House prices in the State should by about a modest 5 per cent this year as the market cools in response to rising borrowing costs and uncertainty about stamp duty, IIB Bank has predicted.
In its Irish Housing Market Outlook 2007published today, the bank says fears of a downturn in the property market are "overdone" but that a "significant cooling" is under way that could continue early in 2007.
Tom Foley, IIB Homeloans
IIB says that although Irish house prices have risen rapidly, the increase can be readily explained by the exceptional buoyancy of the economy.
It says there seems to be little risk of a sharp fall in prices unless the economy "weakens dramatically" and that this seems unlikely in the foreseeable future.
"Instead the broad economic outlook would suggest house prices can continue to increase, although the pace may be notably more modest than we have become accustomed to in recent years," the report says.
"The Irish housing market has cooled notably of late, and a softer trend could continue for some months, but we expect to see a modest rebound in prices as 2007 progresses," said Tom Foley, chief executive of IIB Homeloans.
"The market is in transition. Towards the end of 2006, a combination of factors such as rapidly rising borrowing costs and uncertainty about stamp duty meant this process was not as smooth as might have been expected."
Mr Foley said this adjustment may continue in early 2007 but that strong underlying demand, supportive budget measures, the maturity of SSIAs and a "less threatening" outlook for interest rates mean house prices should begin to pick up again.
According to the IIB report, Irish consumers have become "somewhat more cautious" about property values. One in two consumers see "modest increases" in prices, and only one in nine expects further large increases. Just 1 per cent of consumers anticipate a large fall in prices, IIB says.
Speaking about the report, Austin Hughes, chief economist at IIB Bank, said there were clear signs that sentiment towards the property market had weakened through the latter stages of 2006.
"While this could translate into a slight fall in house prices around the turn of the year, we expect a solid rebound through the course of 2007."
On the expected ECB interest rate rise in March, IIB said the timing of the interest rate cycle "could be ideally suited to the Irish property market". Borrowing costs are set to peak when spending power is at its strongest, the report says.
It also says the underlying demand for housing remains strong, with strong population and employment growth underscored by record levels of inward migration in the second half of last year.
"Reflecting these dynamics, rents are continuing to accelerate. In 2007, the Irish economy should grow by close on 10 per cent in money terms," the report said.
"Household after tax income will rise by a slightly faster amount, and spending power will be boosted substantially further by the maturity of the bulk of SSIAs.
"With signs that supply is stabilising and could even ease back, we expect house prices to rise modestly - by about 5 per cent - in 2007. Towards end year, prices could be set on a somewhat stronger trend," the report forecast.