The relentless upward spiral of property prices and mortgage borrowing needs to slow sharply, or the market could face serious difficulties. That is the clear message from the analysis presented yesterday by the Central Bank. It is important not to overstate its findings. The bank is not predicting an imminent price crash. However it is pointing to concerns about the pace of mortgage borrowing growth and warning that debt levels could quickly climb to danger levels. Much the same message comes in the latest report from the International Monetary Fund, which highlighted Ireland as one of a number of markets where the rate of property price increase was a cause for concern.
Residential property prices here are now, on average, at the top of the EU league. Looking at different urban areas, London is the only one where prices are higher than Dublin. Despite this, property prices continue to rise and mortgage borrowing is growing at a record rate. Expectations that the pace of growth of house prices - and the associated borrowing - would slow have not been realised as low interest rates continue to drive the market. This has moved the average debt burden from a low level a few years ago towards the top of the EU league. Debt levels here are not yet unsustainably high, the bank says, but it warns that the rate of growth is so rapid that it could quickly move into dangerous territory.
There are no immediate reasons to fear a collapse in the property market, or to expect large numbers of borrowers to face early difficulties. However the more prices and borrowing rise, the greater the vulnerability in the future. As the Federal Reserve Board chairman, Mr Alan Greenspan, pointed out yesterday, interest rates will start to go up at some point, even if this does not happen over the next few months. Euro zone borrowing costs are not set to increase in the near future - indeed there are strong arguments for a reduction - but they too will head higher at some point. Many borrowers who have had loans for a number of years are not likely to face difficulties, even if interest rates do rise. However a more substantial risk faces some new home purchasers taking out large loans and others borrowing for investment property, who could be storing up difficulties for the future.
The Central Bank's view is that the rate of property price growth should soon start to slow, particularly given the strong rate of house building evident last year, which is continuing into 2004. In turn this should help to slow mortgage borrowing growth.
The hope must be that this will allow a "soft landing" in the market, rather than a rapid fall in prices. The longer the property boom continues, however, the greater the risks in the years ahead.