A sharp correction in house prices will become much more likely if prices continue to rise in double-digit percentages and become seriously overvalued, the Central Bank has warned.

Speaking at the launch of the Bank's Financial Stability Report, Governor Mr John Hurley welcomed "present tentative indications" of a gradual slowdown in house-price growth.

New and second-hand house prices increased by 14.7 per cent and 10.8 per cent respectively in the year to June, with the rate of growth slowing over the past few months. "This development is consistent with the large increase in supply and the decline in rental income that has been evident for some time," Mr Hurley said.

The Governor pointed out however that house prices do not need to be overvalued to "fall significantly". A crash could occur if any of the fundamental determinants of the market - such as the supply of funding or demographically-based demand - were to deteriorate significantly, he said.

A range of studies conducted by the Central Bank into the justification for current property prices has produced mixed results, with some pointing to a significant overvaluation and others contradicting this.

Valuations based on the past relationship between price and earnings (rents) would suggest for example that property is more expensive than it should be.

An analysis that takes account of the the service fulfilled by housing on the other hand produces the opposite result.

Mr Hurley said the bank would be comfortable" if house prices grew in line with disposable income over the next few years.

Rather than the zero per cent price growth that commentators such as Davy and Merrion Stockbrokers are expecting for next year, this would see prices growing by about 6 per cent.

"We would be surprised if double-digit growth continued," said Mr Hurley. "But it's very difficult to predict," he added. "we have seen signs of this before. It's too early to say."