, still remain limited.
"We do not foresee a sharp fall in house prices but a protracted period of stability could follow beyond 2007. Nevertheless, the risks to the sector require continued careful monitoring."
As regards the wider economy, Mr Beggs predicted that GNP would grow by 5 per cent this year, accelerating to 5.5 per cent in 2007. He said this would be mainly driven by consumer spending, boosted by the maturing of SSIA funds. AIB warned that employment gains will continue, but not on the same scale as in 2005 where the construction sector added 26,000 new jobs.
Overall employment growth may remain strong, the bank added, with about 65,000 a year on average over the next two years, and over half of these will be foreign nationals.