The housing market is entering "bubble territory", raising the risk of a painful downward adjustment in prices later in the economic cycle, according to an analysis by Goodbody Stockbrokers.
The broker warns in particular that the "downside risks" for anyone buying apartments for investment purposes are becoming increasingly apparent.
Momentum in the housing market is a legitimate source of concern, according to Mr Colin Hunt, chief economist at Goodbody.
The broker believes that the strong price increases of the 1994-2001 period were "a rational response to the structural shift in Ireland's economic performance".
However, with price levels more than adequately reflecting the increasing wealth levels, further big increases can no longer be justified.
Housing price inflation of any more than 7 per cent "will push the market into overheating territory this year and will raise the risks of a painful adjustment later in the cycle", according to Goodbody's latest economic review.
Given the momentum in the market in recent months, there is a distinct possibility that this will happen, it says.
However, Goodbody's economists warn that it is difficult to predict when a house price correction might happen.
Low interest rates and expectations by investors of capital growth could keep prices rising at 8 per cent in the short term but the economists say they "are increasingly concerned about the overall stability of the market".
House price inflation has accelerated sharply from low levels at the end of 2001 to 15.2 per cent year-on-year in January 2003. It is increasingly difficult to justify this level of price increase, the review says.
Demand is likely to weaken due to slowing job creation and falling wage inflation.
On the supply side, residential completions could hit 50,000 this year, against underlying demand that the broker estimates to be 38,000 per annum between 2001 and 2006.
In terms of the "buy-to-let" market, the broker points out that the increased supply of rental property is leading to a decline in average rent levels.
Given the evolving age structure of the population and continued pressure on average incomes, "the downside risks of the buy-to-let market in response to falling yields are becoming increasingly apparent".
Looking at overall economic prospects, Goodbody says Ireland will, in 2003, "enjoy its first year of below-trend GDP growth".
The broker estimates that gross domestic product will grow by 3.6 per cent this year, down from an estimated 5.9 per cent last year, with gross national product growth is set to fall to 3.5 per cent.
The rise of the euro is a risk to the economy, the broker says, magnifying the wage burden on industry caused by rising wages and other costs.
Further adjustments, particularly with regard to prices and inflation, are needed to ensure that the economy can return to above-trend growth in the medium term, according to the review.
