Goodbody Stockbrokers has revised its economic growth forecast downwards to 3.1 per cent for 2008, due to a sharper than anticipated slowdown in house building activity. House prices are also predicted to fall by 4 per cent this year.

In one of the most bearish outlooks to emerge of late, Goodbody said an over-reliance on the construction sector has developed into a potentially dangerous imbalance in recent years. Dermot O'Leary, the broker's chief economist, said higher interest rates had triggered a rebalancing in the economy.

Builders have reacted to weaker demand in the housing market by deciding to "offload current unsold stock" before beginning new housing projects, Mr O'Leary explained.

Goodbody has revised its forecast for house completions in 2007 down to 75,000. This is expected to fall by a further 20 per cent to 60,000 next year. GDP growth is also expected to ease considerably from 4.6 per cent this year to 3.1 per cent in 2007.

As a result of the slowdown in housing output, Mr O'Leary believes that up to 40,000 jobs may be lost in the residential construction sector over the next two years. However, it is likely that 15,000 of those who lose their jobs will be absorbed into non-residential building projects.

Nevertheless, employment growth of 2.4 per cent is predicted for 2007, although this will slow to 0.7 per cent next year.

Goodbody also released its second survey of mortgage brokers, estate agents and solicitors yesterday. The findings of the survey indicate that the key components of the mortgage market remain depressed, and that recent stamp duty reforms have had little impact.

Affordability was highlighted as the main reason for the slowdown in the housing market, while investor activity was found to be the hardest hit area.

Even with recent increases in rents, the gap between funding costs and rental yields remains significant. The report suggests that rental yields are unlikely to cover the cost of funding an investment property until 2013.

Goodbody's predicts a 4 per cent drop in house prices this year, followed by stagnation next year.

Mr O'Leary expects two further rate increases to be unveiled by the European Central Bank this year, bringing the interest rate to 4.5 per cent. However, this is likely to represent the peak of the cycle.