Large increases in the housing market have been highlighted again as a potential source of trouble for the economy. And certainly it appears that house prices will rise further this year, fuelled by the continued shortage of supply despite the fact that 42,000 new homes will be built in 1998. Increased take home pay following the Budget and falling mortgage rates should lead to further substantial house price rises this year. When combined with increases in the rate of new household formation, favourable demographic trends, and rising employment, the formula appears virtually foolproof. It certainly appears likely to further boost or at least maintain recent record increases in mortgage lending and credit expansion. Mortgage lending has recently been growing at 15 per cent a year. However, this hides the fact that lending has doubled since 1992 and last year amounted to some £12.9 billion. That is a massive 416 per cent rise over 10 years when total mortgage lending only amounted to £2.4 billion. How much further this can go is open to question and certainly the Central Bank itself is worried.

One measure which can prove useful is affordability. According to Dr Dan McLaughlin, chief economist at Riada Stockbrokers, house prices are now at their historical peak compared to manufacturing earnings. When house prices are compared to average male manufacturing earnings they are now around about 4.8 times - equivalent to the early 1980s. By the mid 1980s they had reached a low of about 3.2 times with an average over the past 20 years of about 3.9.

On the face of it this data would imply that house prices cannot rise significantly this year. However, there are now many more service sector jobs, particularly in high earnings locations like the IFSC and thus average earnings are probably far higher than raw manufacturing earnings data would suggest.

This sort of basic index also leaves out the impact of rising or falling interest rates which can substantially impact on the relative affordability of homes.

According to the house price affordability index from DKM Economic Consultants, which includes the impact of interest rates, prices still have some way to go to reach the peaks of the early 1990s. However, the main difference here would appear to be that higher interest rates at that time which coincided with the currency crisis made mortgages more expensive.

However, it is likely that forthcoming monetary union has already had a profound effect on the market. It is likely to have changed most expectations to even lower rates and the ratio may be able to rise above its historic peaks.

Monetary union may also imply some sort of an equalising of house prices across Europe. And there is an argument that relative to average euro area earnings that Irish - and even Dublin - house prices are still cheap. And with the recent decline in the pound there is a large incentive for many British and German investors to buy property here.

This raises the possibility of continuing rises in Dublin prices until they reach the equivalent of those in Brussels or Copenhagen. This view would support the idea that while property prices may level out somewhat, particularly if supply increases, there is no great danger of an imminent collapse. But it does raise significant social issues. It is clear that first-time buyers are becoming increasingly priced out of the market. Thus if the Government is to attempt to prevent the price spiral it must address the basic problem which is on the supply side.

There is a major issue concerning the lack of zoned, and indeed even serviced, land which must be tackled. Mr Mark FitzGerald of Sherry FitzGerald points out that there are only three or four years of supply of serviced land and that this needs to be addressed imminently by the Government.

And of course there is an urgent need for even more new houses, many of which would have to be built on the outskirts of Dublin or other major cities. If Dublin is to become more like London with the majority of people moving to outlying areas like Naas or Maynooth, services would have to be put in place, particularly a suitable public transport policy which would allow people to commute easily from such areas as well as social amenities, schools and so on.

There may also be a need to invest more money in building social housing and to implement effective measures to encourage rental. At the moment few families are willing to rent given that the landlord can effectively ask them to leave a home with only one month's notice.

Apart from these issues, the main problems of rapid house prices increases will probably become evident at an individual level. While it appears unlikely that there will be an overall crash in the housing market there are certainly areas where trouble may be brewing. Chief among these concerns people who have stretched themselves to take out mortgages.

The traditional mechanism for causing a crash - a rise in interest rates - may not look as if it is on the cards unless, of course, monetary union falls apart. But as the ESRI's Mr Terry Baker pointed out, the problem is with those who assumed their jobs are secure only to find they are not. Seagate is an all too recent example of this. Borrowers who over-extend themselves and then lose their jobs may find that repossession becomes a reality. See also BTW 2, page 1