The abolition of mortgage interest relief should be considered as part of a package of measures to cool the property market, the Economic and Social Research Institute (ESRI) has said.
ESRI review
ESRI's Medium Term Review: 2005-2012 says the prospects for the Irish economy remain good but that the potential for a significant slowdown in US economic activity and a booming property sector pose a threat to growth.
It says growth averaging around 5 per cent per annum to the end of the decade is a realistic projection but warns of "dangerous imbalances" in the economy, particularly the reliance on the construction sector, which accounts for 12 per cent of growth.
"Because of its openness the Irish economy is probably more exposed to international shocks emanating from the US than are our EU partners," the review said.
"However, our concerns are greatly heightened by Ireland's current exceptional dependence on the building and construction industry to fuel economic growth. No other economy in the EU is anywhere near as exposed as is Ireland in this regard," the review says.
While the economy remains constrained by the limited stock of dwellings, and infrastructural improvements are only keeping pace with an increasing population, measures need to be taken cool the construction sector, the review says.
A package of measures including an end to mortgage interest relief, ending property tax reliefs and property taxes should be considered, the ESRI says.
These are needed because construction is diverting resources from other sectors in the economy.
"The economy now has a significant exposure to the housing market. A lot of people focus on prices but there is the fact that we are building nearly 80,000 houses per year and a lot of activity is being driven by that," said one of the review's authors, David Duffy.
But Geoff Tucker, economist with estate agents Hooke and MacDonald, said the housing would not collapse as suggested by the ESRI.
"The main risk to the stability currently inherent in the Irish property market is any curtailment of the future supply of new homes, particularly in the Dublin market, where there is currently a shortfall of 6,000 units per annum," Mr Tucker said.
"The property market continues to play a central role in the Irish economy's success and is not only contributing to the increase in growth, but it more importantly is facilitating this growth," he added.
The ESRI report warned of "euphoria" in the housing market that could lead to some people struggling to meet mortgage repayments in the event of an economic downturn.
"This sector is very vulnerable to a shock, in particular any change in external circumstances which would cause unemployment to rise and expectations about future incomes to fall. Such a change could bring about a collapse in the housing market, including in housing prices," the review said.