Uncertainty in the face of an economic downturn will mean many potential house-buyers are likely to delay buying a new home. In addition, there are already signs that the very substantial market for second dwellings is being affected by the rising uncertainty in the labour market.

When taken together, the Economic and Social Research Institute (ESRI) said this could see house prices falling quite rapidly and reaching a floor over the next two years. In the case of this slowdown scenario, the ESRI expect house prices to drop 15 per cent by next year.

In 2000, the total number of houses built was just under 50,000 of which 46,657 were private residences. The various forces driving the Irish housing market indicate that the economy will, on average, require that many completions each year until 2010, with demographic factors a primary pressure.

The knowledge that, in the medium term, the demand for housing will remain particularly strong in the Republic will encourage potential buyers to enter the market as prices fall. The ESRI recommended that the government also take advantage of falling prices and invest heavily in social housing.

The annual rate of national house price change in the latter part of the 1990s was more than 20 per cent per annum.

The upward trend resulted from rising demand for dwellings and a relatively inelastic supply of land, coupled with infrastructure constraints.

Demand was driven by rising income and employment growth, demographic factors and the reduction in domestic interest rates as the State converged within the European Union.

The recent growth in house prices has been much faster than income growth and the cost of new houses relative to personal disposable income per head is now higher than at any time since 1971, when data was first published.

Despite the rapid increase in prices and concerns about the exposure of the economy to the property market, the ESRI said the level of outstanding residential mortgages is much lower than in other European countries.

The institute was critical of taxation policy on housing, saying it has been particularly inappropriate and inconsistent.

Policy failed to free up essential resources, especially building land, and changes in the capital gains tax regime reduced the incentive to release development land for building.

It suggested broadening the private rental sector and removing the discrimination against investment in private rental property.