Goodbody Stockbrokers has signalled a possible fall in UK house prices this year, suggesting residential property in Britain is overvalued by 9 per cent and could fall even further in 2004.

In a new report, Goodbody suggests UK house prices should correct to where they were in the first quarter of 2002. It warns that the greater the upside surprises in house price inflation in 2003, the more severe the eventual correction. "In our view, consensus estimates of 9 per cent house price inflation in the UK this year implicitly assume a sharp correction of the order of 16 per cent in 2004."

Goodbody states that, while low interest rates had made it easier for individuals to get onto the property ladder, conservative lending policies by the main financial institutions had had a significant impact on affordability.

"We feel the argument that low interest rates can sustain house price inflation indefinitely has been overplayed given that UK economic growth is set to drift further below trend."

It believes the UK economy will comfortably avoid recession and, given the robust economic fundamentals, construction volumes are unlikely to be significantly affected by a house price correction.

In contrast to the late 1980s experience, which left people with huge negative equity, sustained low interest rates could cushion the wider economic impact of house price deflation, says the report. "We forecast the deflation of the house price bubble will be orderly in so far as the impact on overall activity will be relatively muted," it says.

Despite its belief that UK house prices need to fall, Goodbody says this will not pose any structural threat to the balance sheet or asset quality of the banking market. The implications for revenue growth are far more uncertain, says the report.

In terms of the Irish banks, any fall in UK house prices would have most impact on the Bank of Ireland group, with the UK market accounting for 50 per cent of its loan book.

Goodbody remains comfortable with its forecasts for Bank of Ireland but highlighted the potential for weaker revenue growth at the bank's UK business, particularly if the correction is more aggressive than envisaged.

The implications for the UK banks revenue growth prospects are far more uncertain. Given that the consumer accounts for around two-thirds of the domestic economy, the impact of a housing market correction on the wider macro picture could put pressure on top-line growth, it warned. "If volume growth cannot be relied upon to drive future growth, the outlook for margins appears grim as paying up for market share gains could become a key focus for the heavy-hitting incumbent players."