House price inflation may fall to between 3 and 6 per cent by the end of next year, according to an AIB report on the housing market.
The latest report from the bank's Economic Research Unit says housing demand remains "well underpinned" but that deteriorating affordability conditions were affecting buyers' ability to realise their demand.
As a consequence, the report said, house price inflation is moderating as the supply/demand balance adjusts, and further price moderation is anticipated as the market heads for the much anticipated "soft landing".
It predicated the market would see an annual rate of increase in prices of the 3-6 per cent range by end 2007.
AIB chief economist John Beggs warned the sector was "once again being unsettled by uncertainty about property-related taxes."
"Thoughts of a general election have raised concerns on the selling side about the outlook for capital gains tax. On the buyers' side, recent speculation about possible changes to stamp duties may have persuaded some potential buyers to hold off until after the budget."
He claimed government intervention in the property market has been disruptive in recent years.
"Though the current stamp duty regime is unnecessarily punitive, easing the burden at this stage would probably go straight into higher prices," he said.
"This is an area that requires reform. However, it should be done on a gradual basis so as to minimise the effect on price," he added.
The report highlighted the fact that average Irish house prices have almost doubled over the past six years and over the same period house completions topped the 450,000 mark.
The housing sector directly accounts for one-fifth of the cumulative growth in real GDP of 36 per cent since 2000.
But the report also notes that mortgage credit has more than doubled over the past three years and that personal sector indebtedness now exceeds 150 per cent of disposable income.
Mr Beggs said: "Against the background of such an impressive record, many domestic and international commentators believe that the [housing] sector could, or indeed will, suffer a severe correction.
"While such a correction could have dire consequences for the economy, at least in the short term, the risks are low," he said.
Last April, the bank said double-digit house price inflation was "unsustainable and that the deterioration in affordability would kill off some of the high level of demand that was then evident in the market."
This view, it said, was based on the widening gap between house prices and personal disposable income - which currently stands at 11:1.
Although the situation has been somewhat offset by some lenders offering more flexible mortgage terms, Mr Beggs said, buyers have had to endure the ECB's recent policy of raising interest rates.
"Though not an historically high rate, potential buyers may not be too comforted by forecasts that the ECB will stop at 3.75 per cent," the report said.